Paying Off Debt In Retirement

There’s an inspirational quote about retirement not being the end of the road, but instead the beginning of an open highway.

It’s an uplifting thought for folks after years of hard work and sacrifice, but if debt is a backseat driver that carefree trip might turn into a never-ending series of toll booth stops.

The percentage of households with an adult 65 or older carrying debt increased from 41% in 1992 to 60% in 2016, according to the Survey of Consumer Finances. The median total debt for older adult households increased two-and-a-half fold since 2001. Experian reported the average Baby Boomer had approximately $90,000 of debt as recently as 2020.

The issue of rising debt for retirees isn’t a simple matter of some older Americans failing to pay off their post-Christmas credit cards in a timely fashion. It is a real financial crisis simmering right under our eyes.

The challenge of paying off debt on a fixed income is daunting. But depending on the type of debt you’re carrying and the strategies you employ, it can happen.

Different Kinds of Debt

Not all debt is created equal.

“There is “good” and “bad” debt,” Joe Buhrmann, Senior Financial Planning Consultant at eMoney Advisor, said. “Good debt can be classified as low[er] interest debt that is generally used to finance appreciating assets. Examples typically include a residential home purchase or a college degree.

“Bad debt can be classified as high[er] interest debt used to purchase consumables such as food and dining out, or items that depreciate such as electronics and vehicles.”

Necessity is a determining factor in categorizing good debt and bad debt.

You need a place to live, and in most areas a car to drive, so going into debt there is understandable.

However, even if the full-length mirror confirms you really can’t do without that new dress or sports coat … back away! You really can do without it, especially if you’re going to be paying it off at 21% interest.

Paying off high-interest credit card debt should be prioritized before all others.

“How someone handles secured debt may be very different from unsecured debt, but both are important to pay off,” said Sean Fox, chief revenue officer at Achieve and President of Achieve Resolution in San Mateo, California. “Paying off secured debt, like a large mortgage, can be more difficult. Often, though, getting rid of unsecured debt frees up cash to accelerate payments and pay off a mortgage earlier.”

Common sources of debt in retirement include the following:

• Mortgage: More and more seniors are carrying mortgage payments into retirement, whether it’s because of an expensive remodeling project or because other debts prevented them from paying off their house while they were still working. Or as a strategy. Some financial planners recommend reinvesting the equity from your home to provide additional income. Also, mortgage interest is tax deductible.
• Student loans: Yes, believe it or not, many retirees are still carrying student loan debt, whether it’s for themselves, their children and maybe even their grandchildren. Turning 65 doesn’t bring student debt forgiveness. In fact, by law, Social Security can subtract your retirement and disability benefits (up to 15%) to pay off your defaulted student loans. According to a 2016 Government Accountability Office report, almost 115,000 borrowers age 50 and older had Social Security benefits deducted to repay defaulted federal student loans. In the bigger (more desperate) financial picture, keep in mind that while filing bankruptcy makes some loans go away, it does not dispatch student loans.
• Credit card debt: Paying down high interest debt should be a priority. Anytime you can pay off a credit card by paying more than the monthly minimum using a smart, disciplined budget of your own device, as opposed to taking out a high interest loan or paying a debt settlement company, you’re ahead of the game.

“If dealing with credit card debt, see if you can obtain any help available from your credit card issuer,” Fox said. “With the volatile economy, many are open to changing credit terms, setting up payment plans, deferring payments or waiving interest (though not eliminating debt).”

Fox recommends retirees stick to a budget and explore a strategy like the snowball method or avalanche method. There is a sense of accomplishment in attacking debt with a focused strategy that can help build momentum and confidence.zz

10 Strategies for Getting Out of Debt in Retirement

It’s challenging enough when health issues tarnish the “golden years,” let alone when debt compromises your best-laid plans for enjoying retirement. Peace of mind is priceless at any age but even more so when your free time is filled with anxiety.

It’s why financial advisers strongly recommend paying off debt before retirement. But it’s easier said than done in difficult economic times. Meanwhile, there are strategies for getting out of debt in retirement. Here are 10 good one worth considering.

1. Stop Gaining More Debt

Sounds simple. Like if you feel a sharp pain in your eye with every sip of coffee, you might want to take the spoon out of the cup.

