Should you postpone retirement to pay off card debt?
“To Her Credit” columnist and expert on women's personal finance issues
Is too much credit card debt crushing your retirement dreams? If you’re getting close to your planned retirement age, but don’t know what to do about your credit card debt, it may seem that way.
You have lots of company. According to a recent CreditCards.com survey, 2 out of 3 Americans in debt are unsure they will ever be debt free. In fact, the older and closer to retirement age Americans in debt get, the more pessimistic they seem to become about paying off their debt.
For example, of baby boomers approaching or in retirement, fully 70 percent of those in debt doubt they will ever get out.
In addition, it appears that preretirement debt is rising through the generations. According to an analysis by the National Bureau of Economic Research, 71 percent of early baby boomers (born 1948-1953) had nonmortgage debt when they hit 56-61 years of age, compared to 38 percent when aged 62 to 66.
If you are approaching retirement and are still revolving credit card balances, a big question should be whether to keep working until those debts are paid off.
George R. Barnes, a financial professional at Prudential Advisors, recommends continuing to work until you pay off your credit card debt as you can’t always be certain of your expenses during your retirement years. You can plan household expenses to an extent, but the wild card will be health care.
“Depending on your health, you can have a rising cost,” Barnes says, “and there are inflationary aspects to health care that are unknown.”
Carrying too much credit card debt makes it harder to deal with unforeseen expenses.
“Depending on the significance of the debt and the annual percentage rate, you could be in a vicious cycle, where you don’t have enough to make more than the minimum payment,” Barnes says. Your credit card balances could then escalate in retirement instead of getting more manageable.
Most of us would love to be free of mortgage debt as well as credit card debt by the time we retire. However, nonmortgage debt, especially credit cards and other consumer debt, may be more of an issue for people facing retirement.
For one thing, the interest rate on consumer debt is almost always higher than the rate on mortgage debt. In fact, some people purposely avoid paying off their mortgages because they can get a higher rate of return on their investments than they would save by being mortgage free.
If you are ready to retire, having a mortgage should not be a showstopper if you can comfortably pay your mortgage on your retirement income.
Retirement options when you have consumer debt
- Keep working until the debts are paid off.
- Pay off debts with savings or other assets.
- Plan a retirement budget that includes debt repayment.
- Resolve debts with debt settlement or bankruptcy.
Let’s look at these options one by one:
1. Keep working.
If you can pay off your consumer debt by working a little longer, whether you are at full Social Security retirement age or not, you probably should. “Wouldn’t you want to patch a leaking ship before you set off to sail?” asks Samuel Rad, certified financial planner and instructor at UCLA.
Continuing to work may not be as bad as you initially think. For one thing, nobody says you must keep working the same job. If you can’t wait to retire, maybe you’re just in the wrong job. You may still be young enough to enter a field you’ve always found interesting, change your angle to something less stressful or just find a more enjoyable working environment.
You also might consider working less than full time, but still bring in enough money to work on retiring your debt.
“Semiretirement is an attractive option for those who are ready to quit their full-time jobs, but still have some personal debts,” says Brian Davis, co-founder and director of education at SparkRental.com. “Semiretirement could mean consulting, freelancing, tutoring or picking up work that’s low-pay but highly rewarding and enjoyable.”
Besides the extra money, working a few hours or days a week can keep you engaged and adds meaning and structure to your days.
You may even be able to take time off before you start back to a different line of work. Maybe you can’t afford to retire permanently yet, but you can work out a way to take six months off. It’s the new temporary retirement – giving yourself time to read, travel or do absolutely nothing until you’re ready to take on permanent or temporary work again.
Another option could be starting your own business in consulting, training or other service business with minimal startup costs.
Before you hand in your resignation as an employee, be sure to plan for how you will obtain health insurance coverage. If your spouse’s employee plan doesn’t cover you, and you are too young for Medicare, check out other options including private health insurance, medical sharing plans or possibly subsidized plans under the Affordable Care Act.
Putting off permanent retirement has three key financial benefits, according to clinical gerontologist David J. Demko.
“Continued work income just might reduce, or totally retire, your consumer debt,” Demko says. “Retiring later offers you a higher Social Security pension benefit. And a higher benefit gets better inflationary growth due to the impact of the Cost-of-Living Adjustment (COLA) on the higher benefit.”
If you’ve already started taking early Social Security benefits (before full retirement age), be aware that earning more than a minimal amount may reduce the benefits you receive.
If you are under full retirement age for the entire year, the Social Security Administration deducts $1 from your benefit payments for every $2 you earn above the annual limit, which is $17,040 in 2018. After the month you reach Social Security full retirement age, the amount you earn does not affect your benefits (although it may cause part of your Social Security benefits to be taxable).
Working a few more years can make a huge difference in your financial comfort for the rest of your life, especially if you finally have the last kid through college and can start really making progress on your financial goals.
2. Pay off debt with savings or other assets.
Another way to rid yourself of some or all your card debt is to use savings or sell some of your assets. If you have an extra vehicle, investment real estate or other valuable assets you can turn into cash, you may be able to retire on schedule or close to it.
