In 2013, the average household headed by someone age 55 or older had $73,211 in debt, according to the Employee Benefit Research Institute. While this may seem like a significant amount, 67 percent of retirees the EBRI surveyed earlier this year said their debt is not a problem. Some financial experts say that thinking could be a mistake.
“When you have debt, you are less rich than you think you are,” says Ken Moraif, a certified financial planner and senior advisor at Money Matters in Dallas.
Moraif says one of the major risks associated with debt is the possibility seniors won’t be able to make payments should the market take another dive like it did in 2008. “The people you owe money to don’t care if your investments lost 20 to 30 percent,” he says.
An estate also has to pay off outstanding bills before any money or assets are passed to heirs. Seniors hoping to leave a legacy to their family or a favorite charity should therefore carefully consider how their debt will impact the amount available as an inheritance or bequest.
For seniors hoping to get out of debt, here are five steps they can take to get on the path to financial freedom.
1. Create a budget and prioritize debts.
It all starts with a budget and a debt-repayment plan.
“The first step is to get real about where they are,” says Shanna Tingom, an accredited asset management specialist and co-owner of Heritage Financial Services in Gilbert, Arizona.
Seniors should take stock of their current spending as well as the money they have coming in from various sources, such as retirement funds, pensions and Social Security. They should also make note of all their debts, including the monthly payment and interest rate, and prioritize the order in which they are to be paid off. Advisors say the best bet is usually to start by paying off the debt with the highest interest rate.
At this point, financial experts diverge in their advice. While everyone agrees seniors should dump unsecured debt like credit cards, whether to include low-interest debts such mortgages or auto loans in a payoff plan is up for debate.
Some, like Moraif, argue strongly that no debt is good debt. Others, like David Peterson, a certified financial planner and managing director at United Capital in Littleton, Colorado, say seniors shouldn’t worry too much about secured loans with low interest rates. When loan interest rates dip to only a few percentage points, retirees may find they come out ahead financially by investing their money rather than using it to pay off debt.
2. Adjust your lifestyle.
Once a budget is made, seniors should take stock of how they pay bills and whether it’s time to change their current lifestyle.
“Sometimes people pick up the slack with credit cards,” Tingom says. “Sometimes it takes some time for reality to catch up.”
Rather than waiting for a financial crisis, seniors who are running a deficit each month should take action now. That may mean taking in a roommate, eliminating travel temporarily or selling a car, RV or vacation property. In some cases, seniors may only be able to pay the bills by downsizing to a smaller house or apartment.
While that may not sound like fun, Moraif says lifestyle changes should be viewed as “rightsizing” rather than downsizing. “That reduced lifestyle is probably the one you should have had in the first place,” he says.
Even seniors who can comfortably pay their bills should think about where they can cut back in order to get out of debt more quickly. For example, reducing the frequency of dining out or switching to a cheaper cable or satellite package could free up money that can be used to pay down the highest priority debt.
3. Pay your bills on time.
Financial advisors suggest seniors focus all their extra money on one debt at a time. However, they still need to make other payments.
“Make minimum payments on every debt except the one with the highest interest rate,” Peterson advises.Failing to make a minimum payment could mean the interest rate on the debt increases and what was once an affordable minimum payment turns into an unaffordable amount. Plus, penalty fees could be added to the balance, setting back a senior’s efforts to become debt-free.
4. Ask for help.
Seniors who feel overwhelmed by the debt repayment process or are over their heads in debt shouldn’t be afraid to ask for help. Family or friends may be able to help set up a budget or, if assigned power of attorney, negotiate a lower debt payoff amount or consolidate debt at a lower interest rate.
For those who don’t have family or aren’t comfortable asking them for help, resources are available through local organizations and government agencies. Some states have legal hotlines for seniors that can provide advice. The National Association of Area Agencies on Aging can also connect seniors to local assistance.
5. Use your retirement fund … carefully.
Finally, seniors shouldn’t overlook their retirement funds as a source of cash to pay off debts. However, financial advisors urge caution when dipping into savings, since that money is usually taxable.
“Look at how much [you] can take out without bumping up to a higher tax rate,” says Peterson, reminding seniors that a $50,000 disbursement from a retirement fund won’t pay off $50,000 in debt once taxes are paid.
As far as Tingom is concerned, pulling money from a retirement fund can be smart so long as a senior is committed to living within his or her means going forward. “My only guideline is that there is a plan in place to make sure [debt] doesn’t happen again,” she says.
Without a plan, several withdrawals from a retirement fund to pay off debt can leave the account depleted and seniors nearly bankrupt at a time when medical bills and other expenses are increasing.
Still, Moraif says seniors should take advantage of whatever resources they have to get out of debt. “Paying off your debt is a guaranteed return,” he says. “Being debt-free is the most important goal you can have.”
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