Don’t let debt swamp your retirement

A friend of mine nearing retirement is looking longingly at a new Harley, but getting financing is going to be a challenge. He’s contemplating refinancing his house and using some of the equity to buy the bike.

When he told me that, I didn’t say anything, but I guess I didn’t have to. My face must have done the talking. My friend is within 10 years of retirement. Unless he hit the lottery recently, he doesn’t have a huge amount of savings and his job has been off and on the last year or two while the economy has been so lousy.

Job-wise, things seem to be looking up, and if he just keeps plugging along, he’ll have his house paid off before he reaches retirement age. When he told me about the bike plan, he paused almost immediately and said, “I guess you don’t think it’s a good idea?”

I don’t, actually. Debt is a widespread Baby Boomer problem. We’re addicted to it and unlike our Depression-era parents, we’ve never been very good at delaying gratification. Many of us are looking at going into retirement still paying a mortgage and struggling to keep the credit card debt under control.

U.S. News & World Report in its retirement blog calls debt the No. 1 obstacle to retirement and its very first piece of good advice is to stop borrowing. You can’t climb out of a hole you’re still digging.

The other piece of particularly good advice from U.S. News was not to try to penny pinch in every category, but to cut back in a couple of key areas. I think saving money is like dieting. If I eliminate every spare calorie or every little luxury, I’m destined to fail.

The U.S. News article dismissed mortgage debt as less critical than other kinds of debt, but for Boomers, that may not be true. The standard deduction for a married couple filing a joint return for 2010 is $11,400. The standard deduction for single individuals and married couples filing separate returns is $5,700 for 2010. At this stage in life, lots of Boomers start losing extra deductions, so before you dismiss paying off the mortgage, take a hard look at last year’s tax return and see if the standard deduction might not be the better deal.

If it is, paying off the mortgage makes more sense than putting extra cash in savings because it’s pretty hard these days to make enough in interest to exceed even the lowest rate of interest on a mortgage.

The insidious thing about debt in retirement is that most of us are saving our money in tax-advantaged accounts. The less we take out to pay for living expenses after retirement, the more time we give it to grow — and the greater the likelihood that it will last as long as we need it.

Paying off debt in retirement not only requires taking out the amount owed each month, but it means that the debtor has to pull out enough from the IRA or 401(k) to pay taxes on the savings. Even if you are in the 15 or 20% tax bracket, that raises the cost of the debt significantly.