Pay off that debt before you retire

Real Estate

How you manage debt could have a big impact in how your retirement dreams play out.

Four in 10 retirees cite “paying off debt” as a current financial priority — putting it on equal footing with “just getting by to cover basic living expenses” as a top concern, according to a new report from the Transamerica Center for Retirement Studies. Almost 3 in 10 cite paying down credit card debt as a priority, while 17 percent point to mortgage debt and 11 percent are prioritizing some other consumer debt, such as medical bills or student loans.

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While many retirees say they are happy in retirement and have kept up their standard of living, those outstanding debts — in combination with other red flags like reliance on Social Security as a main source of income and a lack of long-term care planning — point to the potential for problems, said Catherine Collinson, chief executive and president of the Transamerica Institute and Transamerica Center for Retirement Studies.

“Many are in a precarious situation if they are confronted with any kind of financial shock,” she said.

TCRS surveyed 2,043 retirees in July, focusing on adults age 50 or older who consider themselves either fully or semi-retired. The median age of those retirees was 71.

Among those retirees in the red, the median owed is $52,000 in mortgage debt and $4,000 in non-mortgage debt.

Earlier-than-expected exits from the workforce may contribute to the share of retirees with debt. TCRS found that 56 percent of retirees left the workforce sooner than expected — for reasons including a job loss, their own poor health or to become a caregiver for an ill loved one.

The circumstances behind an unexpectedly early exit can generate additional debts, while nixing any plans workers may have had to knock out existing debt before retirement, Collinson said.

“They may have found it really difficult to regain their financial footing,” she said.

Here’s how to plan around managing debt ahead of, and into, retirement:

“I tell my clients that before you retire, we should try to retire as much debt as possible,” said certified financial planner Marguerita Cheng, chief executive officer for Blue Ocean Global Wealth in Gaithersburg, Md.

Credit card debts should be a top priority, due to the high rates and revolving balance, she said.

Then look to debts with fixed rates and payments , such as a mortgage or auto loan. Those are more predictable (and so, easier to plan for as part of a retirement budget), but can still be worth chipping away at so you have one less expense in retirement.

If it looks like you’ll retire with some debt, factor that repayment into your overall plan, said certified financial planner Lynn Ballou, regional director of EP Wealth Advisors in Lafayette, California.

“Make sure the payoff of those debts is built into the budget — not as an additional cost, but because you are giving something up,” she said.

Your retirement plan should also include a cash “thinking fund” to save for anticipated big-ticket purchases or expenses in retirement, Ballou said. That way, you don’t have to pull extra out of a retirement account (triggering tax surprises) or take on substantial new debt.

“People forget if they retire at 65, they’ll probably buy a car or two, and replace their roof at least once,” she said.

Keep the potential for an earlier-than-expected exit in mind once you hit your 50s. Be cautious at that point about taking on new debt if you can avoid it, especially where an affordable repayment plan hinges on you continuing to work, Chen said.

“You could experience a reduction in income sooner than you anticipate,” she said.

Particularly dicey: A late-career 401(k) loan to cover credit card debt or other expenses. That loan becomes due should you leave your job, turning an unexpected workforce exit into a double-whammy of reduced retirement savings and a taxable distribution, Chen warned.

Take whatever steps you can ahead of or in retirement, to make your debt more affordable, Ballou said.

Call your credit card issuers to negotiate for a low rate or have fees waived, for example. Depending on the type and details of your debt, it might make sense to refinance it, consolidate with a low-rate personal loan or carefully use a balance transfer offer.

“I encourage clients to research the very best deal they can, the very best payment schedule,” she said.

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