By Mark Miller
CHICAGO May 1 If you're strapped for cash or
have a poor credit rating, the offer would sound tempting:
upfront cash in return for your future pension payments.
But it's a debt trap, according to a recent expose by The
New York Times, a "pension advance" loan charging sky-high
interest rates. A Times analysis of these deals found effective
interest rates ranging from 27 percent to as high as 106
The companies that market these loans like to target
unsuspecting military veterans, teachers, firefighters and
Pension advances are part of a bigger picture of rising debt
burdens carried by a growing number of older Americans in the
wake of the Great Recession.
Credit cards pose the most serious threat, with interest
rates not much lower than the predatory pension loans - average
monthly interest rates ranging from 11 percent to 16 percent,
according to Bankrate.com.
A recent AARP Public Policy Institute report found that
average credit card balances for households over age 75 jumped
31 percent during the recession. A separate AARP report found
that boomers - households over age 50 - now have higher overall
credit card debt than younger people - a reversal of previous
The average combined balance on all cards in 2012 was
The study found the key causes of debt included medical
expenses, car and home repairs and basic living expenses. "The
popular image is people going wild at the mall, but we found
that it's more about making ends meet," said Amy Traub, senior
policy analyst at think tank Demos, who wrote the AARP report.
Howard Krooks, a Florida-based elder law attorney, has
numerous clients "on the doorstep of retirement" who have relied
on credit cards due to recession-damaged portfolios and lost
home equity. "Not just one, but multiple cards to keep things
afloat. For many of them it became a matter of pride, because
they didn't want to be dependent on their kids to meet monthly
living costs," Krooks said.
Bradley Frigon, an elder law attorney in Denver, frequently
has seen the opposite problem: older people who fall into a debt
trap after bailing adult children out of a financial bind.
"Parents are either advancing money to their children or
co-signing loans," Frigon said. "I've seen parents borrow
against their home equity to help adult kids get out of trouble
or personally guaranteeing loans for them. They're putting
themselves at financial risk for the sake of their kids."
Florida-based financial planner Douglas Eaton often works
with clients struggling with debt. Eaton offers this checklist
for righting the financial ship:
-- Start with a financial inventory. Eaton works with
clients to identify assets and liabilities, income and expenses.
"We identify the expenses that are absolutely necessary to run
the household, and which are not. But that's a discussion
point," Eaton said. You might want to stop paying a long-term
care insurance premium because it's not a necessity, but then
you're taking a risk that could hurt you down the road.
-- Target low-hanging fruit. Before going to an austerity
plan, Eaton looks for recurring costs that can be jettisoned and
are not really necessary. "Maybe there's a redundant life
insurance policy, or an expensive Medigap insurance policy that
can be dropped," he says. Some clients have extra cash sitting
in the bank earning a low interest rate while they're paying 15
percent on a credit card, for example.
-- Reallocate investments for income. Retirees who have
Individual Retirement Accounts or 401(k) portfolios can pare
debt by restructuring investments to generate dividend income.
"If you have $500,000 in an IRA, and you're only taking the
required minimum distribution, that could be generating $27,000
in dividends that can be used to pay off debt without losing
principal," Eaton said.
-- Don't panic. "Older people facing a debt problem get so
frightened that they're not thinking clearly," Eaton said. In
many cases they just want to be good citizens and pay their
debts and bills. Sometimes they'll make decisions quickly
without consulting anyone - "big decisions that can be a
mistake," he notes.
That's the point where people are vulnerable to predatory
practices - like signing away a pension at a 30 percent interest