Re­tired and in debt? Don’t worry, it’s fix­able

USA TODAY US Edition - - MONEY - Robert Pow­ell Colum­nist

Amer­i­cans are more likely to en­ter re­tire­ment in debt than ever be­fore.

And that, ac­cord­ing to re­searchers and fi­nan­cial plan­ners, poses some con­cerns. Why so?

Well, in ad­di­tion to de­cu­mu­lat­ing wealth, ag­ing Amer­i­cans now need to man­age and pay off heavy debt bur­dens in re­tire­ment, ac­cord­ing to An­na­maria Lusardi, a pro­fes­sor at Ge­orge Washington Univer­sity; Olivia Mitchell, a pro­fes­sor at the Univer­sity of Penn­syl­va­nia; and Noemi Og­gero, a re­searcher at Ge­orge Washington Univer­sity, au­thors of The Chang­ing Face of Debt and Fi­nan­cial Fragility at Older Ages.

So, how might you deal with debt — be it credit cards, stu­dent loans, auto loans and/or a mort­gage — in re­tire­ment? ❚ Check your fi­nan­cial fragility. First, con­sider what Lusardi, Mitchell, and Og­gero call your fi­nan­cial fragility, whether the amount of debt you have could be a problem.

So, you might be fi­nan­cially frag­ile if you have a to­tal debt to as­set ra­tio greater than 0.5; have a pri­mary res­i­dence loan to home value ra­tio above 0.5; have an­other debt to liq­uid as­set ra­tio above 0.5; and have a to­tal net worth lower than $25,000, which, the au­thors noted, “is ap­prox­i­mately half of me­dian in­come, and it could be thought of as the min­i­mum one might need to weather a health shock or other costly fi­nan­cial emer­gency.”

❚ Cre­ate a plan. If you are or are close to be­ing fi­nan­cially frag­ile, cre­ate a plan to pay down your debt.

“The sim­plis­tic, fi­nan­cially ac­cu­rate an­swer is to do what­ever pro­vides the high­est af­ter-tax re­turn,” says Todd Tresid­der, a fi­nan­cial coach with Fi­nan­cialMen­tor.com.

In sim­ple terms, he says, that usu­ally means: ❚ Pay off your high­est in­ter­est debt first. Lusardi agrees with this ap­proach. “Try to re­pay first the high­est cost debt since in­ter­est rates charged on non-col­lat­er­al­ized debt — for ex­am­ple, credit cards — are nor­mally quite high,” she says.

❚ Liq­ui­date other as­sets to pay off debt if the re­turn on in­vest­ment is lower than the car­ry­ing cost of the

debt. “For ex­am­ple, many CDs are pay­ing sub­stan­tially less than debt fi­nanc­ing costs, so it might make sense to liq­ui­date the CD at ma­tu­rity and use the pro­ceeds to pay off the high­est cost debt,” Tresid­der says.

❚ Con­sider sell­ing off any per­sonal as­sets that you don’t use reg­u­larly and aren’t bring­ing you great joy, and

use the pro­ceeds to pay off debt. “For ex­am­ple, con­sider sell­ing that boat you haven’t used for the last two years or that fancy jewelry that sits in the safe de­posit box,” Tresid­der says.

❚ Think about debt ser­vice. Gen­er­ally, the as­sess­ment of “too much debt” is made rel­a­tive to “too lit­tle in­come,” says Don St. Clair, pres­i­dent of St. Clair Fi­nan­cial.

Now most re­tirees — at least those who can’t work part or full time to pay down their debt — think about re­duc­ing their over­all debt. But that may be the wrong ap­proach, St. Clair says.

In re­tire­ment, this of­ten comes at the ex­pense of tak­ing ad­di­tional IRA with­drawals.

❚ Con­sol­i­date your loans. “Re­duc­ing your debt ser­vice prob­a­bly won’t re­duce your debt,” St. Clair ad­vises. “Con­sol­i­dat­ing a car loan, credit cards and/or stretch­ing out your mort­gage term won’t help you pay off the debt any sooner. But it can cut your monthly debt ser­vice and put more back into your monthly money. And maybe even spare your IRA from a pre­ma­ture death.”

❚ Want to be debt-free? Con­sider us­ing ei­ther the debt snow­ball or a debt avalanche strat­egy to pay down your debt, Tresid­der says. With the snow­ball, you would pay off the smallest debt first while making only min­i­mum monthly pay­ments on all the other debts.

With the avalanche, you would pay the min­i­mum pay­ment on each debt and de­vote any re­main­ing debt-re­pay­ment funds to re­pay­ing the debt with the high­est in­ter­est rate, ac­cord­ing to In­vesto­pe­dia.

Tresid­der fa­vors the debt snow­ball strat­egy.

“It’s the most cost-ef­fec­tive, fastest and emo­tion­ally sat­is­fy­ing way to get out of debt,” he says.

❚ Con­sider a re­verse mort­gage. If you have a tra­di­tional mort­gage, ex­am­ine whether re­plac­ing it with a Home Eq­uity Con­ver­sion Mort­gage (HECM) makes sense, says Ja­son Bran­ning, owner of Bran­ning Wealth Man­age­ment.

❚ Other op­tions. Con­sider down­siz­ing, mov­ing to a low tax state and tap­ping re­tire­ment ac­counts. Lusardi also rec­om­mends avoid­ing late pay­ments, which can af­fect credit scores and also gen­er­ate higher debt pay­ments in the fu­ture.

Robert Pow­ell con­trib­utes reg­u­larly to USA TODAY, TheStreet and “The Wall Street Jour­nal.” Got ques­tions about money? Email Bob at rpow­ell@allth­ingsre­tire­ment.com.

ISTOCK IM­AGE

If you own your home, a re­verse mort­gage could be one way to free up fu­ture in­come.

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