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.
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.
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.