Budget Basics
GETTING PERSONAL: Retirees Turn To Credit Cards
BY
KAJA WHITEHOUSE
A Dow Jones Newswires Column
August 21, 2003
New York -
Cash-strapped retirees are increasingly turning to credit
cards, often unaware of the financial alternatives.
"I had to use the credit cards, I had no other choice,"
said Dollie Hawkins, 83, who relied on a credit card with a 24% interest rate to
pay for emergencies in retirement, like a busted refrigerator.
Yet the
former nurse never knew there were other
options when she left the workforce nearly 15 years ago. Because she owns a home,
for example, she may have qualified for a reverse mortgage, which allows seniors
to convert the value in their homes into income. She might also have saved money
by applying for several state tax exemptions - like a $25,000 homestead exemption
for people over 65 years old.
Seniors are generally savvy about money management.
But there are pockets of retirees who remain in the dark about their financial options,
especially when it comes to products that have grown more complex over the years.
Senior credit-card usage has been rising in what
some say is a direct reaction to climbing medical costs and historically low fixed-income
yields. For retirees under 70 years old, for example, credit card debt levels rose
to $1,691 from $382 in 1996, according to data from SRI Consulting Business Intelligence,
a research firm in Menlo Park, Calif. Average outstanding credit card debt for retirees
age 70 and older rose to $801 in 2002, compared with $147 in 1996.
Meanwhile, fewer than 1% of retirees carry a reverse
mortgage, according to data from SRI. And while there's no data on the subject,
people in the annuity
industry often claim that under 1% of annuity sales are in
the form of periodic payments, which are geared toward retired people.
Avoiding The Meltdown
People in financial trouble often turn
to credit cards because they're easy to use, said Sandra Timmerman, a gerontologist
and director of MetLife Inc.'s (MET) Mature Markets Institute in Westport, Conn.
But one skipped payment can plunge spenders into an abyss of late fees and spiked
interest rates, which is especially hard for people who cannot reenter the workforce.
Instead, seniors might want to tap old life insurance
policies for income, said Howard Dvorkin, president of debt counseling agency Consolidated
Credit Counseling Service in Fort Lauderdale, Fla.
"Yes, it will reduce the death benefit," but by
that age there's generally no need for it, he said.
Dvorkin lamented that retired people too often try
to save things like the insurance policies, the fancy china and the family home
for their children when they should be selling or trading these things to pay their
bills. And their children often say nothing because they don't realize their parents
are relying on credit cards to protect their valuables, he said.
Special state tax benefits for seniors are another
way to generate extra money. Florida, for example, offers low-income homeowners age 65 and over a homestead exemption, and can provide a special tax waiver to widows
and widowers. Also, look into newly launched prescription drug affordability programs
- sponsored by pharmaceutical companies like Pfizer Inc. (PFE) and Johnson &
Johnson (JNJ) - that cut the costs of prescription drugs for low-income seniors.
For steady income, check out immediate fixed annuities
- insurance products that can provide a fixed lifetime payment stream in exchange
for a lump sum. This option is best for people who expect to live a long time and
don't want the burden of managing their own investments.
There's also the reverse mortgage - a product that
allows seniors to trade in the value of their homes for income. This option is best
suited to people who don't have the cash to buy an annuity, but who own a home they
don't want to sell. But be aware that a reverse mortgage can make it harder to leave
the home to heirs.
Charities can offer similar products so that any
remaining value in these products will go to charity upon the donor's death. Reverse
mortgages, however, are called "life estate and gift annuities" in the charitable
world, and they can be hard to find outside of the largest charities and universities.
As with any financial product, research carefully.
Reverse mortgages and annuities can be expensive, and the buyer stands to lose money
if he or she dies too soon.
Adult children who think their parents are among
those who are struggling might want to step in or bring them to a financial advisor,
said Phillip Cook, a financial planner in Torrance, Calif.
"Quite often, they don't have anybody to go to who
they can trust, who's also conversant with those issues," he said, "so they just
melt down and hope everything works out."