But spending is a tough habit to break when flashing a credit card at the register is so much less painful than pulling hard cash out of your wallet or purse. Review what you can afford without adding to your credit card payments and stick to it.

In other words: Create a budget … and stick to it!

“When you retire, your income is fixed, and you know how much money you will receive each month from Social Security, pensions, and retirement savings,” Lyle Solomon, principal attorney at Oak View Law Group in Rocklin, California, said. “A budget also allows you to focus on debt repayment while not ignoring other important financial priorities.”

2. Reduce Your Spending

Drill down on making a budget. Even the necessary expenses such as groceries, utilities, insurance policies and the like should be reviewed for ways to trim costs.

As for the non-essentials, cutting down on takeout food and restaurant visits can save considerable money even if you only dine at the blue light specials.

(A personal note: My 88-year-old father-in-law, who only occasionally drives, leased a brand new SUV three years ago and paid for 12,000 miles a year. In almost three years, he’d driven less than 7,000 miles. Total. He eventually bought the car at the end of the lease but wasted money for three years.)

3. Consider Downsizing

Downsizing can reduce some otherwise hefty expenses: mortgage, property tax, home insurance and utilities. It can also reduce stress (unanticipated homeowner expenses) and physical wear and tear (lawn maintenance, snow removal.)

If you’re considering downsizing, do so carefully to account for rental fees or condo HOA fees at your new residence. Selling and buying a house can be expensive so be sure it makes sense for you beyond the soul cleansing benefits of decluttering.

4. Find Additional Income Sources

Yes, the primary lure of retirement was no having to work. But if you need some financial help, maybe finding work that doesn’t seem like work is a reasonable compromise.

If staying at your job and delaying retirement isn’t an option, you may still find a number of acceptable options doing a side job.

“Beyond part-time retail or food establishment jobs (which pay very well), Baby Boomers could consider everything from tutoring and teaching a language (foreign if they know one, ESL if not) to remote work in customer service to house-sitting, pet-sitting and dog-walking,” Fox said.

Seniors looking for a new job have options in today’s economy. If you’re able to find work that fits your schedule, a little extra money will go a long way toward easing stress in retirement.

5. Use Retirement to Pay Off Debts

If you’re not only stuck on a financial treadmill but losing ground, borrowing from your 401K is certainly an option.

By reputation, bankruptcy probably seems like a last resort in a financial crisis but actually the risks of using retirement money to pay off debts might be a better example of that.

You’re not only likely paying taxes on the amount you withdraw from retirement accounts, but you’re losing future gains since the amount you withdraw is no longer working for you in the market.

Financial advisers are in favor of paying off high-interest credit card debt first, but caution that using retirement accounts is not the preferred method.

“Withdrawals from tax-deferred accounts such as Traditional IRAs and 401(k)s not only miss out on the potential for future growth but also may trigger additional income taxes,” Buhrmann said. “These could also impact Medicare Part B premiums and taxability of Social Security benefits.

“It’s important to consult with a financial advisor or tax professional to determine the best accounts to reduce this type of debt.”

» Learn More: How To Become Debt Free by 50

6. Debt Consolidation

One way to reduce your monthly debt payments and lower interest rates is debt consolidation. Debt consolidation combines multiple debts into a single payment, typically with a better interest rate and more affordable monthly payments.

Balance transfer credit cards are one way to consolidate debts since they typically offer an interest-free or low interest introductory period, but they require a good credit score and the discipline necessary to pay that card off before the rate jumps.

You can try to research loan options for seniors with bad credit, but you are probably better off investigating debt management as an alternative for those with poor credit.

7. Reverse Mortgage

If all you know about a reverse mortgage comes from those Tom Selleck commercials, you might want to delve a little deeper.

A reverse mortgage is a tool for people 62 and older in which a homeowner relinquishes equity in his or her home in exchange for regular payments to help supplement retirement income.

“Reverse mortgages are ideal for retirees who don’t have much money saved or invested but have a lot of wealth built up in their homes,” Lyle Solomon said. “A reverse mortgage converts an otherwise illiquid asset into cash that can be used to pay down debt in retirement. It is an excellent way to access home equity without incurring additional monthly debt payments.”

Likewise, a home equity loan can provide cash (at a much lower interest rate) to pay off high-interest credit card debt.

