The dilemma of retiring with debt, especially mortgage debt.
The most recent Survey of Consumer Finances, published by the Federal Reserve, confirms the disturbing trend that increasing numbers of aging Americans are entering retirement with debt, which they may, or may not, be prepared to manage. In fact, 70 percent of households headed by people 65 to 74 years of age had debt, and 50 percent of those age 75 and older were still burdened by debt liabilities and ongoing payment obligations. The ability to make debt payments from fixed income becomes increasingly difficult as the challenges of aging increase.
Further, a recent article in Reverse Mortgage Daily by Alex Spanko entitled “Bankruptcies Skyrocket Among Seniors Amid Soaring Health Costs” reported:
Since 1991, the rate of Americans aged 65 to 74 filing for bankruptcy doubled, while the frequency tripled for those over 75 according to a new study by researchers from the Consumer Bankruptcy Project. In addition, one out of every seven bankruptcy filers in the U.S. is aged 65 or older.
As stated in the article, “This is nearly a five-fold increase over just two and a half decades” as well as “…a notable demographic shift”. The reasons most filers cited was medical expenses and debt.
Carrying debt, especially from the low interest rate environments of recent years, can be a wise financial strategy if the borrower has sufficient financial resources to offset the inherent risks should something go wrong. That’s fine for the wealthy, but how about the rest of us?
RETIREMENT DEBT DILEMMA
Unfortunately, aging brings increasing financial risks (e.g. higher medical costs, loss of income from the death of a spouse, and unexpected financial shocks) that stress or threaten fixed income budgets. The added burden of debt payments may make solutions more difficult or lead to financial failure. Mortgage debt, especially, presents the greatest threat as the payments and balances are generally higher with the added risk of losing the house if a default occurs.
The cash flow problem is compounded when income is not sufficient to meet current needs. To solve the immediate problem, retirees often take larger withdrawals from savings to close the gap, which further increases the risk they will run out of money sooner.
Clearly, the best solution is to plan ahead before retirement and refinance (or recast a current mortgage) to lower costs, reduce balances owed, or pay debt off while still working. This may require working longer to manage the debt, but may significantly increase retirement security.
Most common solutions include:
Option 1 – Sell and relocate to a more suitable home, increase financial resources, be nearer relatives or friends, or move to a better climate. If a move is in order, it’s best done when the real estate markets are strong and your health is favorable.
Option 2 – If staying at home to age in place is the choice, consider refinancing to the HUD/FHA insured Home Equity Conversion Mortgage (HECM). The HECM is a unique program designed to accommodate the financial needs of aging homeowners (62 and older). HECMs enable older homeowners the ability to remain at home for as long as they chose without the obligation to make mortgage payments (as payments are optional). HECM borrowers are only required to keep real estate taxes and homeowner insurance current, perform basic maintenance, and reside in the property as their primary residence. Moreover, the undrawn HECM credit line balance grows continuously, thus assuring more funds will be available in the future. This growth feature is guaranteed by FHA insurance independent of any future change in home value, up or down.
Option 3 – Refinance with a home equity line of credit (HELOC). Interest-only monthly payments are usually required, but can spike after the initial draw period (usually 10 years) expires and access to additional funds terminates. HELOCs are best used for shorter term needs, or as an emergency fund, but loan term and structure may not be best for longer term retirement planning.
PLANNING IS KEY
There is no single best solution for all. Every situation is different requiring thorough assessment of each client’s circumstances and review of all available solutions before the right solution can be identified. The best way to start the process is to consult a certified professional, which include: Registered Investment Advisor (RIA), Certified Financial Planner (CFP), and/or a Certified Reverse Mortgage Professional (CRMP).
CAVEAT. Make sure the professional you consult understands and supports the value of utilizing housing wealth to increase financial wealth in the retirement planning process. Some, but not all, do. This is a relatively new concept in financial planning promulgated by retirement experts, researchers and academics since the financial fallout from the Great Recession. These experts have documented significant improvements to retirement planning can result providing: (1) improved cash flow, (2) reduced longevity risks, and (3) greater protection of assets under management.