Spring Cleaning for Household Debt

Rethinking Roles
Many people aspire to pay off their home mortgages before entering retirement. But shedding debt has become more difficult in recent years, partly as a result of weak economic conditions and the housing crisis.

In 2010, 39% of households headed by someone aged 60 to 64 had first mortgages, compared with just 22% in 1994. (1)

After more than a decade of free spending and rapidly rising household debt, Americans began taking steps to reduce their debt burdens. By the second quarter of 2011, consumer debt had fallen about 15% from the 2007 peak of $11.4 trillion, but was still close to double the amount owed in 1999 (when adjusted for inflation and population). (2)

Of course, there are some compelling reasons why pre-retirees may want to avoid carrying large amounts of debt and become less dependent on home equity. As retirement looms and opportunities to reduce debt and increase savings become more limited, these issues may become much more critical.

Dealing with Debt and Dwindling Equity
In the past when retirees owned their homes free and clear, they could often count on them to provide additional financial resources during retirement. For those who wished to stay in their homes during retirement, housing expenses could be significantly reduced once a mortgage was paid off. Others might opt to downsize to a smaller home or move to a lower cost area, using the extra money to supplement their retirement incomes.

However, this might not be an option for those who are unable to sell during a weak housing market or are unwilling to sell for a low price. Because of falling home values, some homeowners may have less equity and might even have to take a significant loss if they sell their homes. This is not just a problem affecting middle-income homeowners. Affluent homeowners have also been affected by rising debt levels and reduced home equity.

Nationwide, high-end homes lost 38% of their value after the market peaked in 2006, and lower-end home fell even more. (3)

Refocusing on Saving
When times are tough, it's not uncommon for investors to reduce or discontinue making retirement plan contributions in order to meet their obligations. Pre-retirees who are unable to reduce or eliminate debt can direct their efforts toward saving and investing more for the future.

In the years preceding retirement, many workers are in their peak earning years which make this a particularly critical time to save as much as possible for retirement. Workers aged 50 and older not only may be able to maximize their retirement plan contributions but also could take advantage of catch-up provisions that enable them to contribute even more.

The most recent housing downturn has drawn attention to the potential risks created by carrying too much debt into retirement. Money dedicated to service debt is no longer available to spend or save. This simple fact could have larger implications not only for the economy as a whole but possibly for your own financial future.

(1) The Wall Street Journal - Sept. 7, 2011
(2) The Wall Street Journal - Sept. 7, 2011
(3) USA Today, June 6, 2011

Stan Molotsky is President and CEO of the Voorhees and Collingswood-based SHM Financial Group. He hosts The Molot$ky Money Hour live Monday at 10 am on WWDB-AM 860 in Camden, Burlington, and Gloucester Counties, and Saturday at 7 am on WWOB-AM 860 in Ocean and Monmouth Counties.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. Its content is derived from sources believed to be accurate.

Neither the information presented herein nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. You are encouraged to seek tax or legal advice from an independent professional advisor.