Don’t Let Debt Drag on Your Retirement

by Marc Bastow | March 26, 2013 1:07 pm

Now that you’ve got retirement in your sights, it’s time to kick back, collect income, and … load up on debt?

Obviously, that sounds counterintuitive, but it appears that’s what too many households entering those critical years in retirement are doing.

Census Bureau data[1] shows that median debt for households led by people age 65 and older jumped from about $12,000 in 2000 to nearly $26,000 in 2011 “due largely to rising mortgage debt,” according to the Wall Street Journal[2].

So what’s going on? Several factors are combining to put more seniors and retirees into debt:

• Increased home ownership, meaning new mortgage loans.
• An increase in second mortgage (home equity) debt levels.
• Increased credit card debt.
• Even student loan debt.

The spike in debt comes right alongside a decline in seniors’ overall wealth. Census data shows that the median net worth of American households declined to $69,000 in 2011 from $82,000 in 2007, and $107,000 in 2005.

If saving and investing are two of the bases for solid retirement footing, managing expenses certainly is another. Loading up on debt — even inexpensive debt associated with low mortgage rates — puts a crimp on a household budget that might one day (or already) be dependent on fixed income.

Here are some suggestions on avoiding the debt run-up:

• It’s nice to have the ability to borrow against what is hopefully a home with just a little bit of debt left, but why open a $100,000 line if you might only need $10,000 or less? Take the lure of easy money out of the equation. Only borrow what you need.
• Credit cards still are about the most expensive debt out there. Don’t spend any more than you can easily pay off in any one-month cycle, two months tops.
• Everyone wants to help their children and other family members, so do so … but prudently! Co-signing student loans makes you responsible, too, so use this tool wisely, not just for emotion’s sake. As for family loans, consider putting together a contract with a repayment schedule, forcing your borrower to meet the debt.

If you’re not already on Social Security, you are probably getting close, and those minimum required distributions from your IRA are getting closer too — providing you with more sources of income to go with what’s coming in from your other retirement investments. But what you don’t want is an increased debt burden to eat into that income.

So don’t just take a long, hard look at what you’ll have coming in — but also look at your debt to see if you can do anything about what you’ll be paying out.

Marc Bastow is an Assistant Editor at InvestorPlace.com.

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