You’re Approaching Retirement with Debt

You’re Approaching Retirement and in Debt, Now What?

A Study by the Employee Benefit Research Institute indicated that nearly 70% of retirees have debt and nearly 50% of retirees over the age of 75 are still managing debt. by Stuart Welch of Birmingham and Birmingham’s Al.com.

Managing cash flow during retirement is tough enough without also dealing with debt.  As we advise our clients, our goal typically includes retiring all debt prior to retirement.  Here are some strategies we suggest you consider:

1. Get a handle on estimated income and expenses.  Do a trial income and expense report to get an idea of how your retirement cash flows will match up against your expected expenses.  Pay extra attention to potential healthcare costs.  By some estimates, out-of-pocket health care expenses, including long-term care expenses, will average $300,000.  You can either self-insure or buy insurance to help offset part of these expenses.  The long-term care insurance industry is in turmoil and determining the best solution can be complicated.  If you feel lost here, consider hiring a financial advisor or CPA to assist you.
2. Downsize your home.  Most people have raised their families and lived in their homes for decades.  Smart downsizing includes buying a home with minimal maintenance costs and close to shopping and medical services.  You’ll also want to downsize enough that you pay cash for your new home.  If you don’t have a mortgage, consider buying a less expensive home and using the newly released equity as part of your retirement investment plan.
3. Be careful of debt going forward.  First, for existing debt, develop a plan to fully pay it off prior to retirement.  Second, you want to be very careful before taking on new debt and if you do take on new debt, be certain that you’ll be able to pay it off before you retire. The study found that a lot of the retiree’s debt was in the form of student loans…for children or grandchildren.  Be very thoughtful before guaranteeing student loans.
4. Sell everything… everything that you don’t need.  By the time we reach retirement, most of us have collected a massive amount of ‘stuff’.  It might be boats, jewelry, a rarely used truck, etc.  Simplify and raise cash and use the money to pay towards debts.
5. Keep working.  Even a little bit of income can be a big help during your retirement years.  You might continue working longer at your existing job or cut your hours and work part-time. You might also turn one of your passions into an income producing business.  I know of one couple who loved to snow ski.  They moved to a ski resort town and became professional instructors for kids group lessons.  This income along with their retirement income was enough to allow them to live their retirement dream.
6. Consider a reverse mortgage.  This is not my first choice since the goal is to get out of debt, but it can be a way to eliminate debt payments when you can’t eliminate the debt itself.  For example, say you’re retired and have used all the strategies we’ve discussed but you still have $60,000 left on a first mortgage; $15,000 on a car loan; and $25,000 on student loans (for a child) with total payments of $2,500 per month.  A $100,000 reverse mortgage would end all of those payments.  Yes, you’d be using a portion of your home equity which we like to keep as a ‘financial ace-in-the-hole,’ but in some cases, this is a good solution.