debt

4 ways to face a cash-strapped retirement

Steve Bucciq_v2.gifDear Debt Adviser,
Help, I'm about $30,000 in debt. I have about $50,000 in my retirement. I will be 59½ years old in January. I had to go on disability from a fall at work. My house is paid for. Should I just take money out and pay off my loan? Could I just hire someone to (advise me)? I don't know what to do and am at my wits' end. I am not behind on any bills.
-- Doris

a_v2.gifDear Doris,
You worry me. You are nearly 60, have saved little and spent much. Now you are out of work and ask me if you should hire someone? My suggestion is that you get rehired as soon as possible and develop a plan for building up your savings, paying down your debts and preparing for retirement.

Before you say, "I don't plan to retire for a long time," consider that many people end up having to retire before they plan to due to illness, injury or job loss. You may be late getting started on a financial plan, but I suggest that you put one together now before it's too late!

Let's start with these four major moves:

  • Begin by setting some realistic goals, such as when you want to retire and how much you will need to do it.
  • Put together a budget that will allow you to save the money needed to meet your goals and begin to pay down your debt.
  • Find a financial planner to do some serious retirement planning.
  • Consider how you can use the equity in your home for debt repayment and retirement planning.

You can get help with all of these tasks and it shouldn't cost you anything. A credit counselor can help you with goal-setting and budgeting, a financial planner should do a review of your finances and make suggestions and a local banker can help you understand what options you have for tapping the equity in your home.

As you are only three years away from 62, I especially want you to look into how a reverse mortgage might fit into your plans. Simply put, a reverse mortgage provides a monthly payment to you that extends your income while you stay in your home. Most reverse mortgages require you to be at least 62 years old.

You asked if you should use your retirement money to pay off your debt. I don't recommend that you tap into your retirement money at this point. If your disability is permanent, then you need to rebalance your budget to assure that your monthly expenses can be met with your disability income. Should your disability not be permanent, the sooner you can get back to full salary, the better.

For now, you could use your home equity to secure a low interest loan or line of credit that would allow you to draw enough to pay off the $30,000 debt. A line of credit can be structured so that you are required to make interest-only payments, which may make it an affordable option for you while you are on disability. Depending on what your home is worth, you may be able to pay off the new loan with a reverse mortgage once you turn 62.

If after a thorough review of your resources, finances and your future earning potential, it still makes the most sense for you to tap into your retirement money, keep in mind that although you will not pay any early withdrawal penalties at your age, you will owe income taxes on the amount you withdraw. My last bit of advice is to speak to your doctor about getting you back to work as soon as possible so you can get started with the great plans you will have developed.

Good luck!

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

To ask a question of the Debt Adviser, go to the "Ask the Experts" page and select "Debt" as the topic. Read more Debt Adviser columns and more stories about debt management.

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