Most Boomers Feel OK About Handling Debt
Although debt levels and personal bankruptcies have been increasing for the general population in the U.S., data suggests that although baby boomers spend more, they are also in a better position to handle debt.
Financial planners contacted by National Underwriter say that while debt can be a problem for some clients, it is not widespread.
A report titled Beyond 50.04A Report to the Nation on Consumers in the Marketplace,” from AARP, Washington, found that in the 1990s, while the average American family experienced a 53% increase in credit card debt from $2,697 to $4,126, those in the 55-64 age group had a 57% increase, and those in the 65+ age group, a 149% increase.
Even with the higher consumer debt level, however, the 45+ age group was optimistic about their ability to pay off debt, AARP found in a 2003 consumer experience survey. Only 7% of respondents reported more debt than they could handle, while 41% said they had as much debt as they can handle. Thirty-two percent said they could incur more debt, while 16% said they did not have personal debt. Four percent either did not know or refused to answer the question.
Bedda DAngelo, a fee-only financial planner of Fiduciary Solutions, North Andover, Mass., says that the boomers she is working with are wiping out debt. Her clients in the boomer age group are realizing “weve got appliances. We dont need the latest and greatest. The kids are through college and suddenly you realize how free you are and how easy it is to pay down debt. You say, oh, wow. This is kind of nice.”
DAngelo adds that for boomers and other clients, focusing on a positive goal can be a strong motivating factor. She says the experience of some of her younger clients underscores the power of the positive and is a lesson for boomers.
Her clients, 2 young couples, were out of school and had school debt to pay off. But there is nothing more exciting than a first house or a first baby, she says, and so, with proper planning, she got these couples to focus on the house. The prospect of ownership made it easier for them to reduce spending in other areas, DAngelo adds.
A planner has to come up with a plan that will “show them how” this is possible, she says. Of course, she adds, if a client refuses to take action and “takes on the role of victim,” then there is not much a planner can do for them.
Jonathan Krasney, a certified financial planner with Krasney Financial LLC, Brookside, N.J., says if a new client was in debt, the first thing that he would find out would be “what kind of debt?” Is it an oversized mortgage, debt from auto leases or loans, or has a client “gone wild on credit cards?”
A home equity loan can be a reasonable way to structure debt while a client tears up credit cards, he says, and there could be the potential for deducting interest on the home equity loan.
What you want, Krasney adds, “is to restructure debt in a way that doesnt suffocate them.”
Another option is to take a loan on a 401(k) that is “temporary, and I do mean temporary.” The interest that is paid back goes back into the participants 401(k), he adds. Some 401(k)s have provisions that permit loans for any purpose, Krasney says.
And, if a person has a life insurance policy, there is the potential to borrow against the cash value, he continues.
Overall, Krasney says, “debt can be a good tool as long as you dont push it too hard.”
Reproduced from National Underwriter Edition, August 19, 2004. Copyright 2004 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.