I remember visiting my grandmother as a child, and noticing when her memory started failing. I recall seeing my father’s frustration when we once arrived at her house, he saw late payment notices on utility bills and taxes. He took care of them, but this caused a lot of anxiety. What if they turned off her power? We’d like to avoid such unspeakable things, but the problem that faces us is how can we get our elder parents to open up about their finances, especially their debts?
As we reported before, for those providing help to elder parents requiring long term care, out-of-pocket costs average $140,000, or $174,000 for Alzheimer’s patients. 50% of nursing home expenses are being paid-out-of-pocket by families, with adult children contributing on average $10,000 a year to their parent’s care. Another study estimated a whopping total family contribution of $82,000 for nursing home care. One reason for this is several elder parents simply have too much debt. With less income than ever, once they can no longer manage their activities of daily living, you as their adult children may be faced with these enormous costs.
So how do you know if your parents are in debt? One way is to ease in by tying a conversation into current events. For example, if there’s a news story you and your elder parent just saw about health care, you can try asking: “How can anyone possibly afford your medication?”. Then you might say: “Do you pay for them with a credit card?” And then ask questions about the interest rate they pay. Eventually, they might open up to discuss any indebtedness they have fallen into.
A durable power of attorney may be an uncomfortable but necessary and legal method for taking over your elder parents’ finances since this would allow you to make legal decisions should your parent become incapacitated. If your elder parent is unwilling to give up financial control, but you think she or he is unfit to make sound decisions, you might have to seek court intervention, but this could mean having your parent declared incompetent. Also, keep in mind that you may not be the best person to have a conversation with your parent about finances. Your parent may open up to another family member or family friend. Stay in touch with this person and ask them to keep you posted as they get more information on this topic. If you feel their situation is deteriorating, add a sense of urgency to your request.
Make a budget and prioritize debts
Your elder parents’ or loved ones’ successful debt reduction can start with prioritizing which debt gets paid off earlier while paying attention to cash flow. Is there good debt and bad debt? Probably all debt is bad, but you could consider prioritizing which debt you should address first.
The American (and much of the world’s) dream is to own a home. So is a mortgage a “good” debt to have? You’ll see how complicated that answer is below.
Pros to paying off the mortgage
Paying off a mortgage can give your elder parents more peace of mind, increase their cash flow and safely tuck away those funds for future unseen emergencies such as nursing-home care. It may be counter-intuitive to think their cash flow increases if they pay off such a large sum. But by making the decision to pay it off, they might consider working a few more years to do so. In addition, savings generally aren’t viewed as income. Many seniors leave their savings untapped for emergencies, and because of this, their monthly mortgage forces their monthly cash flow to decrease.
In some cases, it is might be more tax-efficient to pay off the mortgage. Some may think of using taxable withdrawals from their IRA or 401(k) plans to make mortgage payments. But, surprise! For example, if you have an $1800 monthly mortgage, you would need to increase the withdrawal to more than $2,300 monthly in order to cover both taxes and that mortgage.
Another unpleasant surprise is that in some cases, the extra monthly withdrawal could force you into a higher tax bracket, and make more of your Social Security to be taxable, counteracting any tax deduction you might get from the mortgage interest.
- Getting rid of your mortgage is like making a big investment – without any market risk– with the interest rate equal to the mortgage. If you paid off a $100,000, 3.5% mortgage, it’s like you made $3500 just that year alone.
- If you are like many, if you think you have extra money, you may spend a lot of it. Getting rid of your mortgage will reduce that “extra” money which shouldn’t be used for frivolities, especially if you’re trying to reduce your debt.
- If your senior parents are about to retire and expect to change tax brackets (for example from 28% to 15%) due to loss of income, their mortgage tax deduction could likewise be cut in half; another reason to pay it off.
- If your elder parents definitely have funds to pay off their mortgage, and much of those funds are in a low-interest savings account, then paying it off makes more sense.
Cons to paying off the mortgage
Using their available money today to pay off their mortgage can reduce the amount to which your elder parents can readily use. They will basically trade equity for this access. Equity is great, but keep in mind that retirees have a more difficult time to qualify for a home equity loan. And by the way, if they could qualify, what would some good reasons any elder would want a home equity loan?
- Helping children or grandchildren with education costs? (Incidentally, if your elder parents took out a home equity loan for your education, make sure you budget to pay them back monthly as soon as you can. Their cash flow can be quite tight as it is after retirement.)
- Consolidating high-interest debt (typically home equity loans beat credit card rates for example.)
- Costly but necessary home repairs: Do they need a new roof? Does their home need to be renovated so it is friendlier to your elder parents?
More to the point, paying off a mortgage could mean not having enough of a savings cushion for unexpected costs or emergencies such as medical expenses. What if interest rates rise? Let’s say the bank pays 6% and the mortgage rate is 4%. If you use $100,000 of your free money to pay off your mortgage, you just lost the chance to earn an extra 2%.
