Retired and in massive debt? Do this

Don't do anything hasty.

  • By Alessandra Malito,
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Near retirees are supposed to be amassing wealth to live off of in retirement, but unfortunately, some are drowning in debt instead.

Such was the case for one 60-year-old man, whose child posted on Reddit that he was buried in about $600,000 in debt. The father owed about $200,000 on 10 to 15 of his credit cards and still had $400,000 on his mortgage. The child (it wasn’t clear if it was his son or daughter) said the father manages monthly payments, but wasn’t sure that were true. “Last week someone from the court came to our house and said one of his credit card companies is suing him if he doesn’t respond to the court with a payment plan in the next two weeks,” the Reddit user said.

The home was bought four years ago and probably doesn’t have much equity, the original poster said. The father said he earns $200,000 a year, but allegedly used a credit card to pay the down payment. “I honestly don’t know what to do,” the user said.

The cost of retirement

Here's how to calculate your expenses to determine how much you'll need to save.

Many financial advisers suggest entering retirement with as little debt as possible, including a paid off home. Retirement income is typically less than what a person earned while working, unless they have an extremely high preretirement income replacement ratio — something that doesn’t happen unless that person saved substantially during his or her career. While some expenses may decrease in retirement, such as transportation because of no commute, others jump — especially health care.

But not everyone can afford to pay down the mortgage, save for retirement, spend on everyday expenses, fund an education and all the other goals that happen during an entire lifespan. So what can an older person do when they’re nearing retirement, and crippled by debt?

Many fellow Reddit users were skeptical of the father’s finances, but some jumped immediately to bankruptcy. “His best bet is to start clean, live well below his means for the remainder of his working life and then hope there is some savings,” one person said. “My advice would be to push the issue and hire a bankruptcy attorney as his burden will quickly become yours.” Others argued the father’s financial woes don’t have to become the original poster’s problem, but users retorted family members may try their best to get a loved one out of a difficult situation. (And the father’s debt may become his child’s, after all — the original Reddit user edited the post to say bankruptcy would be a last resort, and they’d sign a mortgage for the father who likely wouldn’t get approved otherwise. Many fellow Reddit users urged against that option, though).

No one need rush into bankruptcy, which has a lasting impact on a person’s credit history and finances, said Bruce McClary, vice president of marketing at the National Foundation for Credit Counseling. There are numerous other factors to consider: not just how much debt they’re in and the interest rates or fees tacked on to that debt, but other figures like how much equity is in the home and if there is any money saved at all. Credit counselors can review assets and liabilities, check credit obligations and possible repayment arrangements, determine which assets may be liquidated and create a plan of action, McClary said. In many cases, retirement savings in qualified accounts such as a 401(k) plan or individual retirement account are protected from creditors, but debtors should ask an attorney to review those accounts as well.

Along with meeting with a counselor or talking to creditors about payout options, near-retirees can look into refinancing a mortgage, consolidating debt or opening a home equity line of credit or reverse mortgage. Even those options, however, should be thoroughly vetted and discussed before pursuing, McClary noted.

Someone nearing retirement with deep debt should not attempt to borrow more. “Don’t make a decision when you are panicked without stepping back and talking about options,” he said. “No matter how desperate you are, you will always have a little bit of time on your side to thoroughly review and talk to a financial professional.”

Many older Americans use payday lenders, which are short-term, high-cost loans typically paid out for $500 or less and come with high annual percentage rates. The average rate is close to 391%, according to the Center for Responsible Lending.

Still, the number of Americans 62 and older using payday lending tripled between 2015 and 2016, according to the California Department of Business Oversight, and nearly one in four payday loans go to senior citizens.

In certain cases, the problem may come down to spending habits — something many Reddit users pointed to in their responses. Many Americans fall into debt because of high costs of living, too low of a salary or an unexpected tragedy, but in some cases, it’s because of a lack of a budget or financial plan.

“Bottom line, there is no happy ending to this without an immediate and drastic change to his spending,” one person said. “Since it sounds like more is going on than his debt, it might not be possible for you to help.”

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