The Internet is filled with articles and websites that deal with accumulating enough money to achieve a comfortable retirement. But credit and debt problems can sabotage your retirement, even if you have adequate income sources lined up. While your income sources may provide you with the means to retire, your credit and debt problems are draining away resources and options on the back-end.
There are several reasons why you need to address credit and debt problems, in addition to saving and investing money for your retirement.
Carrying Debt into Retirement
An article in Bloomberg quoting the Consumer Financial Protection Bureau (CFPB) reported that among Americans 65 and older, 30% had mortgage debt as of 2011. This is up significantly from 22% in 2001, only a decade earlier. What’s more, the median amount of mortgage debt also increased substantially, rising from $43,400 in 2001 to $79,000 in 2011, after adjusting for inflation.
It’s clear that carrying debt into retirement is no longer the taboo that it once was. A generation that grew being comfortable with high levels of debt is no longer as concerned with the prospect of living with it for life.
A mortgage in particular can limit retirement options. For example, if you want to sell your primary residence and downsize to one that is smaller and less expensive, the fact that you have a mortgage on your current home will make that process more difficult. Unless you are prepared to dip into your retirement savings to purchase a new home, you’ll most likely be limited to buying a house that is no more expensive than the amount of equity that you have in your current home. That will be reduced by a mortgage.
Debt Means You’ll Need More Retirement Income
Debt represents a reduction in cash flow. For example, let’s say that you will have a retirement income of $4,000 per month. If $1,200 must go to making monthly payments on your home, your car, and various credit cards, then your net cash flow will actually be reduced to $2,800.
That’s bad enough, but on the flipside, if you have a debt-free position you won’t need $4,000 per month. You can get by quite comfortably on $2,800 per month.
That will have a major impact on the amount of money that you’ll need to have saved for retirement. For example, let’s say that you plan to use the safe withdrawal rate of 4% of your retirement portfolio each year, to make sure you never run out of money. If you will need an income of $4,000 per month, you will need a portfolio of $1.2 million ($4,000 X 12 months, divided by .04).
But if you only need a monthly income of $2,800 – because you have no debt whatsoever – you will only need to accumulate a retirement portfolio of $840,000 ($2,800 X 12 months, divided by .04). That means you will need $360,000 less saving your retirement portfolio.
That alone would make saving for a successful retirement much more doable.
Credit Problems Can Limit Your Retirement Options
It should go without saying that debt plus credit problems will have a negative effect on your retirement. If nothing else, this will limit the options that will be available to you – so these issues must be addressed.
This is especially true since the existence of debt and credit problems probably will indicate a lack of adequate retirement savings. That will force a reliance upon debt in the retirement years in order to make major purchases. But if you have poor credit, that will be difficult to accomplish.
For example, let’s say that you want to buy a retirement home. If you’ll need a mortgage in order to buy the home that you want, you may find that your impaired credit is making it impossible to get a mortgage. That is especially true in the post-Mortgage Meltdown world, where mortgages are harder to get in general. With credit problems, it can be virtually impossible.
The same may be true in regard to buying a new car. If you will need a loan in order to do this, it will help to have the best credit profile possible. If you don’t – if your credit is poor – you may be forced into a subprime auto loan. Not only will that come with higher interest, and probably a much longer term than you are comfortable with, but you may also find that it will require you to put up a larger down payment, or to purchase a much less expensive vehicle.
There may also be problems later on should you decide that you want to move into some kind of senior citizens housing arrangement. If credit qualifications are required, your application for residency may be rejected.
You Don’t Need the Stress that Debt and Credit Problems Cause
Most of us dream of retirement as a time in life that will be carefree, or at least more so than during the working years. But if you have large amounts of debt and especially if you have credit problems, your retirement years may be anything but carefree. In fact they may even be full of stress. And you must take action to solve that problem.
Credit and debt problems cause stress all by themselves. But the issue will be bigger in retirement, since you’ll be living on a fixed income, and largely dependent upon a relatively low cost of living.
But not only do debts mean extra expenses each month, but credit problems will make those expenses higher. For example, you may be paying higher rates of interest on your mortgage and car payments. Credit problems can also see credit card interest rates rocket to as high as 30%.
All of that will cause a greater level of stress at a time in your life when you will be wanting to lead a more peaceful existence. And let’s also not forget that stress has a negative impact on your health, particularly when you are older and maybe dealing with other health issues related to the aging process.
Cleaning up your credit and getting out of debt will be the best way to cure that problem.
Fix Your Credit and Debt Problems Before You Retire
If you are working hard to accumulate enough money to be able to retire, you should also be giving equal attention to improving your credit profile and getting out of debt. If you don’t have much in the way of assets, including retirement assets, this will be even more important as you enter the retirement years.
If you’re unable to repair your own credit and get out of debt through your own efforts, you will need to get professional help to enable you to get the job done properly. As we get older, options become fewer, so it’s best to address credit and debt problems well ahead of retirement. It’s the best way to lower your expenses and expand your options.