By Joshua Lewis
Maybe it’s an out-of-control credit card balance. Maybe it’s a mortgage payment or perhaps it’s mounting medical bills.
Regardless of the cause, debt is becoming a growing issue for older Americans, threatening to upend all of their retirement planning and transform their “Golden Years” into gloomy years.
The numbers are sobering. A Congressional Research Service report issued in August 2021 found that 62.1% of households headed by someone age 65 or older held some amount of debt in 2019. That was up dramatically from 43% in 1992.
The median debt for those older households was $31,050, and the average debt was $86,797. Each of those numbers was roughly three times the 1989 amount, even when factoring in inflation, the report said.
Anyone who has any debt at all knows that interest payments alone can carve a significant chunk out of your monthly budget. So, if you are in or near retirement, how can you go about reducing the debt that is frustrating your financial plans?
Here are a few suggestions:
1. Analyze Your Debt
Scrutinize anything with an adjustable-rate and factor that into your priority list. Right now, with interest rates so low, adjustable rates are not a major issue. But in the next couple of years, it’s possible that could change and they could become significant.
For example, if you have an adjustable-rate mortgage, as interest rates go up, so will your monthly mortgage payment. There are a number of different factors that impact the cost of the increase as well as the timing of when the increase may occur. Let’s say you took a 30-year ARM loan for $500,000 at 4% and at year 5 the rate could begin adjusting by 0.5% every 12 months.
The first 5 years (60 mortgage payments) would be $2387.08/month. After the 5-year fixed term has ended, interest goes up by 0.5%, so the rate is now 4.5% making your monthly payment $2,513.68, an increase of $126.60/month. However, it does not end there. The following year rates again increase by 0.5%, for a total rate of 5%. The payment is now $2639.59. This could continue until the cap on the rate has been reached, which is dependent upon the frequency and amount of the rate increases.
Assuming a rate cap of 12%, your highest monthly payment, in this scenario, would be $4,156.20 in the 20th year of a 30-year term. This would equate to a total increase of $1769.12 per month or $21,229.44 a year. This is only assuming a half of a percent increase every 12 months.
This could mean your mortgage payment has gone up by 74.11% over a 20-year period. Bear in mind that rates could go up much more and faster during this period as well. For perspective, the average fixed 30-year mortgage in January 2022 was 3.45%, which has increased by 2.05% in only 5 short months to a rate of 5.45% in May 2022.
2. Pick a Starting Place
If you take a look at all of your debt, the highest interest you pay is likely on credit cards. That’s where your job begins. Determine which card has the highest interest rate, make it the priority and start paying down that card.
Once you pay off a high-priority debt, you now have extra money in your monthly budget. Instead of splurging, take the amount that was being used on the debt you eliminated and add it to the amount you pay each month on another debt. This will accelerate paying off the second debt. As you knock off one debt after another, keep applying this principle to everything, including your mortgage.
3. Understand your Budget
It is important to know where your money is going and a budget can help you spot unnecessary expenses. Here’s an example:
One of my clients wanted to pay off his mortgage before he retired but struggled to make any extra payments. Then the pandemic happened and, as it dragged on, he and his wife discovered they had a large balance of extra cash in their checking account. Where did that money come from? When they began working on a budget, the answer to that question became clear. They previously had been spending $600 to $700 a month dining out, but with everything shut down, that was no longer the case. Once we identified that “unknown” expense it became a simple decision — eat out less and pay off their mortgage or continue down the same path.
4. Research Large Purchases Thoroughly
As simple as it sounds, the more time we spend assessing a large and expensive purchase, the more likely we are to realize we can do without the item we had our hearts set on. Or we might discover that there are other, less costly options. Yes, two weeks in Hawaii sounds tempting, but perhaps a shorter vacation closer to home would be the wiser choice. In this case, you trade “instant gratification” for a long-term sense of stability.
5. Set Goals & Monitor Results
Most people need some type of motivation when it comes to the kinds of lifestyle changes that eliminating debt can require. That’s why it’s important to set attainable, tangible goals that will help you achieve your ultimate desired result.
For example, if you have more than one credit card, look at the interest rate and balance for each and determine which one is costing you the most money. Target that one and plan to pay it off first by setting aside an extra amount of money to pay on it each month.
Here’s where you need to be realistic, though: don’t make that extra amount $200 monthly if you can only afford $75. Your failure to achieve your goal could cause you to give up altogether.
Also, monitor your progress. Is the debt balance not falling as fast as you hoped? Could you pick up the pace for reducing it by cutting out expenses elsewhere? Or conversely, do you temporarily need to dedicate less money to paying down that debt because of other unexpected expenses? If you need to make changes as you go along, make them. but keep the big picture in mind as you do so.
Certainly, debt can seem overwhelming, and in some cases you may even need to consider delaying retirement until you get your finances where you want them.
But a fresh set of eyes can also help. After all, it’s difficult to be objective when we are knee-deep in the weeds. A financial professional can help you sort through the different options, and assess your personal balance sheet to determine realistic timelines and dollar amounts that can go toward attacking that debt.
Then maybe the gloom can dissipate and the shine be restored to those “golden years.”
About the author: Joshua Lewis
Joshua Lewis is an Investment Advisor Representative with Layman Lewis Financial Group, a firm that helps retirees and pre-retirees develop strategies to work towards their financial independence. Lewis has worked as a financial professional since 2012 and has a series 65 license as well as a life/health insurance license.