Dig out of debt before retiring
Paying it down before leaving the workforce is a healthy step toward a secure retirement
How to pay it down before you leave the workforce. Robert Powell,
The stats, at first blush, are staggering. According to a Pew Charitable Trusts report out in July, eight in 10 Baby Boomers — those born from 1946 to 1964 — hold some form of debt, and nearly half (47%) still have a mortgage, which totaled and average of $90,000.
And, more than half (58%) of the Silent Generation — defined as those born from 1928 to 1945 — still have debt. Nearly three in 10 (28%) still have a mortgage, which totaled $76,000 on average, according to Pew’s report.
And that debt could cause big problems down the road. “Because most older Americans are not eliminating debt before retirement, they may be at greater risk of financial insecurity in their golden years,” wrote the authors of the report, “The Complex Story of American Debt.”
What debt, besides mortgages, are Boomers and the Silent Generation holding ? According to the report:
u26% of the Silent Generation and 41% of Boomers have credit card debt, the median balance being $2,700 for the former and $4,000 for the latter.
u21% of the Silent Generation and 35% of Boomers have car loans, the median balance being $12,000 for the former and $14,000 for the latter.
To be fair, many of the 29 or so million members of the Silent Generation are not carrying much debt. One-third have no debt; the middle third has median overall debt of $3,540; and the top third have $93,000 in debt. And that pattern holds true for the now 66 million or so Baby Boomers: One-third have no debt; the middle third have $37,500 in overall debt; and the top third have $200,000 in debt.
All that money has to be paid back. And here’s how experts say Baby Boomers and members of the Silent Generation should pay down their debt. TRACK YOUR INCOME AND EXPENSES. “We often see figures bandied about in terms of how much you’ll need to live on — say 70% of pre-retirement income,” says Gerri Detweiler, the director of consumer education at Credit.com in Sarasota, Fla. “But many of us really don’t know how much we can comfortably live on.”
According to Detweiler, getting a handle on spending before you’re forced to make changes can put you in a better position to be able to retire on more of your own terms. “If you learn to live on less now, you can definitely live on less later,” she says. “And the money you free up can help you retire consumer debt.” CONSIDER COUNSELING. “A non-profit credit counseling agency is a good place to start,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling. Agencies that are a part of the NFCC can conduct a financial review with a holistic approach that can address credit card and budget concerns, as well as help resolve housing and student loan debt issues. PAY DOWN HIGH-INTEREST DEBT FIRST. From her perch as a credit and debt expert, Detweiler says it usually makes sense to pay off unsecured consumer debt first, but not always. “For example, someone might need to pay down a mortgage to the point where they can afford to sell their home and move somewhere less expensive,” she says.
Paying down your mortgage first can also help you secure a reverse mortgage later on if you need one. To qualify for a reverse mortgage, you either have to own your home outright or have a small remaining mortgage balance — “small balance” being defined as one that can be paid off with the reverse mort- gage proceeds, according to Investopedia. DON’T TAP YOUR RETIREMENT ACCOUNTS TO PAY DOWN DEBT. You might think it wise to pay down your debt by tapping into your retirement accounts. It would be wiser to talk with a bankruptcy attorney first, Detweiler says. Yes, by tapping your retirement accounts you could reduce or eliminate your debt and the associated payments.
But Detweiler likes the protection provided with retirement accounts. “No one wants to think that they will have to go down that path, but retirement funds are often protected from creditors,” she says. “Most people will need every penny they have saved in retirement and then some.”
Besides, “If you borrow against a 401( k) or IRA before you reach 59½ years of age, there can be tax consequences and other fees that enter the picture,” McClary says. “Borrowing against your savings can undermine progress toward your target goal, and delay the
start of your retirement.” INCREASE YOUR INCOME. If you’re having trouble making ends meet, Detweiler suggests starting your “retirement business” now to bring in extra cash to pay down debt. “Many retirees find they either can’t or don’t want to stop working but they do want to do something different,” she says. “If you can start that income stream while you are still working, then the transition may be less stressful.”
To be sure, it’s not practical for everyone, especially if you have a stressful full-time job, Detweiler says. “But you can certainly start to do your homework — and dream a little — in the process,” she says.
“Most people will need every penny they
have saved in retirement and then some.”
Gerri Detweiler, director of consumer education at Credit.com