Is It Scary To Retire With A Bag Full Of Debt?

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Is it scary to retire with a bag full of debt? If you ask this question to my grandad or even dad, he would instantly say “a big no”. Fortunately or unfortunately, I have interacted with many people who are entangled with debt problems. Some are immersed in credit card debt. Others are postponing their marriage and family plans because of their huge student loan debt. I wonder what these people would do at the time of retirement? What if they can’t pay off their debts before retirement? Is it perfectly fine to retire with a bag full of debt?

Is it bad to retire with debt?  

Sometimes, it is not possible to retire complete debt free due to unavoidable circumstances. You have so many things to take care of. You have to buy a house, get married, raise kids, run a family, buy a car, buy insurance policies, pay for your kids’ education, cover medical expenses, and so on.

 If you’re not good at money management, then there’s 90% chance to retire with debt.

Anyway, coming back to the main question, it is scary to retire with lots of debt. However, after analyzing the present scenario, some experts opinion is that it may be okay to retire with debt, depending on the kind of debt and the way it is handled.

What does the figure say?  

Average credit card debt for retirees (age – 65 years) in March 2016 was $6351.

Average debt for retirees (age – 65-69) was $6876

Average debt for retirees (age – 75 and above) was $5638

Older Americans started to carry more debt between 1992 and 2013.

Factors leading to higher level of debt

Student loan debt and mortgage debt are the biggest driving force. People are carrying debt for a longer period than in the past. The current trend is to not clear debts before retirement. As a result, the debt is carried into their senior years.

1. Mortgage debt: This is a good debt. But, even then you need to pay it off. One reason why retirees have been forced to carry debt for a longer period is because they took out large mortgages with small down payments for buying expensive homes before the economic downturn.

Sometimes, a mortgage with a low fixed-rate can be useful if your pension increases slower than inflation. In the past, high inflation has created a big problem for the retirees since fixed income doesn’t increase with rising price.

2. Student loan debt: Kids’ education has created a huge financial pressure upon retirees. People above the age of 60 years have the fastest growing student loan debt.Student loans taken on for financing education grew 850% between 2004 and 2014. In 2013, a retiree carried an average debt load of $2300. A 5% interest meant a retiree paid an additional $750 over the period of 3 years.

The rich vs poor retirees

Retirees who can survive even after having debts are the ones who with massive income, more education and a robust financial health. They can borrow money and pay it off anytime. It isn’t a big deal.

When your income is fixed and low, even an affordable mortgage drains your savings. You could have used the money for a better purpose. And, don’t forget you’re putting your home and retirement savings at risk too.

Credit card debts or adjustable-rate mortgages are too risky for poor retirees, especially when they’re living on a fixed income.  

What we can conclude

Debt is a disease for many retirees. As per the EBRI report, the debt-to-income ratio is at its highest level since 1992. Consequently, retirees are more likely to see themselves in debt due to higher lifestyle standards than their past generations.

Are you going to retire soon? If so, then calculate how much you owe and think about the strategies to pay it off. In case of credit card debt, you have lots of affordable repayment options and these are:

  1. Debt settlement

  2. Debt management

  3. Bankruptcy

In case of student loan debt, there are many repayment options like:

  • Standard repayment plan

  • Income-based repayment plan

  • Graduated repayment plan

  • Extended repayment plan

  • Income-contingent repayment plan


The road to safe retirement

Ideally, you should never retire with debt. Even a good debt can ruin your life. A certified financial planner once said, “Not having the encumbrance of debt offers the maximum flexibility and security for retirees.” So, before you decide to retire, think about the possible ways to retire without any debt.

Here are the 2 tips that can help you have a safe retirement:

  • Don’t retire now: What’s the hurry? You can retire later to avoid touching your nest-egg sooner. You can leave your Social Security benefits untouched. This means later you’ll get higher monthly payments when you do take it.

  • Get another job: Do you feel that your income wouldn’t be enough to survive after retirement? If so, then consider going back to work. I’m not telling you to take a full-time job. All I’m asking you to do is take a part-time job to boost your emergency fund.

Some companies are eager to capitalize on your years of experience. You can apply for jobs in those companies.

A word of wisdom

Don’t co-sign student loans or even a mortgage. Remember, if the primary borrower defaults, the pressure will be on you to pay off the loan. You don’t have a long time and huge resources to pay off those loans. So, if your children are in a financial crisis, given them money if you can afford it. But, don’t increase your debt load. Let your children pay for their education. And, if you have already retired, then sit with a financial advisor. Ask him about the possible ways to reduce your debts as much as possible. If you can keep your expenses under control, low income wouldn’t matter much.

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