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Ohio Department of Aging Boomerang: It all comes back to you!

Boomerang: It all comes back to you!

My Future - February 2010

Retiring With Debt
Should You or Shouldn't You?

Should you carry debt into retirement? That's the $4,000 question, $4,041 to be exact - the average amount of debt owed by Americans age 65 and older, according the public policy advocacy group, Demos. Traditional wisdom holds that debt is a major threat to a retiree's financial security. The recent recession has caused many people to look at debt differently, but is it now okay to retire with debt?

According to a report from life insurance company, Securian, baby boomers today are less likely to use credit debt for lifestyle and status purchases and more likely to use it for emergencies, travel and everyday expenses such as groceries and medical care. They are paying off car loans, credit cards and mortgages, and settling debts with family and friends. In short, says the report, "retiring debt-free should be the goal for more Americans."

Traditional wisdom holds that debt is a major threat to a retiree's financial security.But can you really pay off debt and save for retirement at the same time? Experts say yes, but you should keep in mind that this likely will mean it will take longer to pay off the debt. The upside is that it will cause you to form two positive habits: saving and paying off debt. Many online debt calculators, like the one at BankRate.com, collect information about how much debt you owe and your goals for paying it off, then help you determine the types of payments you will need to make.

AARP suggests that the first step to retiring debt-free should be to stop using credit and begin managing the debt with the resources you currently have. This means paying cash and saving for big purchases, but it also means making a budget, trimming expenses and applying the money you save toward your debt. Pay more than the minimum amount due on all credit card bills. Focus on paying off accounts with higher interest rates first, but if you can free up cash by paying off smaller balances first, do that. Then, depending on your situation, you can look at more aggressive ways to get rid of your debt.

One strategy is to pay off debt with your existing savings. This isn't an option for all retirees, but most financial experts say that if you have the resources to simply pay off your debt, you should do it - it's easier to replenish your savings when you aren't paying high credit card interest. Resist the urge, however, to borrow from your 401(k) or other investment tools to pay off debt. Even though it is a low-cost loan, it carries risks, especially if you leave, or lose, your job.

If you have an existing mortgage, you may be able to refinance it and use the equity in your home to pay off more expensive debt. Refinancing also may reduce your interest rate, giving you more cash to apply toward other bills. Check with lenders about refinancing programs that offer special features for retirees.

If you don't currently have a mortgage, consider a reverse mortgage, which allows you to draw on the equity in your home without making mortgage payments, making it ideal for non-mortgage debt elimination. But consider a reverse mortgage carefully - it comes with high fees and, depending on your home's value and your life expectancy, may end up costing you more than other financing options. When you die or leave your home, the bank will recoup the cost of the reverse mortgage from the equity in the home, making it a poor choice for retirees who wish to leave something for their heirs.

Another way to tackle debt is to plan to work in retirement. Returning to work full-time or part-time can supplement your retirement income and help you focus on paying off debt more quickly. Check with the source of your retirement benefits, however, to make sure that taking a job will not affect your benefits.

If none of these options works for you, consider debt consolidation. Basically, consolidation means that you secure a blanket loan with a relatively low interest rate, into which you roll higher-interest debt. You can do this yourself or choose one of the many companies that offer debt consolidation services. Some companies use their bargaining power to negotiate much lower interest rates and lower payments with your creditors. You then make a single payment to the consolidator, who disperses the right amount to each creditor, keeping a fee for themselves. Research debt consolidation firms carefully, as some of them have better reputations than others.

No one strategy is perfect for everyone. You can employ a combination of several of the above tactics to manage and even pay off your debt leading up to and into retirement.