Credit Card Debt in Retirement

Going into retirement with credit card debt can pose challenge to boomers, experts say

By Deborah Jeanne Sergeant

Do you owe a balance on a credit card? According to MSN.com, 40% of baby boomer Americans are still paying off credit card debt.

Local experts say that’s a problem because unlike simple interest on loans such as mortgages, credit card debt compounds interests. Debtors pay interest on interest.

Bryce Carey, partner and certified financial planner with NorthLanding Financial Partners, LLC in Rochester, said that carrying credit card debt by this age usually means the budget is unbalanced — or there is no budget.

“If they carry that habit into retirement, it’s likely they’ll overspend any distribution from their investment portfolio,” Carey said. “Just missing one payment can compound new spending being added to those credit cards. I work on developing a budget and an emergency savings account before using credit cards.”

If the client has insufficient cash flow, Carey recommends consolidating the debt with a loan with a lower interest rate. Refinancing a home may help them use home equity to get out of credit card debt, as can establishing consistent payments with a known end date, all while not using credit cards anymore.

“Most find it’s advantageous to downsize rather than loan against it,” Carey added.

He said that some people accumulate credit card debt because they over-contribute to their 401k or focus on funding their children’s college education or they’re taking care of their elderly parents. Any of the above can leave them strapped for emergencies such as a vehicle breaking down or replacing an appliance.

Some rack up debt for luxuries they cannot afford but want immediately, such as springing for a vacation while their children are still teens or young adults.

“It demonstrates why having that budget is critical,” Carey said.

Elizabeth A. Thorley, certified financial planner and president of Thorley Wealth Management in Pittsford, said that recent data shows the amount of debt among boomers is higher, but those going in debt have more assets to show for it, compared with a decade ago.

“When someone’s approaching 10 years or so of retirement, the most important question is how much you need to live on in retirement and if your resources will be able to support that,” Thorley said. “If 20% of your income goes to debt, make sure you have the resources to pay that.”

Although not an ideal situation, if a retiree can keep up with credit card payments and not skip any, carrying credit card debt into retirement is still manageable.

“We definitely will encourage our clients to think about their debt management as a total picture,” Thorley said. “You don’t’ want to use your 401k as a piggy bank, but sometimes you should think of the other resources than credit cards. There might be other options that are cheaper than credit cards.”

For those looking forward to retirement while carrying credit card debt, Diana Apostolova, financial consultant and owner of Rochester Investments in Rochester, recommends still matching the company 401k while paying down debt.

“If possible they should try to refinance the debt into a lower interest rate,” she added. “In addition they should try to eliminate any unnecessary purchases. A good start is to go over their expenses and see if some expenses can be either reduced or eliminated, and if that’s possible to use the money to pay down debt. Another option is to either work extra hours or get a second job, although that may not be a feasible option for many.”

Credit cards should be viewed only as a last resort for an emergency, according to Adam M. Mark, certified financial planner with Wealth Management Group, LLC in Rochester.

He also sees credit card debt as an indicator that affording retirement is going to be extra challenging.

“You’re earning the most in those years before retirement,” Mark said. “If you can’t afford to pay off credit cards before you retire, the odds of paying them off on a fixed, limited income are going to be a challenge. If at all possible, it should be paid off before retirement. Rarely would I suggest retiring if you still have credit card debt.”

He said that a trusted and knowledgeable family friend or a credit counselor may help form strategies that can help knock out credit card debt.