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Guest Post: Is it normal to retire without discarding debts from your shoulder?

The cardinal rule is that people should never retire with debt as it complicates their financial life. But the reality is far from the ideal situation. Baby boomers are drowning in debt.


According to Transamerica, baby boomers are facing financial hardship due to the following types of debt.


1.      Credit card debt - 42% of baby boomers have this type of debt.

2.      Home loan - 40% of baby boomers have outstanding home loans.

3.      Auto loan - 34% of baby boomers have auto loan debt.

4.      Personal loan - 10% of baby boomers have an outstanding balance on personal loans.

5.      Medical debt - 10% of baby boomers are experiencing financial hardship due to medical debt. Some are planning to file bankruptcy.

6.      Student loan debt - 9% of baby boomers are carrying student loan debt.  

7.      Home equity loan - 6% of baby boomers are struggling with home equity loans.

8.      Tax debt - 5% of baby boomers have tax debt.

9.      Payday loan - 2% of baby boomers are suffering financially due to payday loans.


Debt is a major concern for baby boomers because it affects their post-retirement lifestyle. But the big question is, should baby boomers retire with debt? Is it okay?


Well, debt doesn’t necessarily mean that retirees will become bankrupt. But it is equally true that baby boomers should avoid retiring with debts. There is a valid reason behind this logic explained below.


Debt affects cash flow big time


Debt hurts the cash flow of individuals. People live on limited income after retirement. They have to plan their finances carefully to survive on the limited income. If retirees have a huge amount of debt, then it will be a tough challenge for them to cover their living expenses. Debt payments will eat up a gigantic share of retirees’ income. Income from Social Security benefits and pension plans are not enough to cover the debt repayments. Plus, they are much less than preretirement income.


As people age and become physically weak, they want comfort in life. But that is only possible when they have enough money to buy comforts in life. When retirees spend a massive amount of money on paying off debts, they have hardly any money left to lead a comfortable life. That is why it is wise to discard debts before retirement.


When individuals are approaching retirement, they should analyze their financial situation once and think about their existing debts. Can they pay off debts now? They have a job and a regular income now. So, if they get the right suggestion from credit counselors and act upon them, then they can become debt free even before retirement.  


There are various strategies to pay down debt. This includes the debt snowball method, debt avalanche method, debt snowflake method, etc. They can help baby boomers/retirees in leading a debt-free life after a certain time. But all these are DIY debt relief methods. They have to do everything on their own. There is no one to guide baby boomers. As such, there are chances of making expensive mistakes and slacken the debt relief process. However, this does not mean that DIY debt relief methods are worthless. They have helped millions of people to get out of debt in the US.


Those who can’t manage debts on their own, they can get professional help. They can enroll in a debt settlement program to get financial freedom by paying a lower payoff amount. Here, a debt settlement company negotiates with creditors on behalf of baby boomers to reduce their payoff amount. They give convincing stories to creditors so that they forgive a portion of the debt. Once creditors believe that baby boomers are in financial hardship, they agree to settle and close the account in exchange for a lump-sum payment.


Another good strategy for the baby boomers is to consolidate their debts through a program where they can pay back creditors with easy monthly payments. In a debt consolidation program, baby boomers have to pay low-interest rates on their bills. So, that helps them to save money. Plus, when they make monthly payments, their payment history improves, and that helps to boost credit score.


Baby boomers can take out a debt consolidation loan as well to repay their debts. They can take out a consolidation loan to pay off their high-interest debts. Like a consolidation program, baby boomers have to make low monthly payments here also. But, there is only one risk, and that is the repayment term. If the repayment term is long, then baby boomers may have to keep on making payments even after retirement. Plus, baby boomers may have to pay more in the long run due to the long-term repayment plan.


No matter what strategy baby boomers adopt, they should try to get rid of high-interest debts first because that makes a large bite on the savings. Credit cards and payday loans are high-interest bad debts as they don’t help to build wealth.


As far as good debts are concerned like mortgage, student loans, and home equity loans, retirees must calculate their interest rates, tax consequences, and affordability before making a decision. Many financial experts feel that retirees should not take out a student loan for their children and grandchildren. Students should take that financial responsibility. If parents want to do something, they can help students to pay off the loan depending on their financial situation.


Words of wisdom

Baby boomers should calculate their projected income and expenses after retirement. If their post-retirement income can afford the debt repayments, then they can retire with debt. Otherwise, they should try to pay off debt before retirement.

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