Sense & Centsibility Blog

Can Debt Derail Your Retirement Plans?

The answer is… absolutely.  When thinking about retirement preparation most of us focus on saving. We think about how much we are saving, how we are investing, and day dream about how to spend our golden years.

Unfortunately, not enough time is spent thinking about how the debt we are accruing now can impact our future.

Recent studies done by Demos and Harvard University’s Joint Center for Housing Studies (JCHS), show that older Americans are still carrying high levels credit card and mortgage debt into retirement. 

Just like high student loan debt can force younger adults to put off a milestone like buying a home or starting a family, mortgage and consumer debt can be just as devastating for seniors planning to retire. With the lower fixed income that often comes with retirement, significant debt payments can push back a planned retirement age WAY down the road.

Here are four tips to help you take back control of your financial future and stay on track for retirement:

1. Avoid using equity in your home to “pay off” debt.Lounging

Refinancing or taking out a home equity loan can seem like an effective way to get rid of debt.  However, when you tap your equity to deal with debts you are not really “paying off” anything. You are simply moving debt from one place to another and at the same time increasing your housing costs well into the future. 

As home values then increase, it’s easy to get into the habit of using equity again and again over the years. But that habit will leave you with no equity and a high mortgage payment that may be unaffordable in retirement.

If credit card debt is creating a problem for your finances get all the information about your options from a certified financial counselor.

2. Got unsecured debt? Get on a plan!

Don’t let your debt decide when you retire. Meet with a financial counselor who can talk with you about all of your options. They will help you create a workable budget with a plan of attack to conquer your debt and create emergency savings in order to avoid dependence on credit in the future.

One great option is a Debt Management Plan (DMP). So for example, if you’re planning to retire in 5 years, you could start a DMP now and with on time, monthly payments your credit cards would be paid off by the time you retire (5 years or less)!

3. Don’t take on debt for others or put yourself in a tough financial position to help others.

Helping family members financially can be a very difficult decision to make. Here are questions to ask yourself when deciding whether or not to provide financial help.

  • Do I have to put myself in debt (or more debt) to help? If yes, will you have to delay retirement if you take on more debt…and is that worth it? Is this a debt that I feel comfortable repaying if the person I am taking it out for is not able to? A simple rule to follow is that if you can’t afford the payment yourself, don’t take out the debt for someone else or co-sign for a loan.
  • Am I putting my finances at risk if I help? If yes, think carefully before offering help. What are the risks and consequences?

4. Simplify.

As you approach retirement, start selling or donating items that you no longer need or want. Maybe you even decide to downsize your home. Getting rid of debt can provide freedom in many ways. Watch Rod and Bonnie's story to learn more.

So when you plan for your retirement, think about what is TRULY important to you… and how you want to spend your golden years.

Author Ashley Hagelin is a Financial Counselor at LSS Financial Counseling who specializes in Reverse Mortgage Counseling. Give us a call at 888.577.2227 to connect with a counselor today!