Most people look forward to retirement as ‘the golden years’ — a time to finally relax and enjoy life.
But for many seniors, retirement becomes anything but relaxing. Stock market doldrums, inflation, unexpected medical expenses and even the cost of living longer than expected can create financial pressures that are tough for most seniors to bear.
“Many people expect their expenses to go down when they reach retirement,” says Sandy Shore, a spokeswoman with the credit counseling association Novadebt. “However, for many, expenses go up. Medical expenses are higher and many people have to hire people to do things they used to do for themselves, which they may not be able to do when they’re 70 and 80.”
These higher costs have caused a growing number of seniors to have trouble keeping up with their expenses, say experts. For example, credit card debt held by low and mid-income older consumers increased by 26 percent from 2005 to 2008, according to a 2009 study released by the public policy group Demos. And bankruptcy filings by older Americans more than tripled between 1991 and 2007, according to a study by Professor John Pottow at University of Michigan.
“The research clearly suggests that a growing number of older people are facing funding problems,” says Pottow. “The financial crisis will likely only have exacerbated that situation. Older people have fewer people they can ask for help, even as living expenses are going up.”
Credit card debt problems were the most frequently cited reason that elder debtors gave for filing for bankruptcy, according to the study, and older debtors had 50 percent more in credit card debt than younger filers. Many seniors also cited higher credit card interest rates and fees as a major factor contributing to their debt.
Of course, filing for bankruptcy because of credit card debt is at the extreme end of credit problems. However, many seniors make smaller credit mistakes that can taint their golden years.
Here are four common credit mistakes that seniors often make — and how to avoid them:
1. Using credit to fund a lifestyle you can’t afford.
One of the most common mistakes people make when they retire, is that they don’t reevaluate their lifestyle and recalibrate their expenses accordingly, says Sandy Shore.
“Many people realize too late that they have to make adjustments for the lower income,” says Shore. “They want to do things like playing golf more often, go out to eat with their friends and enjoy other simple pleasures. But they don’t put down the numbers on paper to see how it all adds up.”
When expenses aren’t adjusted according to the new, lower income, most people turn to credit cards to supplement their income. Unfortunately, cards can easily mask the underlying problem and cause people to overlook that they are living beyond their means.
How to avoid this mistake: Try to pay your credit card bills in full each month. If you don’t have enough money in your monthly income to pay off the credit card balances, you are spending more than you can afford. Reevaluate your spending patterns and look for ways to cut back.
“Start tracking your expenses and look at your budget and at what can be cut,” recommends Shore. “Really, everything can be cut. It’s just a matter of coming to the realization that your expenses cannot exceed your income. You have to cut, it’s not a choice.”
2. Not planning for the unexpected.
As you get older, you have to expect the unexpected. Medical expenses have been the bane of many a well-planned retirement portfolio. According to a survey by CESI Debt Solutions in Raleigh, N.C., more than 75 percent of seniors going into credit card debt cited medical or funeral expenses as a reason.
How to avoid this mistake: Set aside an amount in your monthly budget for unexpected expenses and allow this to grow in a savings account over time. That way, when something happens, you don’t have to tap into your living expenses to meet the extra expenses.
3. Tapping your home equity.
Taking out a reverse mortgage or home equity line of credit can be an appealing option for seniors having trouble making ends meet. For example, many retirees turn to reverse mortgages to cover a shortfall in their monthly income, says Shore. However, this strategy can easily backfire, say experts.
“You are using a lot of equity for the reverse mortgage, and it may not be something that works for you in the long run,” says Shore. “Most people fail to plan for the extra expenses that will come up and they don’t realize that the monthly reverse mortgage amount is not adjusted for inflation, and it will not cover them ten, twenty years from now.”
How to avoid this mistake: If you’re considering a reverse mortgage or a home equity line of credit, meet with a credit counselor or financial planner to get an overview of how this will impact your long-term financial situation over the next 10 to 20 years. Then, plan accordingly.
4. Letting your credit score slip.
Accumulating too much credit card debt or falling behind on bills will hurt your credit score. However, if you’re in the fortunate situation that you don’t need to use credit cards, remember that using credit too little can also damage credit scores.
Jeanne Kelly, a.k.a. the Credit Owl, a nationally recognized credit expert and author of “The 90-Day Credit Challenge,” tells the story of a client whose 82-year-old Dad lived in a 2.5 million dollar home and had millions of dollars in the bank. Yet, his FICO score was 602!
“You would never think he was financially stable by looking at that score,” said Kelly in an email. “And it was all because he rarely used credit.”
How to avoid this mistake: Kelly recommends using your credit cards regularly to keep your credit score alive and high. If you don’t want to be bothered keeping track of credit card bills, consider using a credit card to pay for monthly bills you normally pay anyway, such as a cable TV bill. Then have the credit card bill paid automatically from your checking account so you don’t have to spend time paying bills each month.