Dying with debt: A dirty little retirement secret

http://www.usatoday.com/money/perfi/credit/2010-11-21-senior-debt_N.htm?csp=obinsite

Retired Americans are racking up credit-card debt like never before, be it for vacations or medical expenses, and a surprising number have no intention of paying it off before they die.

Nearly 40% of retired Americans said they've accumulated credit-card debt in their twilight years — and aren't worried about paying it off in their lifetime, according to a survey released by CESI Debt Solutions.

"At the end of the day, some people of a certain age say, 'It's too late in the game for me to do anything about it. I can't win. So I'm just going to stop playing the game,'" said Neil Ellington, executive vice president at CESI.

This may come as a surprise to younger generations who thought their parents, the so-called Greatest Generation, were more responsible than youngsters raised in an era of easy money, a culture of credit.

But remember that this is the generation that frowns upon talking about money — and certainly would be embarrassed by any potential money problems. Add in a recession that slashed many retirement accounts in half and that leaves a generation sinking deeper into debt, with a diminishing timeframe to do anything about it — and too much pride to talk about it.

"Most people are too scared to talk about their financial problems, especially in their 'Golden Years,'" Ellington said. "Retirement is supposed to be all about enjoying the time you've been saving up for, and the reality is that many people couldn't save enough," he said.

And yet, that didn't stop them from retiring.

More than half of those surveyed had saved less than $50,000 — and many of that group said they'd saved absolutely nothing — yet they retired anyway. Just 4% said they had delayed their retirement due to debt.

"They get to a certain age and they feel privileged," Ellington said. "They say, 'I'm going to go on that trip even though I have to put it on my credit card.'"

When you're young, you have time to pay off splurges like a trip to Hawaii, but for retirees, procrastination can lead to serious financial problems.

It's not just vacations and entertainment; one of the biggest sources of senior debt is medical expenses. More than 75% of the seniors surveyed said they went into debt for medical or funeral expenses.

Part of the reason they're not paying off their debts is they don't know where to start and they're too embarrassed to ask for help. But the financial crisis may have also played a role.

"Financial institutions haven't been perceived as the most friendly" and many people blame them for the recession, Ellington said. "They think, 'Hey, I'm not going to pay back these guys who ripped off America.'"

One of the biggest mistakes seniors make when it comes to credit cards is being late with a payment.

"That triggers a penalty APR that can exceed 30%, which can trap those seniors who can't pay their balances in full each month in a downward spiral of debt," said Ben Woolsey, the director of marketing and consumer research at CreditCards.com.

Another mistake they make is relying on debt-settlement companies when they get into trouble.

"It's much better to contact card companies directly to work out repayment plans or work with a non-profit debt-counseling service rather than a fee-based settlement company," Woolsey said.

And while many retirees who are being quietly buried under a mound of debt may think they're protecting their kids by not burdening them with their financial problems, if they don't pay off their debts before they die, it will eventually become their children's burden.

Whatever that parent owes will be deducted from his or her estate before that estate is divided among the children and other beneficiaries.

Imagine a scenario where the kids are bickering over who gets mom's house and, in the end, no one gets it because it had to be sold to pay off mom's credit-card debt.

"That is a very realistic scenario," Ellington said. "A lot of kids don't find out how much their parents are struggling until they pass away."

Unfortunately, this debt denial isn't exclusive to seniors: Among those surveyed who had not yet retired, 25% said they were carrying debt of $5,000 or more — yet more than half said they didn't plan to delay retiring because of debt.

And more than one in four said they weren't worried about paying off their debt in their lifetime.

"People think it will all just work out somehow," said Samir Kothari, co-founder of BillShrink.com, a site that helps people lower their bills. "These things are not based on logic but on people being very optimistic about life — defying reality. I think that's what gets people into trouble."

Taking Charge of Your Debt

For those who carry a balance on their credit cards, BillShrink recommends PenFed's Promise Visa, which costs $20 as a one-time fee to join and charges annual percentage rates of 7% to 9%, or CapitalOne's Platinum Prestige card, a no-fee card with an annual-percentage rate of around 12%.

You might assume that most people have paid off their mortgage by the time they retire, but nearly a third of those surveyed said they were still carrying mortgage debt into retirement. BillShrink recommends the Wells Fargo Home Rebate card where your rewards dollars automatically go toward paying off your principal balance on your mortgage.

If you want to make sure your loved ones don't get into debt trouble, BillShrink suggests the Edward Jones Personal Card or Fidelity's Retirement Rewards Card, where your rewards dollars are directly deposited into an IRA, Roth IRA or 529 college-savings plan.

It's not just about choosing the right card, it's also important to lift the taboo on talking about money. It's not only important to talk about money with a spouse or partner, but also with your parents and your kids — before it's too late.

"Talking about money to the important people in your life forces you to come clean about the life you are living and … the way you manage your money," said Katie Dunsworth, one of the "Smart Cookies," a group of friends who formed a money group and now teach others how to take control of their money.

© 2010 CNBC.com