Debt

When Living Off Fixed Retirement Income And Assets, Debt Does Not Make Sense

There is a television advertising campaign in the U.S. for a bank that shows a band of marauding Vikings attacking a middle-class couple who are spending liberally on their credit card. The metaphor is not subtle: high interest payments can feel like an overwhelming force. In reality, carrying a large amount of debt is more like death by a thousand cuts. Most people can manage their debts by juggling repayments, but fewer and fewer of them are paying them off in full. On average, the debt carried by U.S. households is equivalent to 100 percent of their personal disposable income.

Most disturbingly, the problem of massive debt accumulation is most acute among seniors. A report by Demos, a New York-based advocacy group, found that:

• Average self-reported debt among seniors (65 and older) grew by 89 percent between 1992 and 2001 to $4,041.
• For those aged 65 to 69, the news was worse. This group experienced a 217 percent jump in credit card debt to an average of $5,844.

Dr. Joyce Brothers said, "Credit buying is much like being drunk. The buzz happens immediately, and it gives you a lift. The hangover comes the day after." Entering retirement with credit card debt is a sure way to feel hung-over.

In fact, you can not really retire when carrying high-interest credit card debt. Most people in retirement are living off of a fixed income – meaning that you will not have more money tomorrow to pay off the debt than you do today. You will simply be paying more interest – wasting money every month you carry the debt. The average family between the ages of 55 and 64 who carry credit card debt spend 31 percent of their income on servicing the debt. In retirement, particularly, that is akin to throwing money out of the window.

The rise in credit card debt would not be so worrying if it were not accompanied by a simultaneous decline is savings. The Demos report on retirement says that the average share of senior's income derived from assets dropped from 21 percent in 1992 to 16 percent in 2001.

What about your mortgage?

A home mortgage won't mean disaster in retirement if your finances are solid in other areas – you have paid down other more costly debt, such as credit card debt, your expenses are low and you have a steady stream of income from pensions, savings and Social Security.

The Federal Reserve Survey of Consumers showed that 24.7 percent of households headed by someone age 65 to 74 had mortgage debt in 1995. That number grew to 32 percent in 2001, according to the most recent Fed survey. The baby boomers -- those ages 40 to 58 now -- are expected to push that trend even further. Consumers owed $766.2 billion in home equity loans and lines of credit by the second quarter of 2004 -- double the amount they owed in 1998, according to Fed data.

However, carrying mortgage debt into retirement is best avoided:

• It creates tax hassles.
• You lose financial flexibility because you have this big fixed monthly cost. That can make for tough choices in down markets, as you try to figure out which investments to sell in order to make the monthly mortgage payment.
• Your mortgage debt will limit your ability to tap into your home's value through a reverse mortgage.

Learn more about Debt Consolidation or talk to a Home Refinance Lender about Debt Consolidation.