Debt: The big threat to a happy retirement

Debt — whether it's credit card debt, student debt or mortgage debt — is emerging as a serious threat to a successful retirement for thousands of Americans.

"We saw this huge refinance boom in the 2000s," says Katherine Dean, head of wealth planning at Wells Fargo Private Bank. "There's also the trend of people buying homes later in life and buying a second home late in life. We are seeing older Americans saddled with debt."

In fact, according to the Consumer Financial Protection Bureau, the percentage of homeowners age 65 and older carrying mortgage debt increased from 22% in 2001 to 30% in 2011. Among those age 75 and older, the rate more than doubled, from 8.4% to 21.2%.

Janet Taylor, a psychiatrist and thought leader for AARP's Life Re-Imagined, said that debt can really take a toll on people, especially retirees.

"Debt is a constant source of stress, and in particular, chronic stress, for many people — especially those who are reaching retirement or in retirement," she says. "For too many Americans, retirement is where people are on a budget and have to modify what they spend. When you go in with debt, whether it's debt you know about or is unplanned debt, it just causes a huge amount of stress."

The recession exacerbated the debt problem among retirees, says Robert Fragasso, principal at Fragasso Financial Advisors in Pittsburgh. "People make indiscriminate financial decisions," he says. "They are unplanned, and their results are sometimes negative or catastrophic."

A closer look at the debt issues:

MORTGAGE DEBT

It's one of the big questions going into retirement. Should I pay off my mortgage, even if I have to dip into my retirement funds?

The answer: It depends. The CFPB says the median mortgage debt for seniors increased 82% from 2001 to 2011, from $43,300 to $79,000. But, "The answer is not how much debt," says Ron Weiner, president and CEO of RDM Financial Group. "The answer is more complicated and depends on your tax bracket and the size of your mortgage payment," he says. Not all of the decision is rational. "Some people feel it is emotionally comforting to pay off their mortgage. But that's not necessarily the right answer."

But there are some clearly bad choices. Mike Woomer, senior vice president at Fort Pitt Capital Group, says a client refinanced a mortgage for 20 years at age 58. "He's not going to pay it off until he's 78," he says.

CREDIT CARD DEBT

According to the National Center for Policy Analysis, older Americans are also accumulating more credit card debt. The group says the average credit card balance for Americans 65 to 74 was $6,000 in 2010, up from $2,100 in 1989. For those 75 and older, the average balance went from virtually nothing in 1989 to $4,600 in the same period.

"We would advise our clients to not carry credit card debt (into retirement) and pay the balances," says Tom Mayper, executive vice president at RDM Financial Group in Westport, Conn. "Older people living on a fixed income can really get themselves in trouble paying a high interest rate that is not deductible."

In these days of low savings rates, retirees don't understand that paying off a 16% credit card balance is like earning 16%, says says Weiner. "They are better off paying the debt. Their costs go down."

There's some evidence that people are starting to be better about credit card debt. "We have seen a downtick in credit card debt," says Dean. "But you also see increases in other debt, like auto loans. For a couple that is not saving enough, it can be a little bit scary. How are these folks going to be able to afford retirement?"

"Multiple credit cards are not the ally of the financial planner or the client," says Greg Smith, managing director and senior financial planner at the Wise Investor Group in Reston, Va.

STUDENT LOAN DEBT

Surprisingly, student loan debt is another problem for retirees, says Dean. "Many of the loans young people are taking out may be federal loans. If the students can't afford to pay, the parents are on the hook, saddling that older generation with paying for college.

"We've been going thorough this phase of college for all," she says. "Maybe it's the entitlement thinking. That's what's really lent itself to making this the fastest-growing category."

Many retirees have home-equity lines they took out to pay for their kids' education, says Smith. "With some loans, they will be paying on their kids' college for the rest of their lives, because they are paying interest only."

"We would hope that by the time someone reaches retirement age, they have already put a significant dent in whatever debt they have," says Travis Sollinger, director of financial planning at Fort Pitt Capital Group. "When they come to us and they are 65 and in retirement, there is a limit as to how much we can do for that person. If they get too far down that road before they talk to a financial adviser, there is no easy answer."

SOME TIPS FROM FINANCIAL PLANNERS

1. Debt consolidation. "Roll over debt to 0% interest," says Jim Stoops, vice president and financial consultant with Charles Schwab in Naperville, Ill. If you have good credit, you can sometimes get a zero-interest loan for 12 to 18 months on credit card balance transfers. Also, he says, some people have refinanced into a 15-year mortgage instead of 30-year in anticipation of having the home paid off by the time they retire.

2. Understand your retirement numbers. Some people want to get out of debt using their retirement savings, which may not be a good idea. "They end up selling an asset that should be earmarked for retirement. Understand you own personal retirement goals and what it is going to take. Truly calculate what those numbers are and what they would need to have in retirement before they blindly pay off debt," says Stoops.

3. Figure out what happened to cause the debt issue, says Smith. "Was there an emergency, a health scare, a roof needing repair?Or is it a product of overspending? It's important to identify the root of the problem."

4. Retirees with multiple credit cards with balances should write all the information down. "Create some sort of chart, naming the credit card, the balances, the rates and all the minimum payments. Tackle the highest interest rate first. Then apply everything to the next. Then the next."

5. Reduce your spending, says Dean, to help you pay off debt in a timely manner, but also to save more and allow your nest egg to last longer. "Do the simple things," she says. "Look for deals, cut coupons and look for rebates. Be a little more frugal."

6. Get a retirement plan in place, says Dean. "If you don't have a plan in place, how will you come back and see if I'm on track or did I go overboard on expenses? That is so key."