WHY carry debts into retirement?

Some debts can be manageable in retirement. For some pre-retirees with low-interest mortgages, low monthly payments, or who have a few years remaining before the expiration of mortgage payments, maintaining mortgage payments during retirement may not be a financial burden. But other debts like car payments and credit card debts can prove problematic in retirement.

This week I want to focus on some debts that can prove problematic for retirees. Recently I had several interactions with retirees who complained about the financial and emotional stress of having debts.

I was a guest presenter at a business expo recently and the organiser asked that I address the topic of ‘Planning for Retirement’. At the end of the presentation a retiree approached me to share her concerns regarding her inability to cope with debt in retirement. She claimed to be heavily in debt and needed advice as to her options. Then within a week I met with two retirees who have taken bold steps to confront stressful debt situations that were threatening their peace of mind in retirement. For retirees, peace of mind is crucial at this life cycle stage.

One retiree reported her plans to cancel her car loan. She thought closing the car loan and rebalancing her finances made economic sense. The car loan has a savings component. Her plan is to use funds from the emergency account to clear the car loan, then reinvest the savings that will be refunded to replenish her emergency fund. I endorsed her proposal. In addition to reinvesting her refund, she would be able to save and invest more funds monthly once the car payments are cancelled.

Another retiree expressed concerns about the oppressive interest rate on her credit card. Now that she is no longer working, this financial obligation is taking a toll on her finances. Paying the monthly minimum balance provides no relief from the looming debt. Regrettably, she had to close a long-term investment account to pay off the credit card balance. The good news though is that she no longer has the debt to carry throughout her retirement.

Managing debt in retirement can be a stressful task. It can take a toll not only on retirees’ finances but their peace of mind. What if she had not made the decision to invest part of her monthly wages during her working years? Where would the funds come from to close her credit card? Investing early and investing longterm provide the key to financial freedom in retirement. There are also retirees with several credit cards. The credit cards that bear the highest interest rates should be closed early and preferably before retirement. Managing these high-interest cards can prove problematic in retirement when retirees are no longer earning the income they had prior to retirement and investments may be underperforming at the time of greatest need.

For some retirees, their pension income is far less than their pre-retirement salaries. The monthly salary deductions or automated contributions to their investment accounts are now non-existent. There is nothing to cushion them from the rising cost of living. It is important during the working years to save and invest early — and do so as often as possible because if you live long, the years will come when your needs may outweigh your wants and the greatest risk that you will face is outliving your money. Often during the working years, employees get concerned with the possibility of losing money from investments. There may be losses along the investment journey but the rewards will be far greater if you invest wisely and have a diversification strategy that minimises losses and maximises gain. Don’t be caught up with temporary losses — it’s part of the investment experience.

Financial literacy is crucial to investors’ success, and during the working years human resource personnel should play a critical role in having employees get the necessary investment exposure through financial presentations and seminars conducted by professional and licensed financial advisers.

Retirees should get rid of student loans as quickly as possible. Ideally, student loan debts should not be carried into retirement. Some retirees have co-signed on student loans for their children and grandchildren prior to retirement. Understanding the terms of these loans at the time of signing is important as well as keeping track of repayments. Paying more than the minimum monthly payment on these loans while still employed helps in paying off the debts early. Every retirement plan must have a debt management strategy. Paying off debts during the working years should not stop employees from saving for retirement. After reaching age 60 you are likely to spend upwards of 20 years in retirement, so every dollar counts.

Car loans, student loans, and credit card debts can be nightmares for retirees. Credit cards, in particular, mean not just huge interest rates but high fees. Online shopping makes it easier for consumers to increase their credit card debt. According to noted personal financial expert Howard Dvorkin, “Credit cards and retirement don’t mix. Or they do mix like gasoline and an open flame.”

Grace G McLean is a financial advisor and pension specialist at BPM Financial Limited. Contact her at gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com