How to Avoid the Trap of Retiring With Debt
Adjustments now could help make your later years less stressful.
Total debt among people at least 70 years old has doubled since the financial crisis. Among 60-year-olds, total debt is up nearly 50%, according to the Federal Reserve of New York. While younger households have more debt than older households, since the financial crisis the aggregate amount of debt held by households younger than 60 is actually down, not up.
Dial back to the start of this century, and the current debt load of retirees is even more pronounced. If total debt owed by people at least 70 years old in 2000 had grown at the rate of inflation, it would amount to about $275 billion today. In fact, according to the Fed report, the 70+ crowd currently is carrying a total debt load of $1.15 trillion.
That’s not a recipe for a care-free retirement. Mortgage debt is the main burden for older households. A generation ago, homeowners between the ages of 55 and 70 had 90% equity in their home. Today it’s below 75%. A survey of more than 2,000 retirees by the Transamerica Center for Retirement Studies reports that the average mortgage balance among retirees is $52,000.
Getting rid of debt before you retire is the surest way to bolster your financial security. A monthly payment that may be “easy” to handle today while you are still earning an income, can become harder or, at the least, more stressful on a fixed income in retirement.
If your intention is to stay in the house, it’s financially and emotionally smart to ramp up payments today so the mortgage is paid off before you retire. If you expect to work until age 70, it’s smart to have the mortgage paid off in your 60s, so you can weather any shocks such as a layoff, illness or caregiving demands that make it impractical to work.
Can’t imagine coming up with more money to pay off the mortgage faster? Here’s how:
Contact your loan servicer and ask for a new amortization schedule that will have the loan paid off by the time you are 65. Or search online for “mortgage prepayment calculator.”
Take a fresh look at your spending. Speeding up payments might increase the monthly cost by $100, $200, $300 or more. A $200,000 30-year fixed rate mortgage—at 3.8% -- has a monthly payment of about $925. To pay it off in 20 years requires an extra $260 a month.
Before you scoff, take a hard look at your spending. Every $25 adds up. Got a car payment? Vow to keep that car for at least five to seven years after the loan is paid off. Being car-payment free means you can redirect money to your mortgage. Adult kids you’re still helping? Time for a serious review of priorities. If the help is absolutely necessary, that’s one thing. But if you’re contributing to improve their lifestyle — helping out on rent for a nicer place, on payments on a new (rather than used) car — at the expense of your retirement security, that’s an odd priority.
Take on a side hustle. Maybe it’s extra hours or projects at your job, or some part-time gig work.
Use extra savings sitting in the bank. If you’ve got more than six months of living expenses tucked into your emergency fund, you might want to consider using some of the excess to pay down your loan. This is, of course, a personal decision. If having more cash helps you sleep at night, then don’t touch it.
Slow down your retirement savings. Blasphemy? Maybe not. If you have already done a solid job of building retirement savings, you might consider contributing less to your 401(k) and IRAs for a few years and use the money to pay down your mortgage. If you get a company-matching contribution, just be sure you continue to contribute enough to earn the maximum match; that’s free money you never want to pass up.
Two important caveats to scaling back your retirement savings: This only makes sense if you know you can afford to stay in this house in retirement, and that your retirement income based on what you’ve already saved will be enough to live comfortably. (Those are big “ifs”— you can hire a financial planner on an hourly or project basis to help you run the numbers.)
If it is financially reasonable to “age in place,” the rationale for reducing your retirement contributions is that even though you are scaling back your retirement savings, you are also scaling back the income you will need in retirement: If there’s no mortgage payment to deal with, you’ve likely eliminated the single biggest monthly cost.