Should You Retire With Debt?

In today’s economy, many retirees and soon-to-be-retirees are piling on the debt (in order to make ends meet) and delaying their retirement (in order to make ends meet). This is NOT a good thing, according to many financial experts. Conventional wisdom suggests that you shouldn’t retire with debt. According to recent statistics, more than 70 percent of boomers held debt compared with a dozen years ago, when 64 percent did.

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Should retirees take on debt, live the good life and then die leaving their heirs to sort things out?

Why are boomers getting to be so heavily indebted at this age, you might ask? The main culprit is housing. Boomers are taking out larger mortgages, which might not be such a bad thing. Mortgages are constant and steady. Most have fixed rates that can help boomers control their housing costs when inflation takes over. Many boomers also, have taken on second mortgages and equity lines of credit. Those latter things, however, I find to be most dangerous for retirees. I’m against using one’s home as collateral, simply to go out and spend more money, buy new things, take expensive vacations or jeopardize one’s home over buying a new car or other adult plaything (like boats and RVs).

There’s good debt. And then there is bad debt. Did you know many retirees are still paying off student loans? That’s a bad debt in my opinion and probably why many retirees are staving off retirement and continuing to work. Mortgages are good debt. Reverse mortgages are bad debt. Equity lines of credit and second mortgages are bad debt because they put a retirees home on the line. One of the most stable things a retiree needs to do in retirement is secure a roof over their head. Putting one’s home base in any sort of danger is bad debt IMHO.

Any kind of consumer debt, IMHO is also bad debt. If you are borrowing on your charge card to pay for food, gas, health-care costs or entertainment, you have a serious credit problem. You’ll have to look over your income vs expenses and start cutting. DH and I have now switched over to cash purposely to make sure we don’t overspend in these categories. It’s easy to walk into the supermarket and pile food goodies in to our cart when we think we are paying for it with a credit card. But put $100 or less cash in to your hands, you have no choice but to spend wisely and within your budget!

Buying a car, on an installment, steady, fixed rate line of credit might be good debt. But if you don’t have the guaranteed, reliable stream of income, one financial blip can send your vehicle over to the repo man.

There’s only one example where having debt in retirement may be a good thing.

An Exception for Some Retirees
To be fair, some retirees who may be able to use debt appropriately in retirement, through liability matching — offsetting a like-kind income source against a debt.
So, for instance, if the retiree has a source of income that meets or exceeds his or her anticipated base expenses for life, then using debt sparingly may be acceptable. Most often, base income sources that should be considered acceptable to cover ongoing and limited debt are Social Security, pensions, government bond income or annuities.

In the absence of those sources of income, and in the absence of any forethought and analysis, it might not be wise to retire with debt. But with those sources of income and with the appropriate forethought and analysis, financial experts just might give you their blessing on retiring with debt. (click here)

For us, we have that guaranteed income stream (social security, pension, bond and CD income) the financial experts listed above are talking about.  Our expenses are lower than our monthly income. We have wiggle room to take on debt and easily pay it off. This tactic is invaluable to us because it saves our financial holdings from cost-of-living withdrawals. Our cash continues to work for us rather than the other way around. Borrowing now is cheaper than ever. So, the old way of thinking ‘retiring without debt’ may no longer apply.

If you’re a retiree and can get a mortgage for only 3% to 4%, and your home is smallish, a condo or a townhouse, thus making it affordable, borrowing may NOT be such a bad idea provided you have that guaranteed steady income AND said income is more than your expenses are.

Also, if you’re a retiree and you’ve been hit with severe medical bills….if you’ve been offered zero or low interest loans to pay off high medical debt, take it! Keep your cash in your bank and use their money instead of your own. You’ll probably need your cash for other things. Maintaining your health is important. So is the peace of mind you get from having cash reserves.

Consumer debt in retirement? The answer to that is no. Revolving credit and high interest rates can kill anyone’s retirement. I agree that it’s best to pay this debt off before you retire. Car loans? Maybe. Mortgages? Maybe. Reverse mortgages? Do your home work because basically they suck!. Equity Lines Of Credit or a Second Mortgage? I say no. I would NEVER jeopardize my living arrangements in retirement. That’s primo! Taking out zero interest loans or zero interest credit card debt? If you can pay this off at least one month prior to the due date, then yes. Or better yet, paying each monthly balance off in full is even wiser.

Using credit to maintain a lifestyle? Absolutely not. In retirement, the goal is survival and having your money last till death. Living is your new lifestyle. Not keeping up with The Joneses or maintaining a social status. That defunct thinking should be tossed aside.

Full Disclosure: We occasionally use zero interest credit card borrowing to purchase some large scale items such as kitchen appliances, furniture, home repairs, mattresses etc. We have no mortgages and we have no car loans. We have no consumer revolving credit lines. If for some reason we can’t pay off the zero interest charge cards, we roll them over into another zero interest credit card till we do pay it off.