“I personally would not feel comfortable retiring with significant credit card debt, or with substantial personal loans,” says Davis.
Faced with that prospect, he would rather sell off assets and pay off his debts. “The interest rates on debt tend to be higher than historically average returns on stocks, bonds and real estate,” he says.
It can seem a shame to part with savings just to pay off debt, but in reality, the money was gone when the purchases were charged on your credit cards. “Remember, your savings aren’t yours if you owe money,” says Tracy Boch, partner at Hakim Financial, based in Macomb, Michigan.
Instead of taking money out of retirement or savings accounts, Boch says one option is to postpone retirement, and in the meantime put less money into your 401(k) or other retirement plan.
“Instead, use some of those monies toward paying down the current debt,” she says. That can get you to the goal of retirement more quickly.
Many would-be retirees are willing to sell their house to pay down debt. As a bonus, they generally have lower maintenance expenses and property taxes by downsizing, too.
Before you downsize to free up cash, however, make sure you figure in your expenses of selling, moving and possibly buying again. Unless the new house is significantly less expensive, you could find yourself in a smaller house, with no more money than before.
3. Plan a retirement budget that includes debt payments.
You may be able to comfortably retire before you get rid of all your debt – if your retirement income will suffice to pay ordinary and unexpected living expenses while still servicing your debt. The important thing is to determine if and how that will work.
You can quickly estimate whether you have an acceptable level of debt for retirement by comparing your monthly retirement income to your debt payments.
“Your retirement income might include a pension, Social Security and maybe interest from your current investments,” says Boch. “A good goal to shoot for is a 10:1 asset-to-liability ratio.”
In other words, in retirement your nonhousing debt payments should ideally be no more than 10 percent of your monthly income.
Before you take the leap into retirement, with or without debt, you should create a budget. That’s the only way to be sure you can live within your means.
“When deciding to retire, the decision usually comes down to whether your assets produce sufficient income to maintain your lifestyle,” says Michael Dinich, retirement adviser with Your Money Matters. Retiring with consumer debt is not ideal, but if you can afford your lifestyle while still making payments on your credit card balances, you may be able to retire as planned.
As you create your budget, try different scenarios with different levels of discretionary spending.
For example, you can cut back from eating out once a week to only once a month. Now that you don’t have to dress for the office, perhaps your clothing budget can be greatly reduced.
“Retirees can cut back on discretionary spending. This expense-saving strategy will make retirement life rather dull, but you will survive,” Demko says.
Don’t make the mistake of thinking you can cut out whole categories, such as clothing and entertainment, however. A realistic budget, with some room for niceties as well as emergencies, is much more likely to succeed.
If you’re deep in credit card debt, the bigger issue may be why you are in debt, and whether it’s only going to get worse.
“What needs to be considered is what caused the debt load in the first place,” says Dinich. “Was it a result of living beyond one’s income, or was it because of some unforeseen emergency or circumstance?”
He advises individuals living beyond their means to improve their relationship with money before they retire.
On the other hand, Dinich says, “If the debt was part of an unforeseen emergency, then paying back the debt can be incorporated in the retirement planning. Some options include considering a debt consolidation loan, home equity loan or even a reverse mortgage.”
4. Resolve debt with bankruptcy or debt negotiation.
It’s always better to pay one’s debts, even if it means putting off retirement a bit longer. Sometimes, however, things go wrong. Sometimes people are laid off around retirement age or suffer from ill health. Sometimes people are required to stop working to take care of a sick parent or spouse. What then?
As in any situation where paying back debts is not reasonably possible, you still need to resolve them one way or another. Don’t just stop paying when you can’t afford the minimum payments any longer.
“If they are not concerned about their credit score, if they are not concerned about a major purchase, litigation, dare I say a good name, then simply not paying is an option. It’s not one I would recommend,” says Barnes.
Leaving debts unresolved will eventually lead to collection attempts. You’re not likely to enjoy retirement trying to live on too little income, with collectors calling and sending letters.
You may want to consider debt negotiation if you have no choice but to retire, and cannot afford to make your minimum payments on your retirement income.
“You definitely want to call the credit card companies and talk to them,” says Barnes. “I think that most people will find that they are very understanding, and they can be willing to negotiate payments and reduce annual percentage rates. Calling them and talking to them is definitely encouraged.”
If you cannot work and have no reasonable way to pay back credit card debt, a last resort is to file for bankruptcy.
Because filing for bankruptcy costs money and has serious consequences, you should only file if you owe a substantial sum relative to your annual income. Before you decide to file, seek qualified legal advice in your state. Make sure you understand other options for dealing with debt, what assets and control of your money you could lose in bankruptcy and exactly how a bankruptcy is expected to help you in your situation.
Most people would probably choose to be debt-free before retirement. Sometimes we have to work with what we have, however, not what we wish we had.
“When deciding whether to retire with debt, ask yourself, ‘Will I be able to sleep at night?’ Ideally, the closer you get to retirement the less debt you would like to have so you can enjoy the next stage in your life,” says Bach.
Understanding your options can help you plan for a good retirement – one that’s as relaxing and fulfilling as you had hoped.
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