Most American’s nearing retirement are facing the harsh reality that household debt will not be eliminated prior to leaving the workforce. Some carry debt into retirement because their jobs ended earlier than expected due to layoffs or health issues prevented the continuation of employment. Some leave work to care for a spouse or a loved one, taking with them more debt than anticipated. Other’s feel if they waited until debt was eliminated, they would never be able to retire at all.
Whatever the reason, statistics bear out that seniors are retiring with more debt than ever and this is impacting the quality of life during those senior years. Debt in retirement results in a higher cost of living and higher income requirements to meet essential needs.
The most common forms of debt carried beyond working years include mortgage debt, student loans, vehicle loans, and credit card debt.
Mortgages in Retirement
The mortgage is typically the highest balance and the lowest interest payment. This debt might increase after you stop working, if you choose to use the equity to fund retirement costs. The danger of adding additional debt to an existing mortgage is that this debt provides your housing expense and if payments cannot be made, you could lose your home.
Options for Reducing or Eliminating Housing Debt
Eliminating the mortgage can be accomplished by selling the home and renting instead. A rental provides more flexibility with regard to moving or relocating, but you lose the predictability of payments, as rent costs generally rise each year. However, renting saves on taxes, insurance, and eliminates the costs of home maintenance.
Downsizing may be a solution for decreasing or eliminating the mortgage, while still providing adequate housing. Moving to a smaller home, a less expensive neighborhood, or a less expensive city, can lower or eliminate mortgage costs. It will also potentially reduce taxes and utility bills. Moving may give you a windfall from the sale, that can be used to increase retirement savings or eliminate other higher interest debts, leaving you with a low interest rate mortgage. Buying another home may require qualifying for a new loan, which requires both income and good credit to achieve.
Refinancing can be used to shorten or lengthen the loan term, and perhaps lower the interest rate. The downside of a refinance is that it costs several thousand dollars to achieve and requires qualifying for the new mortgage. A shorter term translates to lower long term costs and will leave you without a mortgage payment sooner. For those who will work a few years longer, this might be the best strategy to eliminate the mortgage before retirement. Working part time can cover the larger payment for a few years if needed. Extending the term helps with immediate cash flow, but results in more interest paid over time, and more years of mortgage debt.
Student Loan Debt in Retirement
Student loans used to be a problem for those in their 20’s and 30’s. This is no longer the case. Part of the rise in senior student loan debt is mid-career changes that require additional education or degrees. Longer repayments up to 25 years can leave someone who returned to school in their 40’s making payments until they are over 65. The other cause of existing student loan balances in retirement comes from co-signing debt for children to attend school. In 2013, 2.2 million dollars in outstanding loans were held by those who were over 60 and had cosigned debt for children.
Options for Reducing or Eliminating Student Loan Debt
Traditional payment plans result in retired debt within 10 years. Following this path creates the lowest total paid and the least interest accrued. It also comes with the highest monthly payments. During working years, this is the most efficient option for eliminating debt before retirement.
Assistance from children. Co-signed debt for adult children can be paid for by the child, even if the debt remains in the parent’s name.
Extend payments by using income based repayment options. Payments can be extended to 25 years and any remaining debt will be forgiven at that time. If income is not expected to increase, this can deliver smaller payments, though they may extend for life, depending on how many years you have in remaining payments.
Loan forgiveness can happen when certain qualifications are met. Teachers, government workers and those in the military have programs that can assist with loan payments or provide loan forgiveness options. Loan discharges might also be possible through bankruptcy, if you do not have assets and minimal income.
Consumer Debt in Retirement
Loans for vehicles, boats, recreational vehicles, and even furniture are short term loans that can typically be addressed before retirement. The key to consumer loan debt is to make the asset last as long as possible reducing or eliminating the need for new loans once retirement occurs. RV’s are the exception to this, as financing can be extended because it is considered a home, from the lenders point of view.
Options for Reducing or Eliminating Consumer Debt
Make on time payments and then maintain the asset so it will last as long as possible.
Double up on payments to pay the loan off before retirement. Payments are usually higher because of the short time frame and paying off the debt sooner can reduce the amount you need for monthly expenses in retirement.
Eliminating the debt may involve “giving back” the asset. Doing so will be considered a repossession and will remain on your credit for 7 years.
Credit Card Debt in Retirement
With minimum payments of 2% or 3%, credit card debt can become an albatross during retirement. As income declines you may find the minimum payments are all you can manage. The result will be paying up to triple the original amount charged due to interest and fees, and taking up to 30 years to retire the debt.
Options for Reducing or Eliminating Credit Card Debt
Double up on payments. Paying extra each month on all your cards or paying down one card at a time is a debt solution that will eliminate debt without bankruptcy. The challenge is that if you don’t have extra money each month, this might not be possible to accomplish. Eliminating credit card usage is essential for successful debt removal.
Turn to The Pros. Debt negotiation tools are available to eliminate debt at a fraction of current balances. If you are staring down retirement wondering how you will keep the bills paid and stay in your home, it may be time to look at all the options available for debt reduction. Once you are accepted in a program, payments are made in an amount you can afford. You make one payment, and the agency works directly with lenders on your behalf. Working with a professional company like Strategic Consulting will enable you to get unsecured credit card debt paid off in 5 years or less, opening the door for a better financial future in retirement.