Debt and your Retirement

In 2007, Americans age 62 to 69 owed five times as much on their mortgages as the same age group did in 1987. Most people have their highest salaries in their 50s and 60s, and that's the good news. However, many find it difficult to contribute enough to retirement accounts to be able to retire at 65. In 2010, one retirement management organization, TIAA-CREF, reported that loans against retirement accounts rose by nearly 19% compared to 2009. In addition to borrowing against retirement accounts, people delay retirement, and they do so for several reasons:

• Underwater mortgages due to the housing crash of 2008
• Inadequate savings
• Retirement investments that dropped in value
• Excess debt
• A need to keep employer-sponsored health insurance

Keep Contributing

People in their 50s and 60s should continue to contribute to their retirement plans if at all possible. Cutting or stopping contributions to pay down debt can result in delaying retirement or having inadequate cash flow during retirement. Healthy retirement accounts depend on compounding and long term investing for new retirees to have adequate monthly earnings from those accounts.

Find Ways to Reduce Debt

Debt during retirement can severely restrict monthly cash flow. Some ways that those approaching retirement reduce debt include:

• Refinancing mortgages at a lower rate
• Taking out a debt consolidation loan to pay off credit cards and take advantage of a lower interest rate
• Using 0% balance transfer cards to cut interest payments on existing credit card debt

Taking on additional debt in the decade leading up to retirement is not advised Inadequate cash flow in the first year of retirement can snowball, resulting in depletion of retirement funds too quickly to sustain a comfortable retirement.

Consider taking a Second Job

One asset many people in their 50s and 60s have is expertise. Taking on a part time job or moonlighting as a consultant to pay down debt is a great way to reduce debt and maintain skills. But a second job is no excuse to take on more debt. In fact, taking on additional major debt after age 55 is not advised.

Consider Selling Assets

Selling off assets that are paid for in full is better financially than dipping into retirement savings to pay down debt or increase cash flow. This may mean selling a home to buy a smaller, less expensive one, or selling assets that are not used much (such as a second car, boat, or plot of land).

Don't Tap Retirement Funds Early

Raiding an IRA or 401(K) to pay down debt is very unwise. These accounts are generally protected, even during bankruptcy proceedings, except for cases where the creditor is a government organization like the Internal Revenue Service. The IRS generally can't take money from these funds directly, but they can garnish distributions from the accounts to settle debts if they are the creditor. Non-government creditors generally cannot touch these funds in the event of bankruptcy. Retirement may seem very remote to those in their 20s or 30s, but the earlier retirement planning is started, the sooner a comfortable retirement will be possible.

Sources:

http://seekingalpha.com/instablog/820767-smart401k/135916-4-guidelines-repaying-debt-and-saving-for-retirement
http://www.investopedia.com/ask/answers/07/seizing-savings.asp#axzz1hvkOJPTL
http://www.pwc.com/us/en/press-releases/2011/cash-and-debt-management-issues.jhtml
http://www.smartmoney.com/retirement/planning/too-much-debt-to-retire-1315407838873/