Handling Debt in Retirement
“You shouldn’t take debt with you into retirement.” That’s common financial advice. But it’s also commonly said that “financial advice is for people who already have money.” The truth is, advice of any kind is rarely one-size-fits-all. As of 2016, the average debt in families where the head of the household was 75 or older was $36,757.1 More people are carrying debt into retirement than ever before. And as new generations reach retirement, experts expect those numbers to keep rising.2
So you’re not alone. Not everyone is going to retire debt-free. In fact, it looks like most people won’t. And that’s okay. There are ways to help manage that debt.
Prioritize Your Debt
Understanding and prioritizing your debt is a key step towards reducing or eliminating it. Debts with high rates and non-tax-deductible interest are good places to start. Everyone’s debt is unique, but these examples provide a rough guide of what your debt priorities may look like.
If you have consumer debt (like credit card debt), it’s almost always a good idea to start there. Credit cards are still a big piece of the puzzle for many households with debt, and they tend to have the highest interest rates by far.
Student loans are another type of debt starting to affect more and more retirees. The number of people 65 and up whose Social Security has been reduced due to student loans has increased 500% from 2002 to 2015.1 Many student loans have higher interest rates than mortgages, so for many people, they will be a top priority.
If you still have a mortgage in retirement, you’re probably not thrilled. That’s understandable. A mortgage is a big commitment, especially when you’re on a fixed income. But it’s not out of the norm to still have one in retirement these days, and you can treat it like a regular part of your fixed expenses. The interest rate on a mortgage also tends to be manageable, so your mortgage may not be a high priority for you.
You can deduct interest paid on your mortgage from your taxes, and some student loan interest is eligible for tax deduction, as well. Credit card interest isn’t. When you look at the high interest rate and the lack of tax benefit, it’s easy to see why you’d want to take care of your credit card debt first. Manageable debts, with tax-deductible interest, are debts you can typically afford to hang onto for a while.
Take inventory of money coming in and money going out. If you’ve reached the point where you’re having trouble making your monthly payments, odds are you’ve cut most nonessentials, but it’s worth looking. Having a solid budget is always a good idea, and it’s never too late to start.
Consider working (or continuing to work)
If you’re on the cusp of retirement but haven’t taken the leap, you’re in a better position to deal with debt than if you’ve already retired. Many of the financial decisions that a person can make to ease their long-term financial burden require an up-front cost. A mortgage refinance or a debt consolidation could mean lower monthly expenditures. Those things are more likely to be within reach while you’re working, and your income is higher. This can help ease the long-term effect of your debt. If you are already retired, consider taking on a part-time job. Having a little extra income can take the sting out of some of those expenses. Plus, depending on where you are and what your schedule is like, it might be nice to work part-time. You get to break up the week a little and spend some time around people. Who knows, you may even make some new friends!
Consider selling what you don’t need
As you look at the best ways to help eliminate your debt, you might need to free up some cash. If you have investments, it might be worthwhile to re-evaluate the return you’re getting versus how much you’re paying in interest. Would you be better off liquidating your assets and knocking the debt out instead? This especially might be the case with lower-interest assets like certificates of deposit (CDs).
Of course, this option isn’t just limited to investments. If you have property or material assets like a boat or a car that you don’t use, consider selling it and using the money you make toward your heaviest source of debt.
Consider downsizing or other life changes
There are a few life changes you might be able to engage in to make debt more manageable. Moving to a less expensive place might be a solid move. Have you researched states with lower income taxes, or with no income tax at all? Can you move to a more affordable part of town, or downsize your home? If you have a mortgage, but still have a lot of equity in your home, this could be a fantastic option. But even in other situations, it’s worth considering a move. Moving does cost money. But if you can get over that initial cost hurdle, you may be able to drastically improve your long-term financial situation with a lower cost of living.
Consider consolidating your debts
There are a few ways to put all your debt into one place. Some people with debts across multiple credit cards can use balance transfers to keep all of their debt onto one card. This has a few advantages. For one thing, you’re balancing one monthly payment instead of keeping track of multiple sources of debt. For another, consolidation usually gives you a 0%APR period. This gives you a time window wherein you can focus on paying down the debt itself without worrying about accruing interest. There are a lot of factors that play into whether debt consolidation is a smart idea for you. It’s up to you to determine whether the cost of consolidating makes sense with your current debt load and interest rates. But it is an option.
Some people who own homes tap into their equity with a home equity line of credit or a reverse mortgage. These options can help you consolidate your debt as well, but they come with risks, and you’re staking your home on your ability to pay them back.
Consider outside help
If your debt load is unmanageable to the point that no option looks realistic, consider seeking out a financial advisor or a credit counselor. Make sure you find a reputable professional who’s willing to put your interests first. Look for accredited, certified counselors who are licensed to offer services in your state. Look for someone who is up-front about the services that they offer, as well.
1 Nova, Annie. (April 4, 2018). Growing debt among older Americans threatens their retirement. Retrieved September 29, 2018 from www.cnbc.com/2018/04/04/growing-debt-among-olderamericans-threatens-retirement.html
2 Renzulli, Kerri Anne. (April 13, 2018). This Is How Much Debt the Average American Has Now—at Every Age. Retrieved September 20, 2018 from http://time.com/money/5233033/average-debt-every-age/
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