Too Much Debt to Retire Comfortably? You Have Options
Most of us have rosy views of retirement — at least until we hit our 50s. Then, a whole lot of us panic: Are our retirement funds going to hold out? What happens if we need expensive long-term medication? Will we have managed to clear our debts by the time we stop work?
For very nearly half, the answer to that last question may be No. Research published last year by Securian Financial Group found that 49 percent of retirees polled said they still had debt when they retired. And 55 percent of those folks owed $25,000 or more. A whopping one in five of those who had any debt carried $100,000+.
Not All Debt Is Always Bad
Although most of us would probably prefer to be debt-free when we retire, some argue that continuing a mortgage beyond that point may not be a bad thing. In May 2013, Time magazine carried an article that suggested so.
Under the headline, "The New Retirement: Why You Don’t Have to Pay Off Your Mortgage," it pointed to ultra-low fixed-rate mortgage rates, and proposed that some, especially after tax deductions, may be better off keeping their home loans, and investing their money elsewhere. That proposition may appeal more readily to those who retain an appetite for risk in retirement.
Whether or not you buy that Time writer's argument, one thing's for sure. Most debt is harmful, and that with the highest interest rate generally does the most damage.
So, for many Americans, the borrowing they need to address first is on their credit cards. At the time of writing, one monitoring site puts the average rate for consumer rewards cards at 17.64 percent APR. Make minimum payments on a card with that rate and a $20,000 balance, and you should be paying $3,216.07 a year in interest alone. For many retirees, that's an unbearably painful expense.
If you have the financial resources to pay down debt at all, either in your pre-retirement phase or when you've actually stopped working, draw up a list of your borrowing in order of of the rates you're paying — with the highest APR at the top. Then work your way down the list, eliminating balances on your plastic, personal loans, auto loans, HELOCs, home equity loans… whatever. Every time you cross off an item, you should have more spare money (£3,200 a year, in the case of a $20,000 card balance, plus the amount by which you were reducing the principal) to pay down the next more quickly. This is called the "snowball" effect of debt reduction.
Of course, many don't have spare money to devote to debt reduction. But that doesn't mean they're out of options.
One way forward, if you're 62 or over and a homeowner, may be a reverse mortgage. This releases some of the "equity" (the sum by which the appraised value of your home exceeds any loans secured against it) you've built up in your property. To be eligible, you're going to have to have paid off your mortgage completely, or at least have a low amount outstanding.
This is often a very attractive option because you receive a lump sum, a monthly income and/or a line of credit, but have to make no monthly payments in return. These are rolled up, and are generally payable only when one of three events arise:
- You move out.
- You and any co-owner have both died.
- You breach the terms of your reverse mortgage agreement, most commonly by failing to pay property taxes or insurance premiums.
It's important to take this form of mortgage seriously, because the cost of such loans mounts up, and your share of the value of your home is likely to decline. This is going to affect the amount you're left with when you move or the sum you leave your beneficiaries in your estate. The need to fully understand the implications of this borrowing led a few years ago to counseling being made mandatory before you can sign up for it.
However, if you're currently drowning in debt, a reverse mortgage could be just the lifeline you need — especially if your lump sum could eliminate all your borrowing.
You may be horrified by the prospect of bankruptcy, but there are circumstances in which it can be the best way out of an otherwise impossible situation. It's often a particularly effective way of eliminating credit card and medical debt, though some other types may not be discharged in this way.
There are two main flavors of bankruptcy available, and you have to decide which is more beneficial for you. This may vary from state to state, and you need to do some research.The NOLO website is particularly helpful for this.
Two Main Types of Bankruptcy
- Chapter 7 bankruptcy could see some of your property seized, although there's a long list of items that are usually exempt. Indeed, even non-exempt items are frequently not taken. However, your valuables and some other assets may be at risk.
- Chapter 13 is available only if you have sufficient income to pay some or all of your debts during a fixed period. The court or bankruptcy trustee examines your finances and comes up with a payment amount that you should be able to afford. At the conclusion of your bankruptcy (three to five years), any unpaid balances are discharged.
All flavors of bankruptcy are likely to have a devastating impact on your credit score (unless it's already shot), and it could be many years before you're able to borrow again, certainly at a competitive interest rate. But ask yourself this: "Do I really want to get into debt again?" A good prepaid card can do most things a credit card can (except, most notably, provide temptation), and credit histories — unless they involve still-outstanding debts to the federal government — play little part in reverse mortgage approvals.
Look Out for Number One
Chances are, there have been times in your life when you've helped your kids, your parents or other family and friends. Respect! But, if you're a retiree — or soon to-be-retiree — who's overwhelmed by debt, it's time to look after Number One. If poverty in old age (which was the reality for 7.9 percent of American retirees in 2009, according to the Employee Benefit Research Institute) is the alternative, then losing a precious family heirloom to bankruptcy or reducing your kids' inheritance through a reverse mortgage may be a price worth paying.
In particular, try to avoid taking your social security benefits early, just to keep on top of debt payments, a phenomenon noted in a 2013 paper from Boston College's Center for Retirement Research. This could leave you very vulnerable later on.
Dealing with unmanageable debt is a miserable experience at any age. Doing so as a senior can be much worse. If you're at risk, now's the time to take whatever legal actions are available and necessary.