Debt & Retirement

Sep 11, 2019 Topic: Debt

Everyone is familiar with debt. It is the cost associated with taking the next step to reach goals like getting an education, buying a car, or purchasing a house. Debt sticks with people even after those goals have been reached. It’s not uncommon to have debt when you enter retirement. The question is, what do you do about it? Here’s an overview of what to know about having debt in retirement and how to address it.

The Retiree Debt Trend

Debt often feels isolating. But in reality, debt among retirees is not uncommon. Between 2003 and 2017, the amount of debt has gone up 87 percent among those ages 55 to 80. Credit card debt, mortgage payments, student loans, and car payments help contribute to this. Other financial factors like the availability of credit, lower interest rates, and wealth generated by the housing and equity markets contribute too.

The average debt among people 55 to 64 is $108,000. Those ages 65 to 74 have $66,000 in debt. Because of these high average debts, people in these age groups opt to delay retirement and keep working.

The Unknown Factor

Not retiring may help pay down debts. But it offers no protection against unforeseen situations like high tax bills, unexpected health challenges, or a family member in need of financial help. People commonly turn to credit cards for unexpected expenses or other high-interest options. This often puts retirees already saddled with debt into more even debt than they can handle. One way to address this debt is to start making a plan to get out of it.

Planning to Tackle Debt

Making a list of debts and include the amount owed, the terms of repayment, and the interest rates is a good place to start. From this list, put the debts that cost the most at the top and plan to pay those off first. But before thinking how to pay them off, ask how these debts came about, to begin with. Understanding the source of debt and creating a budget or a financial plan will help prevent the same debt problems at a later time.

Financial Options

Lack of financial resources often contributes to current debt problems as well as recurring ones. This is why financial experts frequently advise retirees not to rush into any particular financial option to address debt. Instead, consider assets that already exist. A home is usually the largest asset that a retiree has. Refinancing the home or taking out a reverse mortgage are two popular options that people take advantage of. But both of them come with risks.

Refinancing a mortgage lowers payments and can provide cash out in the immediate. However, it can strain the budget over the long term. People who continue to work after reaching retirement age cannot work forever. Therefore, the new mortgage payment has to be comfortable to pay when income is less.

Since reverse mortgages do not require a payment, this may seem like an option for most older Americans looking to pay off debt. But reverse mortgages are very complex transactions and they are problematic due to maintenance requirements and for homeowners that have other people living with them. The overall cost of a reverse mortgage loan is also a factor to consider.

Options for Accessing Home Equity

Accessing home equity is a solution for retirees that have debt. But if a refinance payment is too high and a reverse mortgage is too complicated or doesn’t work for the situation at hand, what is the alternative for accessing equity?

Consider a home ownership program like SmartRE. SmartRE allows homeowners to access their home’s equity by selling a portion of the home’s value to an investor. The homeowner can use the proceeds from the sale to pay off debts without extending the term of an existing mortgage or putting their home at risk with a complicated reverse mortgage.

In states like California where the cost of real estate continues to rise, drawing down on home equity benefits both the homeowner and the investor. The homeowner will continue to benefit from the equity in the home and have an affordable way to repay the investment.

Entering retirement with debt is a challenge that causes stress and anxiety for many people. That doesn’t have to be the case. Creating a financial plan and considering the best way to utilize existing assets is one way to eliminate debt for good.

To learn more about the smart way to leverage home equity, visit SmartRE today.