Should you retire while carrying debt? This question is on the minds of millions of seniors reaching retirement age. Retiring without debt will allow you to live on less, making your money go further. Debt burdens sacrifice control over finances and will limit discretionary spending.
Poor health or layoffs factor into many retirement decisions and can prevent you from working longer. Statistics show that 72% of seniors take social security before full retirement age. This leads to a permanent reduction in social security income and often means credit card balances, student loans and mortgages carry into retirement.
Years of generous lending practices made life easier during your working years, but may result in struggles during retirement.
Debt burdens for those entering retirement is higher than it has ever been. According to the Employee Benefit Research Institute, households headed by someone 55 or over are still carrying an average of $73,211 in debt as of 2013. For those with incomes over $100,000, 25% of those over 65 years of age still carry a mortgage.
In 2015, a separate survey conducted by the Trans American Center for Retirement Studies discovered that 82% of those 60 and over felt they would not be able to stop working when they were 65, or were already working past 65. Only 27% of baby boomers were confident that they would have enough money to last them through retirement.
So where does that leave seniors at this stage of life?
What Debt Matters
There are primarily three types of debt that analysts evaluate when it comes to debt and retirement. These include credit card, student loan and mortgage debt. Car loans and other short term loans are not included because they can be paid off within a few years. These critical debt categories can extend payments up to 30 years and could mean making debt payments well into retirement.
Credit Card Debt
Credit cards are the most troublesome of the three because of high interest rates and unfavorable terms. The purchases generally pay for items that are no longer owned or enjoyed, making the debt burden significant with marginal current value. Credit card debt should be paid off or settled before retirement, if at all possible. High interest payments may prevent you from covering basic necessities and studies show that approximately 1/3 of seniors in retirement use credit cards to cover essentials, meaning debt is increasing in retirement instead of declining. Once retired, your reduced income might put you in a situation where you are making minimum payments for decades, impacting long-term financial stability.
Student Loan Debt
Student loan payments in retirement are a new reality. It is estimated that 80% of seniors with student loan debt are still paying for their own schooling. Current repayment plans allow for income based repayments that extend to 25 years. It may also be possible to have these debts discharged in bankruptcy if certain criteria are met.
Home Mortgage Debt
Carrying mortgage debt into retirement gets mixed reviews when it comes to recommendations from financial professionals. Mortgage payments can be 30% or more of the household budget, which may increase to a higher percentage when income declines. If you can comfortably manage your mortgage payment, low interest and tax benefits can shore up retirement cash while continuing mortgage payments during your early retirement years.
In a perfect world all seniors would retire debt free. Reality paints a very different picture. The bottom line is — the less debt you have in retirement the less you will need to live.