Retired and drowning in debt? Here's a gameplan

There is only one thing worse than being young and deeply in debt: being old and deeply in debt.

Not that being middle-aged and deeply in debt is any picnic either, but at least when you have a couple of decades until you retire, you have a fighting chance of getting your financial house in order. In fact, the AARP found that people over age 55 are the most likely group to file for bankruptcy protection.

"It's particularly hard if you've played by the rules all of your life, you followed the standard financial advice: you maxed out your retirement contributions only to have your 401(k) decimated by the stock market decline, and you bought a house as a wealth-building tool only to have it worth less than you owe with no hope of selling it," says Gail Cunningham, the spokeswoman for the National Foundation for Credit Counseling.

Reverse mortgages
But, of course, sympathy won't pay the bills, and so Cunningham suggests that if you're truly drowning in debt and own a house or have "significant equity," you should consider a reverse mortgage. "There are many downsides to this decision -- high fees, and due to the low housing prices, not as high a line of credit can be realized -- but nonetheless, it should be evaluated," she says.

Doing your homework is imperative as reverse mortgages are definitely not for everyone. The U.S. Department of Housing and Urban Development has a "top 10 things you need to know" page on reverse mortgages. SmartMoney recently had a helpful article about reverse mortgages and Ken and Daria Dolan discussed the reverse mortgage topic last year on WalletPop.

Moving in with the kids
"When money is tight, it's critical to spend it in the proper order," says Cunningham. "Whether young or old, our advice is always to pay your living expenses first--rent or mortgage, food, utilities, insurance--followed by any secured payments, usually a car, and then the creditors. This will keep the home life stable. However, many people come under so much pressure from creditors that they send them some money that should be going to a higher priority. If your creditor is happy, but your lights have been turned off, you've paid backwards."

To help alleviate some of the expense, consider moving in with your adult children, says Cunningham. That's probably not
exactly what you want to hear, but it could offer some temporary financial relief that will allow you to pay down your debts.

Do not tap into your retirement account
Avoid dipping into your 401(k) or IRA in order to pay off creditors, says Cunningham. The credit card company could close the account once you've paid it off. "As a result, they would have no available credit, little likelihood of opening new lines, and no retirement savings," she says.

Consider bankruptcy only if the situation is truly dire
If you're truly deep in debt with no chance of ever paying it off--like the man recently featured in a column that had $38,000 in debt and was making $37,200 a year--"bankruptcy, although a very serious financial and emotional decision, was created for situations like this," says Cunningham.

Crunch the numbers
All of this said, so much of what the right decision is, in getting out of debt when you're retired, depends on simple math (how much debt you have and what your income is) and your health.

J. Steve Miller, author of Enjoy Your Money! How to Make It, Save It, Invest It and Give It, told me that when his grandfather died, his grandmother wasn't left with much, their house wasn't even paid off. But she lived beneath her means, started investing, and now she is still alive and kicking at the age of 104 -- "and has saved up a small fortune."

"Let's say you're 65, retired and still have a lot of debt. You're depressed because your outlook is that you can't do much in the next 10 years and your health and mind will steadily decline. But what if you got yourself in better physical condition, felt like starting a new career, and could plan for the next 20 years instead of the next 10? This opens up all kinds of possibilities," says Miller.

In other words: Making a few smart moves can actually put the gold back into your golden years.

Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the book Living Well with Bad Credit.

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