Is it OK to Retire With Debt?


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Some money experts argue that retiring with certain kinds of debt is not such a bad thing. But they might not be talking about you.

Is it a good idea to retire with debt? Ask that question a generation ago, and you’d hear a loud and unequivocal “no” from most anyone. Today, however, some argue that debt may be OK in retirement, depending on the type of debt and how it is managed.

Debt among elders

It’s a timely question. Older Americans are carrying bigger loads of debt into their post-work years than ever before:

  • The share of Americans ages 56 to 61 with debt grew from 64 percent in 1992 to 71 percent in 2008 (the latest year studied).
  • The average amount of debt in this age group grew from $6,200 in 1992 to $28,300 in 2008 (amounts in 2012 dollars).

Mortgages and school debt

One of the biggest reasons debt is increasing among elders is that fewer have paid off their mortgages. Researchers (in a University of Michigan study, “Older Adult Debt and Financial Frailty“) say baby boomers’ financial insecurity grew in large part because many boomers used mortgages with small down payments to buy costly homes before the financial crash.

Here’s a quick look at retirees and their mortgages:

College debt is another big weight on retirement today. “Over the past decade, people over the age of 60 had the fastest growing educational loan balances of any age group,” says the Federal Reserve Bank of New York. These school loans — taken on to educate themselves, children and grandchildren — grew 850 percent from 2004 to 2014.

Good debt, bad debt

Plenty of experts — probably most — agree that debt in retirement is not a good thing if you can help it. Some, though, make a distinction between good debt and bad debt.

  • Good debt: When money is borrowed for assets that appreciate — as with a mortgage that lets you enjoy the rising value of real estate in an “up” market.
  • Bad debt: When the asset covered by a loan loses value — such as money borrowed to buy a car or boat, for example.

One retirement expert who sees a role for debt in some cases is Lawrence Kotlikoff, economics professor at Boston University. He tells MarketWatch that a mortgage with a fixed, low interest rate may actually be helpful if your pension or other retirement fund grows slower than inflation.

That’s not an issue today, though, with inflation just a bit over 1 percent currently. But high inflation in the past has been a special hardship for retirees because fixed incomes don’t grow with rising prices. Kotlikoff, an expert in Social Security and retirement planning, explains:

“When inflation takes off, you get to pay back your mortgage in watered down dollars and this offsets the fact that your pension or other stream of fixed nominal income loses real purchasing power. So retiring with debt can be a hedge against inflation, provided it’s long-term fixed term borrowing.”

Another advocate for the use of debt in retirement is Tom Anderson, author of “The Value of Debt in Retirement.” He tells retirement writer Mark Miller that borrowing to cover some expenses with today’s cheap fixed rates lets retirees keep a portion of their money readily accessible, and that could be safer than, for example, paying off your mortgage if you are left without a cash safety net or emergency fund.

The best mortgage is no mortgage

Anderson’s other arguments for debt, though, are more complex.

“He argues that financial advisers need to adopt a more sophisticated view of client debt, taking advantage of low-cost borrowing opportunities to boost liquidity and wealth,” Miller says.

In other words, Anderson is talking about wealthy retirees who can use the money they borrow to make more money and who have the cash to pay off the loan at any time. He isn’t advising low-income retirees to carry a credit-card balance or use adjustable-rate loans — two practices that are risky any time and especially dangerous when you’re living on a fixed income.

Retirees who can thrive while holding debt are ones with higher incomes, more education and greater financial sophistication, the Michigan study says.

When you’re on a fixed income, even a cheap mortgage takes money you could use elsewhere.

“[A]s more seniors carry significant mortgages into retirement, they put themselves at risk of losing their nest eggs and their homes,” said Richard Cordray, director of the CFPB, urging older Americans to pay off their mortgages before retiring.

For most retirees, no mortgage is the best kind of mortgage of all. Keep expenses low in retirement and a low income won’t matter nearly as much.

Get ready for a safe retirement

If you’re facing a retirement with debts:

  • Delay retirement. Waiting to retire offers a couple powerful pluses: Holding off from touching your nest egg lets it grow larger for when you need it more. Also, leaving Social Security untapped longer means that your monthly payment will be bigger when you do take it. Between your full retirement age (usually 66) and age 70, your permanent benefit will increase by 8 percent each year. There’s no incentive to wait longer than age 70 to collect Social Security, though.
  • Get a job. Many people retire but find their income isn’t enough and go back to work for a while longer, often part-time. Take on a part-time summer job, for example, so you can fatten your emergency fund. (Bank that money, don’t spend it.)
  • Just say “no” to student loans. Unless you are wealthy don’t co-sign a school loan for beloved kids or grandkids. Much as you want to help, that’s money you’ll need for living in retirement. (See “More Than 1 in 3 Co-Signers Lose Money“). Let the kids pay their own way. They have many more working years ahead to pay it off.

What’s your strategy for eliminating “bad” debt or all debt? Share your thoughts in comments below or on our Facebook page.

Stacy Johnson

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