Avoid Debt as a Senior

Before the creation of the nation’s Social Security system in the 1930s, 75 percent of American senior citizens lived in poverty. Today, thanks to Social Security, workers’ pensions and retirement savings, the poverty rate for seniors hovers around 9 percent.

And yet many seniors who fall above the poverty rate continue to struggle financially well into their retirement years. The Senior Financial Stability Index, developed by Brandeis University, reveals that three out of four American senior citizen households are in an “economically precarious position, with little or no buffer against financial ruin should they be faced with an unexpected illness or other traumatic life event.”

As life spans continue to increase — the U.S. average is 78.6 years — more and more seniors face the bleak prospect of outliving their retirement savings. And since most seniors live on fixed incomes, with no means of earning extra money when needed, one medical emergency or home repair can spell financial ruin.

Going into retirement without debt — and avoiding debt during retirement — is the best option, but there are other options, such as a reverse mortgage. It’s important that seniors find financial advisers whom they can trust during this rough time, especially since scam artists often target this demographic.

Shrinking Savings

Seniors tend to keep a large portion of their savings in relatively safe stocks and bonds, often depending on dividends from the former and interest income from the latter to pay a part of their monthly expenses. They often maintain the principal of these accounts for emergencies, or to supplement their Social Security checks as they age.

But even as seniors’ financial resources must now last longer than ever before, their economic security is becoming more and more challenged. In addition to ever-increasing expenses for necessities like food, health care and housing, their ability to live on their savings has been severely compromised over the past several years.

During the recent financial crisis, many seniors were hit with a double whammy – they lost money in their stock market investments and received diminished interest payments as rates hit historic lows. And while the Great Recession wiped out trillions of dollars of wealth from all American families, seniors suffered substantially more because of their relative inability to bounce back from financial losses.

Seniors and Poverty

According to a study by the Employee Benefit Research Institute, the proportion of seniors living in poverty has been growing steadily since 2005. Poverty rates for those between 65 and 74 rose from 7.9 percent in 2005 to 9.4 percent in 2009. Older retirees between 75 and 84 recorded a more drastic change, as poverty rates rose from 7.6 percent to 10.7 percent over the same time period.

As seniors age, they are more likely to face serious medical conditions, and related costs can force them below the poverty live. Especially hard hit are seniors who must move into expensive nursing homes. In addition, people who live in assisted living facilities tend to see their assets decrease more quickly than those who can remain in their homes.

Reverse Mortgages

A reverse mortgage is a type of home loan that is sold to homeowners age 62 or older who plan to stay in their home for a while. Seniors who have equity in their houses can access a portion of that equity for living expenses or to pay down debt. There are no minimum income or credit requirements for receiving a reverse mortgage.

In a reverse mortgage, the home owner borrows against the equity in the home, and the loan grows over time. The loan can be utilized as a line of credit, or proceeds can be taken out monthly or in a lump sum. The loan must be paid off when the borrower moves, sells the home, or dies.

In order to qualify for a Home Equity Conversion Mortgage (HECM) back by the Federal Housing Authority (FHA), a senior applicant must attend an approved counseling course, meant to serve as a safeguard for borrowers, ensuring that they fully understand the risks and benefits of the reverse mortgage process.

Avoiding Scams

Seniors are at particular risk of losing money to scam artists and fraudulent schemes of all kinds. In contrast to their younger counterparts, seniors tend to be more trusting and polite, and less likely to attribute ulterior motives to people trying to sell them goods and services. They are also less likely to report suspected scams to the authorities.

Seniors need to be especially on guard against phony health insurance policies, counterfeit drugs, burial and cemetery scams, bogus investment schemes, identity theft, and telemarketing and Internet fraud. These scams often take the form of email, so seniors need to be aware of that. They can talk to one of their children or a friend if something seems suspicious.

Seniors can also avoid scams by never giving out personal information such as a Social Security, credit card, bank account or Medicare number, especially over the telephone or online, unless they know that the person or business receiving the information is reputable.

Also, seniors should never give in to pressure tactics from a caller or anyone trying to sell them something. A legitimate business or charitable organization will not use coercive means to close a sale or solicit donations.

Seniors can report scams by calling the following phone numbers:

Phone fraud: (877) FTC-HELP or (877) 382-4357

Reverse mortgage scams: (800) 347-3735.

Financial fraud: (855) 411-CFPB (2372)

Other types of fraud: (202) 324-3000.

Bill Fay

Author

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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