The unwinding of the Federal Reserve’s balance sheet, improving jobs numbers and increasing wage demand have convinced most economists that higher interest rates are in our future.
On the surface, this seems like a good thing for retired persons who, for the past nine years, have earned next to nothing from their preferred investments – CDs, savings, and Treasurys. Rising rates should benefit those who want to minimize risk.
But for most of that same period, seniors have racked up a mountain of variable-rate credit card and mortgage debt. And that means a rising interest rate environment could be a disaster for them.
As rates go up, the cost of their debt will increase too.
Through 2015, people between the ages of 50 and 80 saw their debt levels rise by 60%. A quarter of those in their mid-50s now hold debt that exceeds half of their assets. That’s up from 10% in the 1990s.
As the interest rates on their cards and mortgages move up, bankruptcies will exceed the already high number for seniors. And financial stress, one of the biggest contributors to premature death, will ratchet up too.
You need to move now to reduce your exposure to what will be money hell for many. And there are two fixes available for most…
Tighten your belt, and pay off your high-cost and variable-rate debt as soon as possible.
Easier said than done, I know. Reducing your balances makes the next solution easier to act on: Take out a fixed-rate loan like a home equity loan or home equity line of credit.
The interest for both are tax-deductible, and if you have decent credit, the rates are still relatively low. They can reduce your monthly costs.
You can also go the reverse mortgage route, but be careful. They are expensive but still better than defaulting.
As a precaution, always check with your accountant or tax advisor on tax-related issues.
If you’ve saved and lived within your means, the new, higher rates will help with your cash flow. But it’s time to retire your high-cost and variable-rate debt before you get yourself in trouble.
