How to Fit Credit into Retirement - dummies

By Steve Bucci

Until a certain point in their lives, most people think of their kids or their home as the most expensive part of their credit and financial environment. Then they hit retirement. Retirement may not last as long as your kids or your home, but it does require more saving and planning. The sooner you begin to plan, save, and invest for your exit from the workforce, the better.

Credit can be a help or a hindrance in retirement. On the positive side, using credit rather than cash can be a great convenience and can add value in your later years if done wisely. But because credit essentially allows you to use tomorrow’s income today, you may wind up overusing credit, which can be difficult to rebound from when your income is more or less fixed.

To avoid falling into a credit crunch in retirement, make sure that you have a solid budget. You need to know what you’re spending and what you have coming in each month.

Budgeting on a fixed income

Following are the essential ingredients for successful budgeting.

  • Set short-term and long-term goals. Whether you’re 55 or 95, you need a reason to get up in the morning. Goals provide this motivation. Although they may differ from those you had earlier in life, goals, especially around spending, keep you looking forward to tomorrow. They may include traveling to places you’ve always wanted to see, making a difference in your community, or just seeing more of family.

    Short-term goals for your stage of life should be in the 6- to 12-month range, while longer-term ones may go out to 5 years.

  • Know your monthly income and expenses. After you settle on your goals, you need to fund them. Don’t guess; know what you can afford. Make sure that you can cover basic, recurring monthly expenses, and don’t forget to keep an emergency fund.

    You don’t need the standard 12 months of expenses because you won’t have to fund a period of unemployment. But you will need to meet any unexpected out-of-pocket expenses like home repairs, major car repairs, or insurance deductibles. Know what your exposure is and set funds aside for it.

  • Protect your cash. When your cash is gone, it’s gone! Be sure to control your urge to spend for items not in your budget. Don’t use tax-deferred retirement funds to pay off debt if you have any other choice. Although you may be beyond the age of early-withdrawal penalties, taxes take a big chunk out of withdrawals.

    Use excess cash flow to pay down debt gradually whenever possible. Home equity loans or reverse mortgages may be sources for interest-deductible or tax-exempt funds if they fit your goals and plan.

  • Control debt payments. Any new debt payments must fit into your budget. Try to match the time it takes you to pay off a debt with the time you’ll be using an item. For example, the debt you incur by paying for a meal out with a credit card should be paid off at the end of the month.

    The debt you incur for a car should be paid off over the useful life of the car or before you plan to buy a replacement. The debt you incur in buying a home that you intend to live in for the rest of your life need not be paid off until you die.

Using credit for convenience

Although your income may decrease when you hit retirement, your credit history keeps on growing. Great reasons to use credit rather than cash include reward points and easier tracking of expenses. These conveniences add value to the money you spend.

With some simple caveats, credit can be as big a boon to seniors as it is to the population as a whole. Here are three easy and simple safeguards to consider:

  • Never lend your good credit to someone else. Adding an authorized user to your account to help a friend with bad credit or cosigning on a loan usually ends in disaster. Giving someone else access to your credit gives that person access to your cash and your future well-being; it’s absolutely not worth it.

  • Don’t put yourself in a position to become a victim of credit card fraud. To avoid becoming another statistic, be on guard when you use credit. When shopping online, look for the padlock icon in the address bar or https in the web address; both indicate that the connection is secure. And never give your credit card information to anyone who contacts you first.

  • Check one of your free credit reports every four months, alternating requests among the three credit bureaus. Staying on top of your credit reports is one of the most effective ways to catch credit card fraud early. Be sure to dispute any accounts you don’t recognize. They could mean identity theft!