Near-retirees need a plan for debt

Retiring a mortgage can be the biggest boost to cash flow. But like the sequestration that continues to play out in Washington, it might be time for some pre-retirees to engage in their own personalized version of across-the-board spend- ing cuts.

Why?

To carry the analogy — even if strained — one step further, it is the same reason that the country is facing austerity. In a word: debt.

Near-retiree households are shouldering more debt than previous generations, particularly mortgage debt, according to new research by the nonpartisan Employee Benefit Research Institute.

Separately, a new report from AARP shows that middle-income Americans 50 and older are holding more credit card debt than younger people.

SERIOUS IMPLICATIONS

This combination of consumer and housing debt could have serious implications for a new generation of retirees who discover that deficit spending in a post-paycheck world can lead to financial disaster.

“Individuals get really excited about jumping into retirement,” said Katie Libbe, vice president of consumer insights for Allianz Life Insurance Co. of North America.

“But like students anxious to graduate, they have to complete their homework first. After reviewing their anticipated expenses in retirement and comparing it to their expected sources of income, they may find a few more years of working would put them in a better position to retire,” Ms. Libbe said.

Nancy Skeans, director of the wealth management practice at Schneider Downs Wealth Management Advisors LP, often works with new and existing clients who are preparing for retirement.

“My first question is, “What do you want your retirement to look like?’” she said. “If you can’t answer that, it’s difficult for me as an adviser to project whether you can meet your goal.” About half of her clients don’t have a ready answer, Ms. Skeans added.

PROJECTING COSTS

Once clients can articulate their vision of retirement, whether it involves low-cost activities such as volunteering in the community and pursuing hobbies, or higher-priced entertainment such as club memberships and travel, an adviser can project their costs and compare them to their sources of income. Ms. Skeans said she also helps them quantify the extra costs that they might not have considered, such as buying a new car periodically, paying for medical expenses and giving to children or grandchildren.

“If possible, a person should try to go into retirement debt-free,” Ms. Skeans said. “For some, it’s not possible from a mortgage perspective if they bought a new home late in life. But you can’t go into retirement paying off the bills for groceries and furniture you bought five years ago.”

New research shows that debt is a real problem for many of those nearing retirement.

Housing debt is a major component of debt for families headed by someone 55 or older, according to a new EBRI report. Not only did the incidence of older households with housing debt increase to 42% in 2010, from 24% in 1992, the average level of total debt — including credit cards — for this group more than doubled to $75,082, from $33,726.

Separately, a new AARP report found that Americans 50 and older now have higher credit card debt on average than younger consumers. And it’s not recreational trips to the mall that are adding to their red ink. Older households often rely on credit cards as a plastic safety net to pay for crucial expenses such as out-of-pocket medical and dental costs, as well as home and car repairs.

For some pre-retirees, downsizing to a mortgage-free home before retirement can be a good way to wipe out debt and boost savings, Ms. Skeans said. Unfortunately, many people wait until they are too close to retirement before they assess their situation, and that can make it difficult to close the funding gap.

Although the traditional remedy for those who come up short may be to postpone retirement, Christine Fahlund, a senior financial planner with T. Rowe Price Group Inc., suggests that a potentially more enjoyable approach might be to “practice retirement.”

“PLAYING’ AT RETIREMENT

This approach enables clients to start “playing” while they continue to work during their 60s — testing out some of their retirement dreams while they retain the financial cushion of a salary and benefits.

There are several important benefits that can be gained from the extra years of working and playing at the same time, Ms. Fahlund noted. Delaying retirement will provide more time for retirement nest eggs to continue compounding tax-deferred, and it will shorten the time those funds will have to last. Working longer can also delay the start of Social Security benefits, which can boost monthly income and provide a bigger base for future cost-of-living increases.

Mary Beth Franklin is a contributing editor at InvestmentNews. [email protected] Twitter: @mbfretirepro

Related Topics: Financial Planning, Mortgages