Debt in retirement seem like a trend for the baby boomers. An article published on Investopedia.com revealed that 63% of people who are 55 years old and above have both consumer and housing debts. In particular, 82% of the baby boomers (55 to 64 year old back in 2012) have debt. These data were originally taken from the Employee Benefit Research Institute (EBRI) study between 1992 and 2007. According to the same study, the debt of households with 55 years old owners average at $70,370. It is double the amount from 1992 to 2007.
The study attributed some of the debt with the health care costs of the baby boomers and the student loans that they had to help their children and possibly even grandchildren, avail. These retirees are facing debt in retirement because they have been fighting to keep up the lifestyle that they clearly cannot afford.
In truth, it is difficult to save for retirement when you are drowning in debt. Some consumers are actually thinking about simply concentrating on one of them. For some, debt in retirement is acceptable as long as they can look forward to a comfortable retirement. For some, they opt to pay off their debts and just continue working throughout retirement.
Common debt problems of retirees
The information we got from Investopedia are actually supported by another website. According to the Social Security website, as the nation approached 2010, 4 out of 5 households of near-retirees are in debt. The mean debt of each household with pre-retirees in 2010 is $120,871. If we consider only the debt holders, it rises to $150,633. That is a huge debt to take with you in retirement.
The data published on SSA.gov also revealed the following debt problems.
The mean housing debt of pre-retirees are at $102,553. This is the majority of the debt that each household has.
The mean consumer debt is at $18,317.
High income households have the highest debt amount per household. The top third of the income level has a mean household debt of $196,749. The consumer debt is at $24,437.
Middle income households have a mean household debt of $79,393. The consumer debt is at $15,836.
Lower income households have a mean household debt of $31,233. Consumer debt is $14,726.
If you compare it to the information from Investopedia (1992 to 2007), the debt grew further in 2010. At that time, the baby boomers still had 3 years before the oldest in their generation retired. Obviously, this is a big debt to overcome and that means it is safe to assume that the first retirees of the baby boomers had to accept debt in retirement. If you are one of the younger baby boomers, you have to start working hard to avoid the fate of those who retired before you.
What to do before retiring to eliminate debt payments
The nearer you are to retiring, the more urgent the task before you will be. For a lot of pre-retirees, they have two options before them. You may want to choose between the two to find out what you can do during your pre-retirement years.
For some, this might even mean working until they drop. The average household debt is just too big to expect to have no debt in retirement. We can hope to at least minimize the amount of your debt. But if not, you will have to work longer than you intended. This is especially true if you have debt payments to meet and little retirement fund to finance your needs. As much as you may want to just lounge around, you have no choice but to continue being employed. Or you can switch careers for a less stressful one. Some retirees also take advantage of their accumulated expertise and experience to go into consultancy. You also have the option to put up your own company. It is all up you and what you think will be appropriate for the retirement lifestyle that you now have to compromise.
If you do not want to work in retirement or you want to keep the delay short, you can opt to extremely downsize your life. That means selling the big house that is putting you in hundreds of thousands in debt. You can arrange it so you can at least get a portion of what you invested in the home’s equity. That can be added in your retirement fund. Or you can use it to pay for a smaller home that you can live in. For some people, living in a smaller house is more liberating. They got rid of the stuff they had lying around – selling them off to add to their retirement fund or paying off the consumer debt they still had. With not much material things dragging them down, it helped them look forward to a stress free retirement.
To help you choose between the two, here are some tips for you.
Find out how much you need during retirement. That will help you decide if you will do one or both of these. You can combine delaying your retirement and downsizing.
Know how much money will receive from your Social Security and your 401(k) or other retirement plans. That way, you can see if you have enough money already.
Check out your options to earn more during retirement. As mentioned, you can put up your own company or you can work part time.
These tips will help you deal with your credit problem to minimize the debt in retirement that you have to face. At this point, you can expect how your money will pan out when you finally step into retirement.
How to make your retirement money last despite debt
The reason why you do not want to take your debt in retirement is because you want to make your money last. People nowadays are living longer than before and while that is a good thing, it also puts more pressure in pre-retirees to save up enough money to last.
Here are some of our tips to help guarantee that you will not outlive your retirement fund.
Use your free time to study how you can increase your stock investment. Some people think about decreasing it. You should do the reverse.
Save wherever you can. Whether you are working part time or full time, try to look at places where you can save. The bulk of the expenses is usually in your home so if you downsized, it should be easy to implement this tip.
Adjust your withdrawal from time to time. Keep a close eye on the market, the inflation rate and your own spending needs. Adjust your withdrawal rate so you only get what you really need. It should be safe to say that you assess your withdrawal rate once a year.
Keep the income coming in. Of course, you can continue working so you can live comfortably. You just have to know the important facts about working in retirement.
Continue educating yourself. Keep yourself in the loop by understanding how your generation is spending and how they respond to the market. In most cases, the general habits of consumers with similar age as you is the same. But of course, you always have to prioritize trusting your gut instinct before making a decision that will affect your retirement and your money.
Debt in retirement should not make you dread this important phase in your life. There are ways to alleviate your situation. Just let go of what happened in the past because you cannot undo it. Focus on what you can control and that is mostly what lies in your future.
Diana hates debt just as much as you do. She is a finance writer for National Debt Relief. She aims to provide the best information to win the battle against debt.