You are nearing retirement age and looking forward to doing what you want to do when you want to do it. You’ve been frugal and sensible – you’ve saved and felt you are in a pretty secure financial position to retire, despite an iffy economy and a roller coaster of a stock market.
Congratulations! But know that you are not out of the woods yet. Just as retirement nears, one or more of the following untenable expenses may crop up and you will need a strategy to deal with it. Many older Americans find themselves with children or grandchildren who need financial help, whether a young person doesn’t have enough money to attend college, or a newly-divorced adult child needs help with expenses. These things happen.
This post explains how to avoid these situations, and what you can do for your loved ones instead of spending your money that way and putting your retirement years at risk of being underfunded. You’ve worked hard, and you don’t deserve that kind of stress.
Running up Credit Card Debt to Help Family Members
This happens a lot. A family member has an unexpected expense and has no savings or emergency fund to pay for it. Whether it is a car repair, a new roof, or medical expenses, it is far too common for people to fail to plan for the unexpected, and in these instances, it is also common for them to turn to older, more financially-secure family members for help.
Of course, help them if you can! But not at the expense of your financial security in your retirement years. If you have good credit and very little revolving debt, paying for a loved one’s small expense now and then and paying off that credit card every month is perfectly acceptable because you are not putting yourself at risk. It’s those near-retirees who overextend and can’t afford to pay their credit cards that run into trouble.
Revolving debt is extended at exorbitant rates of interest, and before you know it a $60 minimum monthly payment can balloon to $300 or $400. If you have credit card debt, be sure to always pay more than the minimum if you can’t pay it off entirely, to ensure the interest rate won’t catch you out.
As an almost-retiree, you have assets. Your pension, perhaps some other investment accounts… and chances are you have paid off your mortgage or are close to doing so. If you default on your credit card payments because they become unaffordable, you can be sure that those creditors will sue you and either levy your bank accounts or put a lien on your house.
Keep a tight rein on your credit card spending. Your credit cards should be used sparingly and paid off every month when possible. Sure, if you don’t have ready cash to help a loved one with an unexpected expense, you might consider putting that expense on a card. But make sure you can afford it, and think about asking for something in return – mowing your lawn, weeding your garden, coming over and making dinner for the whole family… there are many things a person can do to show appreciation for your gift.
Co-signing for Loans or Credit Accounts for Family Members
These days, this is a huge no-no.
Sure, young family members have little credit history and may need some help to buy their first car or house, but do not cosign their loan. Why? Here’s what the Biglaw Investor says.
If your family member defaults, who do you think the lender is going to pursue? Not the young broke kid. You! You have income, bank accounts, a home… you are the perfect collectible defendant in a lawsuit.
Yes, that young person will not get the most favorable rate of interest without a more established co-signer. However, there is another way you can help if you want to and are able to.
You can help your loved one with the initial payment. A larger down payment on a car or house will reduce the amount of principal owed, and thereby reduce the monthly payment. Advise your loved one that this is a one-time gift towards their inheritance, and they will likely take that very seriously. An expert from an in-home senior care company pointed out that it’s also important to advise them that they also can refinance once they establish a positive credit history. This happens after making many months of payments in full and on time and saving money that way.
A Special Note Re: Student Loans
Do not cosign student loans. This is the only debt that one can’t get rid of, through bankruptcy or otherwise. And if the student, through no fault of their own, cannot find a good job after graduation and defaults on the student loan, the lender will certainly try to collect from you.
A student loan lender has more power than any other lender. They can garnish social security payments and federal tax return overages, levy against your bank account, and place a lien on your property.
If you want to help a loved one with education expenses, by all means, do! But not at the expense of your future financial security and your credit! If you have time to plan, open a 529 education savings plan, and contribute to that over time. While you get no tax break on payments made, that money grows tax-free to the student upon withdrawal.
If you don’t have time, help in a way that you can afford, and that makes the student accountable. For example, you might tie your gift to the student’s grades, or match what the student earns during the summer. Whatever you decide, do not overspend.
Paying Huge Insurance Premiums to Leave Something to Your Family
This is one of the most common mistakes retirees make. Sure, you want to leave something to your loved ones when you die, but do not do so at the expense of your current and future financial stability and security.
Insurance premiums are calculated based on the risk of loss to the insurance company. In other words, the older you get, the higher the risk of loss is, and the higher premium you must pay.
If you have a spouse who is dependent on your retirement income, and there is no way to boost his or her social security income or to leave your pension to him or her, then you might consider taking out a policy for that purpose. If this is not the case, the only policy that makes sense to pay for in retirement is one that will cover your funeral expenses. These policies are typically less than $10,000 of coverage and quite affordable.
Hopefully, you will take these tips to heart and avoid the mistakes that many retirees and near-retirees make, thinking that they have to do so to help their family. The best way to help your family is by living as the model of financial prudence and living well.
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About the Author
Kelsey Simpson enjoys writing about things that can help others. She lives in South Jersey and is the proud companion to two German Shepherds and spends her free time volunteering in dog shelters.