Retired and Broke

Older Americans are heading into and through retirement with a boatload of debt. They're carrying everything from mortgages and home-equity loans to big credit-card balances, and many are finding the burdens harder and harder to bear. In the last eight years, the over-55 crowd has become the age group most likely to declare bankruptcy, according to the AARP.

The statistics are unsettling. More than half of people 50 and older who carry debt spend most of their monthly income paying it down. An AARP study released before the worst of the current recession hit found that a quarter of those folks spend more than 75 percent of their income on their debts. Americans 65 and older who carry credit-card balances saw their average balance rise to $10,235, up 26 percent from 2005, according to Demos, a public-policy research group.

"We are seeing an across-the-board increase in seniors coming to us for help," says Gail Cunningham, of the National Foundation for Credit Counseling. "They are in financial distress [for a variety of reasons]: because a spouse has died, they are helping their children and grandchildren, they have credit-card debts, and their home values have declined."

Retirees have a harder time paying down those debts, too, because they don't have salaries to devote to the effort. Most have seen their nest eggs decline. Even those who want to return to work to pay down their debts may not be able to find a job, says Cunningham.

In different economic times, retirees might have downsized and cashed in their homes to pay off their debts—or at least have gotten reverse mortgages against those homes to carry them for a while. But with declines in housing markets, they may not have enough equity in their homes to do that. Some, like their younger neighbors, likely owe more on their homes than they are worth.

Not all retirement debt is cause for concern, though it can be hard to separate good debt from bad debt. Someone retiring with sufficient assets to cover what he or she owes may choose to keep their existing long-term low-interest mortgage, because it can help them keep their assets invested, offering them emergency funds and the promise of greater returns on that money. But even that can be problematic for 401(k) and IRA savers who face income taxes on the withdrawals they make to pay their bills. A couple in a 30 percent tax bracket, for example, would have to take $1,300 out of their IRA to pay their $1,000 mortgage check. So workers who expect their retirement to be fully funded by taxable withdrawals from their own retirement accounts would have more incentive to pay off those loans before they retire. If they retire before paying off the mortgage, they might be better off keeping it and stretching it out to avoid having to make a large taxable withdrawal from their savings to pay off the loan.