Take home tips
Keeping that monthly mortgage payment makes more sense for retirees that can do it without sacrificing their standard of living (that is, their monthly cash flow), especially retirees in a high-income bracket and with a low-interest mortgage (below 5%) and benefit from tax-deductible interest. This works best for retirees who have enough saved up in their retirement account to have a good quality of life, while still having enough cover emergencies and unforeseen expenses. Finally, consider refinancing the mortgage. With home rates at 50-year lows, refinancing only makes sense if they are eligible.
Credit card debt and car loans
This answer is easier. Can you find a credit card that charges less than 10% these days? Usually, it’s 17% or more. If your parents have competing debts, it should be a priority, then, for your elder parents to pay this first. The same goes for car loans. Typically these have high interest rates (typically around 6-7%) that in some cases could make your elder parents pay more than $35600 for a $30000 car loan after 5 years or around $90 in interest per month. An extra $90 a month could instead go a long way to help pay monthly utility bills.
Your elder parents may still be paying their student loans! The average student loan debt by those 60 and older is about $19,500, while the average student loan is around 4%. Most student loans are not secured, that is, not tied to collateral. That means creditors will not repossess personal assets (a home or car for example) if one is in default. Not a good reason to default, because there is always wage garnishing, tax refund offsets or even social security intercepts, to a point. For federal loans in default, the government cannot take more than 15% of your total benefit, and cannot leave you with less than $9000 per year ($750/mo.) So, if your elder parents in heavy debt had to prioritize debt payments, student loans could come in last, but please, consult an accountant first!
So now that we know that credit card debt is the priority, what else can we do to help our elder parents beat this part of their debt?
- Lower the interest. Lowering the interest rate a few points, from 17% to 10% for example, would free up your elder parents about $420 per year for an average $6000 credit card debt, and lessen their need for you to help them out financially. But how? You or your parent(s) could call the credit card company and simply make the request. Knowing they would be guaranteed a higher monthly payment than someone in arrears or in bankruptcy, they could make such an arrangement. Calculate ahead of time what that 10% payment would mean, and discuss that fixed figure with the appropriate contact.
- Call a pro. A credit counseling agency or lawyer could help your elder parents to reach a lower interest rate. You could try contacting the National Foundation for Credit Counseling, NFCC.org (800)388-2227 or Credit.org (866)703-8787 to reach a credit counselor.
- The NFCC and credit.org offer free counseling that includes creating a spending plan and dealing with bankruptcy. Other organizations “InCharge” Debt Solutions as well, which specifically focus on people who are in debt due to credit cards or other unsecured loans.
- Depending on the state your elder parents may be in, Catholic Charities may offer a debt management program for a small fee. They can help with budgeting, housing and credit counseling using a worksheet to help map and manage their budget. This will allow your elder parents to see how much of their monthly cash flow could be applied to different categories of their expenses, discover imbalances in their expenditures, and apply a reasonable amount for debt reduction.
What else can your elder parents or loved ones do to lighten their debt load?
Sell unneeded things around the home
Start by conducting a garage or yard sale. Also, you can try online services Ebay, Craigslist, are places to start. Collectors.com is a great resource for top-dollar collectibles. If you know a good pawn shop, musical instruments and other collectibles could get your parents some extra cash to pay off that debt.
Earn Extra Income
If your elder parents are up for it, getting some extra income would be an ideal way to beat down that menacing debt. Sure, some seniors may fear looking for a job due to their age, but they might consider some areas well suited for them, including consulting, call center sales, customer service, fitness jobs in the senior sector, or jobs in the hospitality industry to name a few. Some online sites like workforce50.com, retirementjobs.com, and seniorjobbank.com are great resources as well.
Cut back expenses
Probably not the least favorite thing, but there are some expenses to cut that won’t be quite as painful. For example, shopping for new Medicare supplemental coverage could end up saving your elder parents quite a bit. Going to the library instead of buying movies and books will save a little. Turning down the heat in unused rooms with a good thermostat system could save hundreds a year. Try generic drugs and items in the store—what’s the big difference anyway? Always ask for discounts. If they are at a hotel, for example, your elder parents should remember to ask for senior rates or use their AAA or AARP membership without being ashamed. They are happy to get their business!
Don’t Cosign for your Elder Parents
Becoming co-signer or open a joint account with your parents or elder loved ones could make you financially liable for their debt. There are better solutions.
To conclude, your elder parents should take the lead well ahead of time to get out of debt. If your elder parents are about 25 to 30 years older, the time to plan for this should be the time you are in your mid-thirties, much sooner than you think. That is, once they approach retirement age, avoiding the crisis of debt should become their priority. If they are already in their 70s, and their debt starts snowballing, it’s time to get some professional help before they need long-term care placement, which could become a financially difficult event for the whole family.