Retirement is thought to be a time to enjoy life, free from the stress of work and financial worries. But for many older adults, certain types of difficult-to-manage debt can cast a shadow over what should be their golden years. If you’re carrying a large mortgage, credit card debt, or other high-interest loan into retirement, you’re not alone. In fact, nearly half of the total debt in the U.S. in 2020 was held by people over the age of 65.1 That’s a lot of folks in the same boat!
In this installment of our “Reversing Retirement Challenges” series, we’ll explore how debt can impact your retirement—and how tapping your home equity with a reverse mortgage can offer a lifeline to help you regain control of your finances.
The Challenge: How Debt Can Weigh You Down
Certain debts can be a heavy burden at any stage of life, but it can feel especially overwhelming in retirement. As you transition to a fixed income, the last thing you want is to be weighed down by high-interest loans or large monthly payments. Unfortunately, many older Americans are finding themselves in this very situation.
According to data from the Federal Reserve Bank of New York, debt among Americans over age 70 has skyrocketed, climbing to $1.1 trillion in 2019—a staggering 543% increase from 1999. That’s the largest percentage increase for any age group!2 This raises an important question: where is all this debt coming from? Let’s break it down:
- Medical Debt
Healthcare costs can add up quickly in retirement, leading to significant medical debt. Even with Medicare, out-of-pocket expenses like copayments and deductibles can become burdensome. In fact, in 2020, unpaid medical bills among older Americans totaled nearly $54 million—a 20% increase from the previous year.3 - Credit Card Debt
As healthcare costs rise and the cost of living increases, many older adults turn to credit cards to make ends meet. While credit card debt affects all age groups, Baby Boomers and the Silent Generation tend to carry particularly high balances.4 This can pose a significant challenge in retirement due to high interest rates and fixed incomes. - Housing/Mortgage Debt
Despite the fact that nearly 80% of Americans aged 65 and older own homes,5 nearly 10 million of them still carry mortgage debt.6 And it’s not just the mortgage payment itself that can strain your budget—property taxes, insurance, maintenance, and repair costs all contribute to the financial burden. In fact, an increasing number of older homeowners are now spending over 30% of their income on housing expenses,7 leaving little room for other necessities and leisure activities.
These bills (along with others) can quickly add up, leaving you with less money to enjoy your retirement. And if you’re dipping into your savings or selling off investments just to keep up with these payments, it can hurt your long-term financial security.
High-interest debt and large monthly payments don’t just take a toll on your wallet; they can also affect your peace of mind. The stress of managing certain debts in retirement can make it harder to relax and enjoy the lifestyle you’ve worked so hard to achieve. But here’s the good news: there are options available to help you lighten this load and regain your financial freedom.
Practical Solutions: How a Reverse Mortgage Can Help
As we’ve covered, housing expenses have the potential to be a major source of debt for retirees. However, for many retirees, their home represents one of their largest assets. If you’re looking for a way to manage debt in retirement, you might find the solution in your own home—specifically, the equity you’ve built up over the years.
With a Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, you can convert a portion of this equity into cash to use as you wish – such as to consolidate debt and improve overall cash flow. Here are a few ways it can work for you:
- Pay off Your Existing Mortgage (or HELOC)
A reverse mortgage can be a powerful tool for managing and eliminating existing mortgage or Home Equity Line of Credit (HELOC) debts. By using a reverse mortgage, you first pay off the remaining balance on these loans in full. Once the existing mortgage debts are settled, any leftover funds from the reverse mortgage are yours to use as you see fit.
One of the biggest advantages of a reverse mortgage is that monthly mortgage payments are not required—so long as you meet loan obligations such as keeping current with property taxes, insurance, and home maintenance. This can free up additional cash each month, easing your financing burden and giving you more flexibility in managing expenses.
You can also choose a reverse mortgage with a line of credit, which grows over time.8,9 This feature allows you to access funds as needed for future expenses. Coupled with no monthly mortgage payments,10 this approach not only provides breathing room in your budget, but also establishes an additional financial cushion for any unexpected costs in the future. - Consolidate High-Interest Debt
If you own your home outright but are burdened with high-interest debt from credit cards, car loans, or student loans, a reverse mortgage could offer a flexible and effective solution. Even without a mortgage, these types of debt can put a strain on your financial stability in retirement. By using a reverse mortgage, you can manage and reduce this debt more effectively.
For example, if you are dealing with high-interest credit card debt, a reverse mortgage could offer several flexible options to help:
- Lump Sum with Monthly Payments
Take a lump sum amount that can consolidate the credit card debt and receive any remaining reverse mortgage funds via monthly payments. This straightforward option helps you manage the high-interest debt with the added benefit of consistent, predictable cash flow each month. - Lump Sum with Monthly Payments and Line of Credit8
Choose a lump sum to consolidate your credit card debt, then divvy up remaining funds between monthly payments and a line of credit for emergencies. This combination allows you to tackle that high-interest debt while keeping some funds available for unexpected needs. - Lump Sum with a Larger Line of Credit8
Use a lump sum to consolidate your credit card debt and set aside any leftover reverse mortgage funds as a larger line of credit. This option provides a large amount of available credit, giving you maximum flexibility to manage your finances and cover any unforeseen expenses.
These choices allow you to consolidate your debt, reduce your monthly bills, and free up cash for other things—like enjoying your retirement!
Moving Forward
Debt doesn’t have to stand in the way of the retirement you’ve worked so hard for. With a reverse mortgage, you can take charge of your finances, consolidate debt, and focus on enjoying the life you deserve.
Ready to explore how a reverse mortgage can benefit you? At Longbridge Financial, we’re dedicated to helping homeowners like you unlock the potential of your home equity to overcome financial challenges in retirement. Our team will take the time to understand your goals, your home, and your financial situation, providing you with the information you need to make a confident decision.
Join over 1.3 million Americans who have already integrated a reverse mortgage into their retirement plans.11 Start your journey to financial peace of mind—contact the Longbridge team today!
Keep an eye out for the next installment in our “Reversing Retirement Challenges” series. In our next blog, we’ll explore smart strategies to fund changing healthcare needs in retirement – ensuring you can prioritize your health without compromising your financial well-being.
