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Living With Debt In Retirement

Written by Lance Roberts | Apr 6, 2016

red-door

Behind The Red Door

At the end of the financial crisis, my perspective on financial planning and investment strategies were deeply impacted.

It wasn’t by choice.

I was jolted by the realization that things had changed; a deep crack now existed in household financial foundations. I was shocked by how fragile our financial system really was.

My former employer didn’t share my concern; a dearth of guidance and direction were provided. And there I was on the front lines with clients seeking answers and assurance. They were scared and it was warranted.

I hit the history books and financial journals from the 1920’s & 30’s. I parsed research on the Great Depression from Ben Bernanke. I studied the writings by Nomura Research Institute’s Chief Economist Richard Koo who understood deflation (which I believed was coming). I spent late caffeine-driven hours studying, highlighting and taking notes from my original copies of “The Magazine Of Wall Street;” I own a voluminous collection from the Great Depression years. I focused on the words of writers who lived through a challenging time for the country.

I was hungry for feedback about the state of retirement from almost everybody I encountered. I was steadfast in my approach in finding people who did not agree with my thoughts about numerous financial topics and long-held philosophies and dogmas.

The majority agreed that the impact of the Great Recession would be postponement (in some cases indefinitely), of retirement plans. During those dark days, the conversations about retirement felt trivial, silly, and awkward.

After all, lives were altered. Several couples I counseled saw their marriages implode as their businesses did.

Main Street is still working through the aftermath of the crisis, seven years later. Long before Wall Street or financial planning academia could admit the Great Recession was a structural hit to household balance sheets, the majority of Americans knew early on it would be a challenging, long-term road back to fiscal prosperity.

I softened my stance about retirees and debt.

The possibility of 100% debt-free nirvana at the start of retirement is now reserved for a fiscally-elite group with the greatest financial disciplines, those who entered the crisis carrying very little debt and people who have prospered since the beginning of the current stock bull market.

Advisers who continue to follow the debt-free mantra are out of touch with retirement reality. I’m not here to preach a strategy that’s impossible to attain; I’m here to plan, stay grounded and face the fact that many retirees will carry debt well into retirement. I help many pre-retirees understand that if they wait until they’re debt free, then physically or mentally, retirement quality will suffer. Retirement timing is a delicate balance between a hearty balance sheet and the health of an aging individual.

Once the red-hot topic of debt arises, the discussion heats up; the hinges deep into liabilities including a mortgage, are enough to deter a pre-retiree from constructing the path to retirement. Planning is placed on the back burner; the transition is perceived as too challenging and stressful.

I engage people who must make a tough decision: Accept and plan for retirement with a manageable level of debt.  It’s either that, or enter retirement debt-free at 75 which for many is huge discouragement. At that point, retirement planning loses impact. People feel defeated.

So, let’s just deal with what’s the new reality for most.

What are some ways to accept debt in retirement and be less stressed?

1). Get zero unsecured (or as close as possible). Work to get unsecured debts to 5% or less than total liabilities. Unsecured liabilities would include auto loans, high-interest credit card debt, medical bills and student loans. If they total greater than 5%, first, complete balance transfers to lower the interest rates or negotiate more favorable rates with lenders. I know several people who reduced high rates, by 20-45%, just by asking. Another viable solution would be to apply for a home equity line of credit before retirement and wiping out unsecured obligations. Home equity credit line rates remain attractive and the interest may be tax deductible. Check with your tax adviser.

2). Don’t pay extra on the mortgage. Most likely you’ve refinanced so the loan is manageable. Don’t worry about owning a home paid-in-full, as a goal. Make your minimum payment to bolster household cash flow in retirement. Owning a home debt-free is not an accomplishment if it curtails the quality of your life.

3). Downsize your transport and your carport. An increasing number of pre-retirees are “going smaller” by reducing the size of their shelter and transportation. These people find large residences for upkeep, big car payments and lots of possessions as stressful and possess a written plan to lighten fixed expenses. More are moving to smaller homes in metropolitan areas where public transportation is available or two-wheeled transport replaces automobiles.

4). Rent in retirement, bank the cash. Since the financial crisis, retirees’ attitudes about home-ownership have changed. They’re more amenable to renting thus avoiding the hassle and expense of ongoing maintenance. They’re investing sales proceeds in single-premium immediate annuities, large-company dividend stocks, healthcare real-estate investment trusts, and bolstering emergency cash reserves. They prefer liquid over illiquid assets.

5). Work part-time. Seven million Americans are stuck in part-time jobs, hoping for full-time employment. What if you could work part-time and actually enjoy it? Having a strategy to find part-time work for the first three to five years in retirement appears to relieve some of the pressure of retiring with debt, especially if that work is tied into something retirees are passionate about. Recently, a new retiree with a passion for animals found a part-time sales position at a local retail pet supermarket. It keeps her busy, brings in additional cash flow and provides self-satisfaction. Occasionally retirement planning is a re-definition exercise and a change of perspective.

6). Work three more years. Whatever your estimated retirement age is, add three working years to increase savings and reduce debt. Create a strict spending plan with the help of a financial adviser who can help you monitor progress. During that period initiate a downsizing strategy. You will be surprised how much progress you can make in three years. I’ve witnessed success many times.

As a youth, I lived in a three-story Brooklyn walk-up with 36 apartments, 36 doors. We lived on the first floor. Apartment 1A. Every door was lead-painted a dark green (almost black), except ours. Our entrance was blood red. Mom’s favorite color.

I remember how much that door stressed me out. It wasn’t supposed to be red. It drew too much attention. It was nerve-wracking to live behind the red door.

The entrance to retirement may not be pretty; it may be stressful, different, and even scary.

However, you still need to open that door, walk through the portal and deal with what’s on the other side.

Planning for a completely debt-free retirement may just not be feasible today.

In those Brooklyn days, my family made the best of limited financial resources. My mother made her front door stand out and embraced the difference.

Pulling the trigger on retirement is not about waiting for everything to be perfect. It’s about maximizing as best as possible what you already have.

And that was one of the greatest perspectives I realized during the Great Recession.


Richard Rosso, CFP, CIMA

Richard Rosso is the Head of Financial Planning for Clarity Financial. He is also a contributing editor to the “Real Investment Advice” website and published author of “Random Thoughts Of A Money Muse.”  Follow Richard on Twitter.

2016/04/06
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