We have a low interest loan (3.99% currently) on our RV. Yes, we could have purchased this RV for cash but because borrowing rates are so low and we are getting a good rate of return on our investments, we decided to leave our investments alone (let them keep earning us money) and borrow money instead. We’re using the bank’s money instead of our own. We have several sources of guaranteed income (social security, pension, bond & CD interest). Our expenses are less than our income so we have wiggle room to take on some “good” debt IMHO. If we do, however, suffer a financial blimp, we have the ready cash to pay off the RV loan. Should either one of us die, we have life insurance to pay off the RV debt if need be. Our plan right now (which could change at any time) is to sell our current home in 2.5 years and relocate somewhere less expensive. Our intention is to pay off the balance of the RV loan at that time with the equity proceeds from the sale of our home.

 

12 comments

  1. Do I see a new blog format? Easy to read…could be my new $100 prescription compter specs! (now they are a deal!) Anyway, agree with all your points above. Still believe in no debt…but with interest rates so low and flexible income for 2 more years Mr. LBD is itching to use the banks money instead of our own that he has invested very nicely. Since we are both, and always have been savers, who have lived every month of 35 years under our income we have peace of mind our habits are sound no matter what cycle the ecomony is in. It’s always in motion! Great post!
    https://littleblackdomicile.com/?s=smaller+living

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    • Thanks Laurel. I haven’t changed my blog in a while. It could be those new $100 prescription glasses! LOL. Both my husband and I have gotten new glasses and new lenses. I’m wearing reading glasses for the first time and it has made reading so much better!! LOL.
      You’re lucky as you can do interior design for a long, long time. Sarasota must love you two! BTW, I have many friends and family still in Sarasota who might just need your services in the very near future. One friend may be getting re-married soon. She and her SO are looking at condos as we write.
      Thanks for your comment.

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  2. You always make me think. We have our own accounts and a joint account from which we pay all of our bills. The personal accounts are for our purchases like clothes, gifts for our own families (I buy much more for my fam than PC, who doesn’t buy for anyone except his parents), our gas in our cars, etc. It works most of the time but of course, I like clothes more than PC, and shoes, and purses (he doesn’t care for them at all) and women just have to spend more, it seems to me, for all of that stuff. How many times have I said I wish I was a guy!!

    All of this to say, we don’t have credit card debt together but I always wind up using my Amazon or Loft card sometime each month for something. Not wise, I know, when I can’t always pay it off immediately, but with four birthdays within 2 weeks time every summer, and Christmas, too, I always over spend and stay slightly in debt.

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    • Leslie, I hear you! I used to go into serious American Express debt over Christmas. No more. It was mutually decided that no one gets any presents anymore except the two granddaughters. And even at that, there is a $25 limit each. Hubs and I never exchange presents. We give each other things like vacations, dinners out, date nite at the movies throughout the year. Those are our presents.
      Neither hubby or I like clothes. Shorts, tees and flip flops for us. We do have dress-up clothes but if you ever see us at a special event, we’re always wearing the same dress-up clothes! I think its funny.
      Thanks for sharing. Thanks you for your comment.

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  3. An impressive share! I have just forwarded this onto a co-worker who has been conducting a little research on this.
    And he in fact ordered me lunch because I found it
    for him… lol. So let me reword this…. Thank YOU for the meal!!
    But yeah, thanks for spending time to discuss this subject here
    on your internet site.

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    • Ciao. Come’ sta? I am only allowing your comment to stay posted because your website is written in Italian and you are probably from Italy. Bienvenuto! Welcome.

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  4. Hi Cindi, I agree with some of your statements but not all. I think the reason is I have managed debt more carefully throughout my life and not overextended my borrowing . I use credit cards for convenience and their rewards are now an added perk. I have always paid my balances off in full so have never paid interest. I switched my amortized mortgage to a simple interest home equity loan and saved almost $200,000 in interest, that’s when we had higher mortgage rates 8%-13% in the 1980s. Home Equity loan was 4% and went down to 2.25%.
    It’s how you handle debt that is important and use it wisely. I too own my home and waver on getting a home equity loan set up in case there is a major emergency or if I find a place close to my kids that I want to get. It is the cheapest easiest way to free up the equity to buy a new home. The amount you can qualify for as a mortgage is only determined by income not your assets and they have a huge amount of fees. My banking relationship gets me a no fee and discounted interest rate home equity loan on my existing home and only a $300 penalty if I close it in the first 3 years. I save before I do any maintenance or renovations I need to have done on my home.
    I used leverage to buy my car with a loan but my investments are making 8-14% difference thus paying all the cost of the loan, property taxes and part of the insurance so no impact on my budget. I think I would have made a bigger down payment on the loan if my investments were paying less then 1 % more then the loan. This would have made less of an impact on the monthly budget. Sincerely, Lara

    Liked by 1 person

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