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In the process of accumulating a nest egg as they approach retirement age, many boomers also have accumulated something that can threaten that egg: a huge amount of debt.

“Debt is a concern depending on how much they have faced reality and lived within their means, and whether they have a heavy mortgage,” says Dick Bell, owner, Bell Financial, Calabasas, Calif. “If they are refinancing their mortgage this late in life to pay off debt, they may have a problem.”

Boomers in their 50s particularly are worried about debt, adds David Woods, CEO of the National Association of Insurance and Financial Advisors and president of the Life and Health Insurance Foundation for Education.

Woods says many approaching retirement recognize that once they stop working, they will have no ability to generate income.

“What a looming terror that really is,” he says. “All our lives we are used to having a job and feeling we have the time to work it out. One of the biggest fears among clients approaching retirement is, I will have debt I will not be able to handle.”

“Where I have come across debt problems is with individuals who are in business for themselves,” says William S. Graebe, principal of Graebe Financial Services, New York. “Theyre often late getting started in saving for retirement and getting their debt under control.”

The financial advisor needs to talk turkey to boomer clients who have heavy debt about changing their spending habits, these advisors agree.

Bell, who is president of the Society of Financial Service Professionals, acknowledges it can be tricky getting an individual to change an imbedded lifestyle. But a consumer who sees his or her debt declining often feels so good about it that the behavior reinforces itself. “Most people can pay down debt if they stay focused on their efforts.”

Although most advisors dont recommend taking on new debt late in life, older boomers should consider refinancing their mortgage if it is for a relatively short period and they can pay more than the minimum each month, to hasten payoff.

“If you have a 7% mortgage and you are overpaying [beyond the monthly minimum], its like making 7% on whatever you overpay,” Bell notes.

However, credit card or other high-interest debt should be paid down before the mortgage, he adds.

Robert M. Roach, a field director with Northwestern Mutual Financial Network, Milwaukee, says the debt-payoff strategy depends on the clients situation. Some can comfortably enter retirement with debt because they still have considerable income.

“It may make some sense early in retirement to continue to carry mortgage debt,” he says. “If a family has an income earner after retirement, a mortgage-interest deduction will still have some value to them. Other people should downsize [spending] at retirement to pay off their mortgage debt.”

In some cases, refinancing will reinforce the individuals financial plan, Graebe says.

“For instance, buy a retirement home now only because you can refinance at a lower rate,” he says. “You can buy a house in, say, Florida for a reasonable price today compared to 5 years from now.”

Consumers should never be in a situation where their monthly debt burden is more than 30% of their take-home pay, Roach says. “We try to catch them before theyre in that situation.”

People should start thinking about paying down their debt around age 50, Roach suggests.

The first step in debt reduction is to help the client reassess priorities, he adds.

“Whats really important 5 to 10 years ahead?” Woods asks. “Is it really important to have a $50,000 auto, or is it better to buy one for $30,000 and use the difference to pay down debt? Also, is it important to put a lot of money into a house you may be selling in 5 or 6 years?”

Bell starts off counseling sessions with an assessment of the individuals financial position, balancing what they owe against what they own.

“You need to establish an accurate you-are-here position financially,” he says. “The whole financial planning process is helping people get an accurate assessment of where they are. A lot of people are in financial denial. They must face reality and change spending patterns to focus on paying off debt.”

Bell says he often advises debt-laden clients to stop using ATMs.

“Many people have no idea where their cash goes,” he says. “If they watch their patterns, become conscious of where theyre spending, they find theyre spending a lot on things they dont get a lot of value from.”

One couple he counseled found they took out an average of $1,500 a month from ATMs, most of which they couldnt account for. His advice was no more sophisticated than putting that amount of money in a shoe box each month. That helped them watch their money more carefully and account for where it went. As a result, they were able to save $8,000 after 10 months, he says.

“That was money going out the door, buying presents, stopping at Starbucks and just doing a lot of impulse shopping, buying stuff they didnt really need,” he says.

Once consumer debt is eliminated, the next step for the client is to load up his or her retirement plan.

“Once people get to that position, they get so comfortable with it they dont want to get back in debt,” says Bell.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 19, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.