In the best case scenario, carrying consumer debt into retirement means you’ll have less cash flow each month. Of course, this can put a damper on your bucket list plans but it’s not the end of the world if you don’t mind living on a tight budget for the next 20 years.
In the worst case scenario, a high debt load in retirement may have you withdrawing more funds at a faster pace from your Thrift Savings Plan (TSP). And this could put you at risk of running out of money when you need it the most: in the later years of your retirement.
Pre-Retirees Are Headed For A Debt Crisis
Compared to previous generations, a growing percentage of current retirees are carrying credit card debt into retirement and the balances they owe are getting higher, even when adjusted for inflation. And when it comes to mortgage debt, recent retirees are far more likely to owe a larger outstanding principal on their home loan.
In fact, a recent report found 45% of older homeowners with a mortgage, and 55% of renters, are considered “housing cost burdened.” This means more than 30% of their gross income is paid toward housing costs. Seniors are also more likely to have a home equity line of credit (HELOC) than they were 30 years ago.
“With credit card interest rates outpacing historic stock market returns, eliminating as much consumer debt as possible before you retire should be your top priority.”
Not All Debt Is Bad Debt In Retirement
Before you panic, it’s important to understand the difference between good debt and bad debt. Good debt is taking out a loan for something that appreciates in value over time and can be sold at a profit. For most federal employees, this is their primary home and other real estate they can sell at a price that’s considerably higher than what they originally paid.
Bad debt is taking out a loan, or using high-interest credit cards, for items that quickly lose value: cars, motor homes, high-priced electronics and expensive consumer goods. If interest rates and balances on your bad debt are high, keeping up with payments will get more and more difficult when you’re living on a fixed retirement income.
Create A Debt Reduction Plan Before You Retire
With credit card interest rates outpacing historic stock market returns, eliminating as much consumer debt as possible before you retire should be your top priority. The Consumer Financial Protection Bureau offers tips and downloadable worksheets to help you pay down your debt. Or, meet with an FRC® trained advisor who can help you develop a personalized debt-reduction plan before you retire.
