Do Your Parents Have Debt Going into Retirement?
September 28, 2015
If your parents don’t have much in the way of retirement savings, there’s an excellent chance that they are carrying a significant amount of debt. Unfortunately, debt goes hand-in-hand with a lack of savings. Retirement can be the moment of truth for the debtor class, since there will be no assets to draw an income from. Meanwhile, debt will represent a reduction of future cash flow.
For this reason, if your parents have no little or no retirement savings, one of the best ways you can help them is by helping them to get out of debt. Retiring when you’re in debt is not a good idea so they should continue earning income until their debts are significantly reduced.
Here are a few ways you can help.
Help Them Create a Budget
In general, when there is an imbalance between savings and debt, there is typically a lack of budgetary discipline. Too much money is going into consumption, and not enough is going into savings. You can help your parents work through that dilemma by helping them to create a budget.
You can have them set up a free budget software, such as Mint.com. That will help them to track their spending, as well as to determine where they can make cuts in their budget in order to free up money to payoff their debts, as well to begin saving some money for retirement (it’s never too late!).
No other assistance that you offer your parents will do much good if they are not able to implement a basic budget. A budget is the method that creates the discipline necessary to improve your financial situation.
Help Them Develop Additional Income Sources
Sometimes what a budget reveals is that there’s simply not enough extra income to begin paying off debt. This happens because debt is a vicious cycle – as the level that you owe increases, the ability to service it on your income declines. It may be entirely necessary for your parents to find a way to increase their income, and dedicate the extra cash flow to paying off debt.
Though it may seem readily apparent to you that they need additional income, but to a person approaching retirement, the idea of working more might be seen as an oxymoron. Though it’s not pleasant to admit, a lot of people believe that they are entitled to retire even if they don’t have the resources to do so.
You may have to help them identify their talents, skills, and specific interests. In doing so, you might help them to determine what it is they can do to earn extra money. If you have a business, you might consider hiring one of your parents for part-time work, or even on a contract basis to do very specific work.
You can make it clear that the extracurricular income activity is just a temporary venture until the debts are paid. If they want to have anything that looks like a decent retirement, that can provide the necessary motivation.
Offer to Pay One or Two of Their Debts
If your parents have not saved much for retirement, it probably won’t be practical for you to provide them with direct support. A better way to do this may be to payoff one or two of their loans, maybe their biggest ones. That will enable you to make a one-time contribution to their retirement, that would improve their cash flow but not require regular checks from you.
Let’s say that your parents have a car loan with a $15,000 balance, and a monthly payment of $500. By paying off the loan for them, it will be the equivalent of providing them with direct support of $500 per month – only you won’t have to be writing checks for the rest of their lives.
Naturally you have to get some sort of an agreement from them that they cannot take a new car loan anytime in the near future. But this may be a way to enable you to provide direct support, without making them into full-fledged dependents.
Get Them Into Debt Counseling or Debt Consolidation
It’s unfortunately true that some people never get serious about a debt problem no matter what you do. And it may be even more complicated since you are their child, and the historic nature of the relationship may not accommodate them taking advice from you.
But if they have a debt problem, and you are unable to help them address it, you may need to point them to debt counseling or even some sort of debt consolidation plan. They may need to participate in some sort of a formal plan that will help them to get out of debt. If that’s the case, then it’s best to get them the help they need as soon as possible.
The sooner that they get out of debt, the better it will be for them once they reach their retirement years.
In Extreme Cases You May Need to Recommend Bankruptcy
This should never be a first resort for people with a debt problem, but it is also true that some people get so deep in debt that they can’t possibly get out. This is even more pronounced as people get older, approach retirement, and have neither the energy nor the motivation to tackle an out-sized debt problem.
If that’s the case with your parents, it is entirely possible that the most constructive way that you can help them is by directing them to a bankruptcy attorney. Many people who are in debt live in denial about the extent of their problem. Denial makes it easier for them to live with debt day-by-day, but also guarantees that they will never get out from under it.
It may be the best thing that you can do is to encourage them to file bankruptcy, wipe their slate clean, and start fresh. That will not only eliminate their debt, but it will keep them from borrowing serious money for at least a few years. And once their debts are gone, they may be able to survive in retirement even on a very limited income.
All of these are tough choices, but there aren’t many options available for people who are entering the retirement years with little or no retirement savings. Pick the best strategy for your parents situation, and do what you can do to help them get out of debt.
All posts by Kevin Mercadante