Wednesday, January 26, 2011

Borrowing to Pay Expenses in Retirement?


One of the most frequent discussions I have with clients these days is about their desire to have their investment portfolios produce more income.

There are a number of choices, but none offer the absolute security of a bank account.

For example, with the overwhelming consensus among the media that interest rates are headed higher in the very near future (a view not shared by Random Glenings, by the way), clients are reluctant to buy longer maturity bonds, despite the much higher yields that are available.

Another alternative - dividend-paying common stocks - has received a better reception, although the memories of the stock market debacle of 2008 still linger with most. Still, the lure of reasonable yields plus the chance for capital growth seems reasonable to many investors.

Regardless of the investment choice, however, there is no denying that one of the most serious problems facing retirees is the fact that they are dipping into principal to meet daily living expenses.

There is another alternative which, fortunately, to which my clients have largely avoided: debt.

According to the New York Times this morning, however, a growing number of retirees have been using high-interest credit card debt to pay their bills, which could eventually lead to financial disaster:

Study after study shows that more of {elderly} are living with heavy credit card debt, regularly swiping cards to pay for things like gas and groceries. And as the balances pile up, the elderly cope in a number of ways. Some...permit their adult children to step in, while others seek outside counsel in an effort to preserve their independence. Some elderly debtors are trapped in limbo, too proud to ask for help but too strapped to pay off the debt.

Retirements Swallowed by Debt - NYTimes.com

With the job market still in tough shape - especially for older workers who, in many cases, lack the skills to compete for available positions - an elderly person who finds themselves heavily in debt has very few alternatives to repayment.

And with interest rates probably staying low for at least the foreseesable future, this could be a problem that will continue to grow.