Six years ago, retirement was a distant blot on Marcus Michaud's horizon.
Hard-hit by the economic downturn, he was drowning in consumer debt. While many of his friends declared bankruptcy, Michaud repaid his creditors through a negotiated plan -- and to his surprise, was able to save enough to buy a condominium with cash a few months ago.
His repaired credit rating could have supported the mortgage for a house, but Michaud went for the smaller condo so he could accelerate saving for retirement, which is only a decade away. "It's the start of an inexpensive, sustainable lifestyle," says Michaud, 54, a self-employed event planner in the Miami area. "I'm completely debt-free. It's gratifying."
Few share that feeling. Debt puts a full stop to many Americans' retirement plans, according to researchers and financial advisers. It's bad enough that many baby boomers carry mortgage debt into retirement instead of paying it off before they retire, as their parents did. But those same boomers are also loading up on consumer, student and other kinds of debt, undermining their ability to retire on their terms, or retire at all.
Five types of debt are especially insidious, financial planners say. Here's what they are and how to eradicate them:
1. Cosigning for an adult child. Just don't do it, even if it looks like an investment, advises Howard Dvorkin, founder of Consolidated Consumer Credit, the agency that helped Michaud regain solid financial footing.
It's hard enough to turn down a request from a 20-something child finally moving out of the basement, who needs help getting an apartment lease. It's even harder to refuse to guarantee a business loan for an adult child trying to open his or her own business. Dvorkin once counseled a widow who effectively wiped out her inheritance and home equity by cosigning a business loan to help her son open an ill-fated carpet store.
Not only can cosigning drag down your credit score -- it can also undermine the emergency fund that buffers your income-producing principal, Dvorkin says.
As painful as it might be, don't cosign, he says. And if you already did, consider buying out the loan. In other words, help pay it down to the level that the primary debtor can refinance for the remaining balance, in order to simply get rid of it.
2. Borrowing from yourself can boomerang. If you borrow against your own 401(k) savings, you must immediately pay back the entire balance if you lose or quit your job, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies. The AICCCA has seen a 27 percent increase in the number of retirees seeking its aid in the past two years, he adds. Where does that repayment come from? Often, it is pushed onto credit cards or wipes out an emergency fund.
3. Student debt. It's tempting to pay off the loans your kids accumulated in college. But those are their loans, not yours, credit counselors say. Teach your kids to take full responsibility.
Redirect the monthly payment amount to your retirement savings account instead. You'll accomplish two goals at once: getting the loan off your plate and automatically saving more.
4. Reset real estate debt. Do you assume you can partially offset the mortgage for your retirement home with a tax deduction, as always? Think again. You probably won't have the same dependent deductions, and other factors will likely change, all of which can wipe out your expected break on the mortgage, according to the The National Center for Policy Analysis. In fact, state and local taxes can so affect the net effect of a mortgage that the NCPA offers a calculator that estimates the net financial effect of an interstate move and home purchase.
All of this applies to home equity loans, too. Often, Dvorkin and Jones say, soon-to-be retirees rationalize home improvements (and loans) such as making the house more compatible with aging. That's a great goal if it doesn't postpone the day when you own the house free and clear.
5. Credit cards, car loans and other unsecured consumer debt. Apparently, it costs plenty to fill up all that retirement free time: The NCPA recently reported that the average credit card balance for those age 65 to 74 was $6,000 in 2010, triple the level in 1989.
Take a cue from your grandparents, Dvorkin says: "You can't go into retirement owing money. Start scaling your lifestyle to fit your retirement income."
Try living for a couple of months on your expected retirement income, or, if you aren't sure what that will be, on half of your current income, Jones adds. Use the savings to knock off some debt and change your habits. "Get used to living beneath your means, scale back your expectations, pay it off and don't let it creep up on you again," he says.