Retiring with Debt? More American's Are. Here Are Some Stratagies

DETROIT – Rhonda and Lonnie Edwards Jr. had good middle-class jobs most of their lives. He worked nearly 35 years in an hourly union job at General Motors. She had a job in Detroit Public Schools for 13 years as an attendance agent and earlier as a parent liaison. She later worked for the state unemployment agency for another 10 years. 

"We were just middle-income earners. My goal was to be debt free by the time we retired," said Rhonda Edwards, 63. 

Things didn't quite work out that way. The medical bills hit after Lonnie, now 67, was diagnosed with prostate cancer in 2007, just three years after he had taken an early retirement in his 50s.

Around the same time, their finances took a dive during the depths of Detroit's housing crisis when they had plans to move to a smaller co-op but had trouble selling their family home in the well-regarded University District in Detroit and ended up in foreclosure. 

"We had a rude awakening that something was really going bad in the economy," she said. 

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Older Americans increasingly are discovering that retirement might not go as smoothly as brochures for retirement communities and river cruises across Europe suggest. 

Carrying a boatload of debt, facing job cuts and dealing with bad health news make it tougher to pay the bills in retirement than many expect, even long after the Great Recession officially ended in 2009. Some, such as the Edwards family, are able to eventually work through their financial struggles in retirement. But the financial curveballs can be stressful nonetheless. 

American families just reaching retirement or those newly retired are more likely to have debt – and higher levels of debt – than past generations, according to an Employee Benefit Research Institute study of debt of the elderly and near elderly from 1992 to 2006. 

About 53 percent of households ages 55 or older had some level of debt in 1998. That number climbed to 68 percent in 2016.

Why such a dramatic increase? 

"Debt has certainly become more acceptable," said Craig Copeland, senior research associate for EBRI in Washington, D.C.

Many people want more manageable payments, so they reject the idea of taking on the higher payments associated with a 15-year mortgage – and many may have bought homes in their 40s or 50s. 

"Some people have, instead of downsizing, up-sized as they've gotten older. And if they've taken a 30-year mortgage, that certainly would make them be in debt into their 70s," Copeland said. 

"The biggest bulk of the debt is the mortgage debt." 

According to the nonprofit Employee Benefit Research Institute, the average debt in families age 75 or older was $36,757 in 2016. That is up from $30,288 in 2010.

Debt can have a significant impact on one's sense of financial security in retirement – and ability to deal with unexpected expenses – especially if they don't have a steady pension or anything even close to a six-figure amount saved up in a 401(k) plan. 

"People are going into retirement less prepared," said Donna McNeill, chief operating officer for GreenPath Financial Wellness, a national nonprofit based in Farmington Hills, Michigan. 

The safety net of a pension and retiree health care from an employer-sponsored plan is not the scenario many people are looking at today, she said.

Like it or not, more people may need to cut up some credit cards before they retire and re-evaluate whether they should retire in their late 50s or early 60s.

Some strategies worth considering if you are in or near retirement:

Focus on ditching the debt

"You have to be smart in how you tackle your debt," Copeland said. 

Ideally, pay off your highest-priced loan before you retire, including credit cards that might be charging 15 or 20 percent. 

Maybe even sell the family home to pay off that mortgage and downsize to a less costly home to live in during retirement.  Given that home values are on the rise in many communities, many families no longer risk going into foreclosure or losing money selling the family home as was the case in 2007 or 2008.

In some cases, people might even be able to use some of the equity they've built in the home to deal with other expenses in retirement. 

Get a game plan for how to pay the bills

Some people do need extra help when it comes to budgeting, like finding an app such as Mint and Wela. Some apps, though, could have promotions for credit offers included in the platform, so consumers should avoid being tempted to apply for other loans or credit cards. 

GreenPath Financial Wellness, a nonprofit service, offers a "Wellness Wallet," a free personal financial management tool via the app store. 

GreenPath also introduced a new program late last year called the Simple Payment Plan, which involves a partnership with EarnUp, an automated loan payment platform.

The tool currently is free for the first year, thanks to a sponsorship from Freddie Mac. The monthly fee later will be $19.95. GreenPath's number is 877-663-0143. 

The tool – which can be used by any age group – automates debt payments such as an auto loan, mortgage and student loans. The objective is to help consumers pay bills on time to avoid late fees, as well as paying down debt.  

GreenPath's financial counselors review clients' loans and expenses to help them determine the debts that should go on the Simple Payment Plan. The payment schedule takes into account when the consumer is paid. The idea is to set it and forget it. 

The consumer can opt to round up payments to save interest over the life of the loan. The increasing rate of consumer debt and low home ownership rates indicate that average Americans can use help managing their debt, according to a statement from Freddie Mac. 

Enrolling in automatic payment plans via utility companies and others might also help older consumers if they're dealing with health issues or dementia to ensure that bills get paid on time, according to James Ellis, a personal finance researcher for ValuePenguin, a financial website. 

Some consumers may want to cut back on bills and limit their credit-card spending to one or two cards, instead of five or six credit cards. Consumers can also sign up for bill reminders via text or email. 

Learn now to deal with life's letdowns

Rhonda Edwards, who retired in 2014, said she and her husband chose to retire relatively early, he at 54 and she at 59, because it was something they had planned to do for many years. 

"Lonnie’s mother and father passed away at 33 and 57 years old, respectively, while my father and mother died at 49 and 55," she said. Her mother died nine days after the birth of their first child.

"We understood that tomorrow is not promised to anyone, and we wanted to do something our parents never experienced; retire with a decent measure of health and quality of life to look forward to," she said. 

When they started facing challenges over which bills to pay, they decided to get help and turned to counselors at GreenPath to get a better handle on their finances. They were clients before the housing crisis hit. 

Today, they continue to pay off some debt but say it's manageable. 

"We're not debt-free but we're not swimming in debt, either," she said.

She was glad that they had outside help as they worked through their medical bills and the foreclosure. At times, she said, they were so stressed that they weren't sure how to prioritize the most important bills to pay with the money they had. 

"Everybody needs to know where they stand financially," she said.