I recently came across an MSN Money article taken from Investopedia entitled "Boomers carry debts into retirement". The article explained how "Using U.S. government data, the Employee Benefit Research Institute in Washington, D.C., found that between 1992 and 2007, the percentage of households with people in their mid-50s and older that were carrying housing and consumer debt rose from 53.8% to 63%. Further, for those aged 55 to 64, nearly 82% were carrying debt." It also mentioned that "The level of debt was higher, too. According to EBRI, the average overall debt for these 55-and-older households more than doubled (to $70,370) in that period." This totally reminded me of a couple with whom I'm working on retirement planning and who I wish would pay off their debt, but won't.
The Debt Load
This same couple with whom I'm working to help plan their retirement is carrying a hefty home equity line of credit. At this point, some or all of this debt could be paid off. However, the adjustable interest rate on this loan is currently only at about 3 percent. The couple's argument for not paying it off is that it's only 3 percent. My argument is that it's an adjustable rate that would be carried into their retirement and could go up. It's also an additional expense during a time in which income will be more limited and 3 percent is still 3 percent.
3 Percent is 3 Percent
Currently, a large portion of this couple's money that could be put toward the home equity line of credit is sitting in a bank account earning about 50 cents a month in interest. Now in my opinion, 3 percent is a pretty good rate on a loan; however, why pay several hundred dollars in interest each year on this loan when these people are only making about $6 in interest on the money in the bank? They could instead pay off, or at least pay down the debt, saving themselves hundreds of dollars each year in interest and cutting or eliminating a big monthly expense that they will have to account for otherwise in retirement.
The Dangers of Available Cash
Another problem I have with this debt scenario is that the cash in the couple's bank account is easily accessible, and these boomers aren't what I would consider highly responsible people, financially speaking at least. That money sitting in a bank account is a temptation. It's easy to get to and once it's gone, it's gone. It would be better put to use paying off a debt -- as long as that debt is not re-accumulated -- since then it would have gone toward securing a better retirement as opposed to simply purchasing more stuff.
Fewer Expenses Means More Options
In my personal opinion, I would want as few expenses as possible entering retirement. Not only would decreasing debt cut the amount of expenses I'd be facing in my golden years, but it would in turn lessen the load upon my income requirements.
In a retirement in which I'd have to pay on a home equity loan like the boomers I'm helping, it would take money that I might use elsewhere to earn more income and put it toward expenses that are eating further into my financial reserves. Plus, good economy or bad, that debt would remain until paid off (or written off in bankruptcy), but my income could go up or down, and if it went down due to a struggling stock market or increased health care costs, that standing monthly debt payment could make life quite difficult, especially if its associated adjustable interest rate began to rise.
Therefore, I'd advise these boomers I'm helping to ditch all the debt they could before entering retirement, but that doesn't mean they're going to listen.
*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.
More From This Contributor:
The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute legal or financial advice. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
Levitt, Aaron. MSN Money. "Boomers carry debts into retirement". December 4, 2012. http://money.msn.com/debt-management/boomers-carry-debts-into-retirement. December 6, 2012.