8. Access Life Insurance Policy Funds Early

This could be an option if you’re carrying a permanent life insurance policy as opposed to a term life insurance policy.

But Solomon points out that associated fees could swallow up to 30% of the settlement value.

“There can also be complicated tax issues, so be careful,” he said

9. Credit Counseling

If your head spins in consideration of all the different options (and challenges)  to tackling debt in retirement, you’re not alone.

It’s why credit counseling might be the best decision you can make. It’s a free service offered by a nonprofit agencies like InCharge Debt Solutions that offer help with budgeting and advice for successful money management. Credit counselors could also provide a debt management plan or bankruptcy counseling if needed.

10. Bankruptcy

Filing bankruptcy is hardly a pain-free strategy. But it could make the most sense for a senior carrying lots of debt and who isn’t overly concerned about how a damaged credit score could affect qualifying for future loans.

Assets like Social Security and most retirement accounts are protected when filing for bankruptcy.

Chapter 7 bankruptcy liquidates your non-exempt assets. If you don’t own a home and have little income, Solomon says Chapter 7 can be “an excellent choice.” Chapter 13 bankruptcy allows you to retain assets while you repay your debts over three-to-five years.

Just know that Chapter 7 bankruptcy stays on your credit report for 10 years, Chapter 13 for seven years, if that matters to you.

Additional Debt Relief Resources

There are assistance programs that can help provide debt relief for seniors dealing with medical, employment, affordable housing and food shortage issues.

Medicare is a tool for retirees to manage health care costs but debt in retirement often goes beyond hospital and medical costs. In that case, targeting debt is a necessary strategy.

• Personal loans: If a home equity loan isn’t an option, check out other loan options for seniors. A personal loan at a more reasonable interest rate provides the convenience of making one monthly payment while allowing you to pay down higher interest debt.
• A loan from friends or family: The same concept as taking out a personal loan from a lender to pay off higher interest debt, perhaps with even friendlier terms. But a word of caution: spell out the terms of repayment with the loved one or friend lending you money and treat it as you would a bank loan. Be specific. Nothing puts distance between family and friends like borrowing money and not paying it back in a reasonable (mutually agreed) time frame.
• Debt management program: Discipline is the key in any good debt management program. In such a program you pay off credit card debt at a reduced interest rate (8%, sometimes lower) by creating an affordable monthly budget. The plan requires you to close your credit cards (we told you discipline was a key). But you’re not doing this on your own. Nonprofit credit counselors review your expenses and income and devise a budget that gives you a structure to pay off your debt. There are challenges, for sure. You can’t include secured debt such as mortgages, auto loans or student loans. And a missed payment can cancel the agreement negotiated between your credit counselors and your creditors. You need to be ready to make that monthly payment for 3-5 years. Is that a drawback? Maybe. But remember, the length of time is often necessary to keep your monthly payment affordable.
• Debt settlement: In debt settlement, you attempt to settle the debt by paying less than you owe, perhaps as much as 50% less. That sounds enticing, but it can be costly. You pay a for-profit company a fee that can be as much as 20%-25% of the loan you want settled. A debt settlement company negotiates with your creditors to get them to accept less in repayment. Creditors can accept or reject any debt settlement offer. The process usually takes 2-3 years, during which time your debt grows because of late fees and interest. Debt settlement can be a viable option, especially if you can reduce your loan by 50%. But make sure the fees associated with debt settlement, and the tax implications (you still owe taxes on the amount forgiven) add up to a real savings before you sign any debt settlement agreement.

Talk to a Professional

It’s difficult enough to navigate debt on your own without trying to climb out of a financial hole on a fixed income. Social Security keeps many retirees afloat but even with the cost-of-living increases retirees are hard-pressed to keep up with inflation and other financial challenges specific to seniors.

“There is little likelihood that retirement and investment account returns could outpace the cost of a high-interest credit card,” Buhrmann said. “Retirees should seek to pay down these debts in short-order and pay attention to which accounts they use.”

If you’re in debt and can’t see your way out, the smartest decision you can make is to contact a nonprofit credit counseling agency like InCharge Debt Solutions. (Read one man’s story of navigating debt through InCharge.)

Credit counselors can offer help in myriad ways depending on your situation and the amount of debt you’re carrying. What doesn’t vary is the importance of gaining peace of mind, especially in retirement.