Tag Archives: retirement debts

A Retired Couple’s Financial Nightmare

Good morning George:

My husband and I are both retired. We own our house with no mortgage. But we have a line of credit of 27,000 on it (at prime plus 1 and it keeps going up)….we have a zero % loan on a truck with 24,000 still owing for another two years. We do have a savings account of 45,000… We both receive a OAS and CPP each month ($ 2,600 total ) but unfortunately our truck payments are taking just about ½ of that…..we are doing our best to live on our pension incomes without taking too much of the savings each month 😊

My question is because of our age do you think  that we should pay the truck off now  out of the 45,000 saving account then we’d have the truck payment gone and have more income to do more with our lives while we are still reasonable healthy to do so….

We now realize buying that truck and tying ourselves up for 6 yrs. was a BIG mistake ☹ but the damage is done and horse is out of the barn…

 

OK, a few things first:

-This email hit me really hard and was rather depressing for a number of reasons.

-I’m sharing it, and talking about it, because it is not an isolated story, but quite common, and getting more so for a lot of seniors.

-The numbers have been rounded to not make it too complex to walk through.

-When I share the odd time that the $20 Money Tools book will save you a hundred bucks on literally every page, I KNOW this couple would never have made the truck purchase or likely have run up the credit line if they’d read either of those chapters first!

Good news: Everybody “sold” you and has made a bunch of money at your expense! The bank won because you’re in a huge financial trap. Your line of credit is a $90 interest only payment (at 4.7% and rising) and thus you’ll pay it for decades without ever paying off a dime. The car dealer’s 0 interest was likely the reason you got the truck at a payment of half your fixed income. They made the profit, and likely sold you some add-ons buried into the payment. So everybody did well…

Your good news is that you have a four-year old truck that will last another decade. You’re right – you can’t change the past, and it’s now worth less than half of what you paid, and likely worth less than you still owe. So love it, take care of it, and drive it into the ground. The other good news is that this is easy to “fix” to create some breathing room.

For anyone not on a fixed income, the fastest way to become debt free is to keep $1,000 in emergency savings and pay off everything else. (The Money Tools book “step up” plan)

In your cases, being retired and having a $2600 fixed income, I would do it a little different, and you have two choices:

1..Pay off the LOC from your $46,000 savings and reduce it to a $5000 limit (as an emergency account). Your savings may be 0.25% at most, so your LOC is NINE TIMES the rate and you’ll never pay it off. And that’ll go up with one or two more prime increases in the next six months to be 12 times the interest you make on savings.

That $90 saving isn’t much, but since it’s all interest, it’s a total gain. Then leave the truck at $1,000 payments for the next two years and subsidize your income from drawing down some savings. It won’t be much of a lifestyle, but there’s a fixed end in sight and zero temptation to “drop down” on how much you pay on the truck.

Option 2 is what I would do: You’ve worked too hard to not have some financial freedom, to go out for dinner the odd time, etc. to live on $1500 for two more years while you’re healthy. It’s stressful, because you have utilities, cable, truck insurance, food, etc. so there’s literally nothing left over – in fact, you’re using some of your savings each month just to tread water.

I would pay off the truck from savings today. Yes, you’re giving away (not getting the benefit of) the last two years of 0 percent, but the financial insanity of those payments will be over. That should or could stop dipping into savings to meet your monthly expenses.

The math says keep the zero percent truck and pay off the LOC but this isn’t purely about math with your situation.

That leaves the LOC. It’s $90 a month to tread water. Now to decide if that’s just going to be around for the rest of your life because of your fixed income, or whether you want to spend 10 to 15% of that income to get it paid off. That’s your call:

25 years to pay it off = 248 a month

15 years = 302

10 years = 372

5 years = 587

See now how the bank has won huge? There’s zero chance you can pay it off in any reasonable amount of time, so their total income (the interest total) is massive…and we all trick ourselves into just looking at the low rate… Even if you paid it off in 15 years, by that time they’ll have made about $12,000 in interest…90 bucks at a time…

You can’t use the rest of your savings ($46000 less truck payoff) leaves $22000 to pay off your credit line. You have to at least keep 6 months of your expenses a full emergency fund.

Financial Trouble for Seniors?

More and more stories are showing up everywhere about the financial troubles of seniors. These range from bankruptcy filings to collection troubles and living life below the poverty line. That’s pretty serious when those who have worked hard all their lives are having significant troubles making ends meet. However, it started way before retirement:

An RBC Consumer confidence index earlier this year found that 57% of us have nothing set aside for an emergency. If there’s not even a one-weeks’ pay set aside for emergency, what are the odds those people have any retirement savings?

Then there was a study a few years ago that showed almost 50% of us do not believe that a debt-free retirement is a must. I was somewhere between stunned and in disbelief. Is that really true? Do we believe having a bunch of monthly payment is OK when we reach the point of living on a fixed income, and there’s no more extra money coming in? Or have we just thrown up our hands and given up and given in – to the fact that we’ll never be debt free? It’s just so wrong, and so dangerous, to carry any debt into retirement because your golden years shouldn’t be spent working at the golden arches.

The biggest pre-retirement step you have to take is that your retirement savings have to come ahead of helping your kids with university costs or other loans or gifts. There are a number of ways to pay for university, but there is only one way to save for retirement, and that is you and your savings. You cannot help others if you cannot help yourself. If you are already retired:

-Cut up your credit cards: At 19% interest they are way too dangerous, and even the minimum payment is robbing you from money for necessities. Never mind that the balance will become almost impossible to pay in full. If you’re going to ignore that advice, at least call them and get your limit reduced to $500 or $1,000.

-Do a budget: You need half an hour to put in writing where your net income is going. Start with the priorities of shelter, food, utilities, medical expenses and the likes. THAT is how you will need to spend your income. It cannot be making a credit card payment first. If the card goes in arrears – so be it.

-If your kids owe you money you need to have a family meeting. Get them in the same room and explain the reality of finances for a retired person. Put the pressure on and demand to get paid back. The niceties are over, it’s time for them to grow up and pay up. You can’t care any longer if they get a loan, line of credit or put it on their credit card – you want to be repaid.

-If you have payments on a vehicle, it has to get sold – today. Those payments are a budget killer for everyone, especially those on a fixed income. You can’t afford them.

-If there is a possibility of collections down the road, your savings and pension money has to be in a bank different from the one who has your credit card, line of credit, or overdraft. Banks have the right to just grab your savings to offset what you owe them. Before that happens, move your money to a financial institution where you do not have any borrowing. It’s critical that you do this, or they can wipe out your savings to pay themselves back.