If you're retiring while still in debt, you're not alone. Over half of 65+ households carried debt in 2016. An estimated 30% of seniors 65 and over still have a mortgage (source), and millions of people 60 and older still owe student loans! According to Forbes, rising debt levels among older Americans isn't just problematic for their finances, but it is also bad for their mental health, as debt tends to cause stress.
This "retirement crisis" is pushing people to delay retirement and postpone filing for Social Security in order to increase their benefits. It's easier to generate the extra income to pay off debt while you're still employed. After all, if you can't pay off debt while you're working, why would it get any easier on a fixed income?
When you carry debt into retirement, you lower your chances of ever paying it off and risk struggling financially when your debt payments monopolize too much of your limited income. But it isn't impossible. Read on for savvy financial tips to strategically manage and pay down debts in retirement.
First things first, what do you owe? Make a spreadsheet of your creditors: credit card balances; medical bills; personal, auto or home loans; and mortgages. Include the entire amount owed, the monthly payment amount, interest rates, and any finance charges or fees. On a separate sheet, take stock of your spending. Make another spreadsheet for income, including retirement funds, pensions, and Social Security. This will help you create a budget and evaluate the next steps for paying down debt, discussed below.
Credit card debt indicates that you might be living beyond your means. If credit card debt is on your list, tackle that monster first. You might be able to negotiate a lower debt payoff amount or consolidate debt at a lower interest rate. Those with good credit scores (and discipline!) can see if they qualify to transfer the balance to a card that offers a 0% introductory rate for a certain number of months to consolidate and pay off credit card debt. Divide the amount owed by the number of months that the 0% rate applies and pay that amount each month to erase the debt before the rate rises.
Can't possibly pay the total amount in the months a 0% interest credit card would allow? Consider refinancing it with a personal loan with a lower fixed interest rate and fixed payments. Is debt load still unmanageable? Talk to a credit counselor and a bankruptcy attorney to learn about debt relief.
Part of constructing your budget is creating a debt-repayment plan. Of course, you should always strive to make minimum monthly payments to avoid late fees and potentially higher interest rates, but you should also aggressively and strategically pay off as much as possible.
The higher the interest rate, the more money you're throwing away to interest each month. Focus on the costliest, least beneficial debts first. As previously mentioned, high-interest "unsecured" debt like credit cards should be your first priority. For example, if your credit card has a 16% interest rate, your student loans have 5%, and your mortgage is at 3%, you'd want to start with the highest interest debt, then move to the next highest on the list.
While some may say there's no such thing as "good debt," secured loans with low-interest rates, such as a mortgage or auto loan aren't all bad. While "bad debt" like credit cards offer little to no benefit and are not deductible, interest from student loans and mortgages can be deducted from your taxes, reducing your tax liability.
Another example of when it's better to keep debt rather than pay it off in total is if you would receive a higher rate of return by investing that "total payoff" money while continuing to make minimum monthly payments. Let's say your auto loan carries an interest rate that is around 4%. If an investment like a CD earns 5% interest, you'd be better off stowing your money away than paying off the auto loan. Make sense? In other words, you could earn a return on your money in a low-risk investment, essentially coming out ahead by investing the money you'd otherwise use to pay the entire debt now. Simply put, invest if you can earn a higher rate of return than your debts cost you.
Another disadvantage to completely paying off debt is that it could leave you cash poor. Not having any expendable money in the bank leaves you open to risk should there be an emergency. You don't want to be forced to take a high-interest loan. If paying off a low-interest loan will leave you with little accessible cash, leave that loan alone.
This might be a gimme, but if you need to scratch up some extra cash to keep up with your debt payments or pay down your obligations altogether, consider selling assets you no longer want or need. This may mean selling a car, RV, or vacation property, or going through artwork, electronics, and other collections to see if anything could be worth some dough.
Mortgage debt, especially, can be a huge burden in retirement. Withdrawing larger amounts from retirement funds to cover payments on debt can trigger higher tax bills and increase the chances of running out of money. If you own a larger home that's not paid off, one way to eliminate or reduce mortgage debt is by downsizing. Not only will you have lesser to no payment for a roof over your head, but you might also end up with a lump sum of cash to put towards other debts which will lower ensuing monthly payments and limit the extent to which you continue racking up interest.
Staying put? It's easier while you're still employed, but refinancing or "recasting" your mortgage loan might be an option to lower payments. Refinancing means taking out a new loan with substantial fees while recasting (offered by some but not all lenders) means putting down a lump sum to help lower the balance, interest, and future payments. Recasting may not be a good idea if the lump sum would come from retirement accounts.
Another option, if the mortgage balance is less than half of the home's market value, is a reverse mortgage. Reverse mortgages allow those 62 and older to tap into their home equity without having to pay the money back until they move out, sell the house, or die.
A Home Equity Line of Credit, or HELOC, is like a credit card that allows you to borrow against the value of your home. This option is dangerous and should be used for emergencies only, like funding home repairs or long-term care, not for frivolous spending. Payments can spike after the initial interest-only "draw period" ends, usually after 10 years.
A reverse mortgage HELOC costs more to set up, but the payments are optional. This can be a potential source of cash in market downturns--a retiree can draw on the HELOC rather than selling stocks in a bad market--and pay the money back in good markets. "The key advantage is the ability to choose if and when to make payments, and ability to access a growing line of credit," says Tom C.B. Davison, a certified financial planner in Columbus, Ohio.
Monthly payments eating up too much of your income? Consider working in retirement. Swelling numbers of Americans these days are working in retirement, taking part-time jobs and launching businesses. There's no rule against working and claiming Social Security simultaneously. Once you reach full retirement age, you can earn as much as you want without facing a decrease in your monthly payment. Be creative about generating extra cash. Could you take a part-time job? Maybe you could even make enough to pay down your principal and get out of debt sooner. Plus, working gives you something to do that doesn't involve spending more money. Or, maybe look into a roommate. That's extra income without any work!
This is another "duh", but it can't hurt to look for ways to tighten your belt and live more frugally. Temporarily stop going on trips. Buy groceries and cook at home instead of eating out. With streaming apps like Netflix, Hulu, and Amazon Prime Video, you could even cut the cable cord and save hundreds of dollars a year.
Kiplinger has a very good article about not making payments for your children when you can barely afford your own!
When faced with an unaffordable tax bill or medical bills, resist the urge to pull out the plastic. Check the IRS installment plan rate before pulling out the plastic or getting a personal loan. Even medical debt is negotiable. Ask the health care provider if you qualify for any discounts or can negotiate a payment plan. While you're at it, ask for an itemized list of the charges. It might shame them into taking that $37 bandaid off the bill. You may also benefit from government programs that help eligible families with medical bills. None of these options are available once you put it on plastic.