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Retirement plans increasingly hampered by student loan debt

By Chris Metinko/TheStreet

Most Americans are not saving enough for retirement. Now it seems many aren't even clearing out debt before their golden years.

A new study by LIMRA Secure Retirement Institute shows retirees are bringing unprecedented levels of student loan debt into their later years. The research showed student loans made up only 4 percent of debt for pre-retirees in 1989. However, in 2013 student loans now account for 30 percent of pre-retiree debt. The same is true among retirees, where education loans made up less than 1 percent in 1989, but now totals 15 percent.

"As someone moves into retirement, it's very important that they minimize their risk," said Kristopher Carroll, chief investment officer at Carroll Financial Associates in Charlotte, N.C. "The number one risk is the risk of running out of money, and the best way to decrease that risk is to reduce or eliminate monthly payments that you have to make."

The new data seems to suggest parents and grandparents are picking up the tab for their children and grandchildren to go to school. In 1989, pre-retirees held an average of only $600 in education loans, but by 2013 that amount grew to $8,000. For retirees, the average education loan debt increased from $400 in 1989 to more than $2,300 in 2013.

"Retirees are carrying unprecedented levels of student loan debt into their golden years," Roger Cowen, owner of Cowen Tax Advisory Group near Hartford, Conn. He added the situation could be dangerous for retirees, with those in default on federal student loans getting their Social Security payments garnished. Cowan said recent analysis shows that happened to 156,000 Americans in 2013 -- three times more than in 2006.

Cowen said paying off credit card debt usually should take priority over student loans, because interest rates on student loans are typically lower.

"However, you want to make sure you are paying the minimum payments so you don't go into default," he said.

"The best defense against student loans is to make sure you don't take out more than necessary," Cowen added. "If you are taking out loans for your child or grandchild, be sure to investigate all other options first, like federal aid, scholarships, grants and work-study income."

Bringing student loan debt -- or any debt -- into retirement is dangerous since retirement already is full of variables, with the largest being how long the retiree will live, said Coleen Pantalone, a professor of finance at Northeastern University in Boston.

"Retirement is a risky time of life," Pantalone said. "It is tempting to take loans to help your child go to the college of their dreams. Parents often want to do whatever they can for their child. But taking on debt that will carry into retirement is foolhardy."

Faced with debt, some pre-retirees may be tempted to use the money they have saved to pay it off, but Cowen said he strongly warns against pulling money from a 401(k) or IRA unless it is absolutely necessary.

"First of all, you will need that money when you retire," he said. "Second, if you can't pay back a loan from your 401(k) within 60 days of leaving your job, you will be charged a 10 percent distribution penalty and you will owe taxes on it."

Cowen said to rely on other debt elimination strategies first, such as paying off debts higher with the highest interest rates first or possibly going to a professional for counseling help.

"I can't stress this enough -- even better than eliminating debt is not to accumulate it in the first place," Cowen said. "Budgeting is one step in building a solid financial plan."

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