Retirement, the “golden years” in the ideal world, is when all Americans want to kick back in their own home, count dollars from their passive income, and get back to their hobbies.
But, this dream for many remains a hyperbole due to a lack of financial planning, adequate investment, and debt.
A Congressional Research Service report issued in August 2021 found that 62.1% of households headed by someone age 65 or older held some debt in 2019. That was up dramatically from 43% in 1992.
The median debt for those older households was $31,050, and the average debt was $86,797. The report said these numbers are roughly three times the 1989 amount, even when factoring in inflation.
If you are nearing retirement and still have debts to pay, you might be thinking about ways to cut down on this obligation.
Read ahead — in this post, we provide a comprehensive mix of tips to prevent debt from demolishing your retirement dreams.
But first, let’s see why debt in retirement is such a huge concern.
Why Debt in Retirement is Bad
More than one-fourth of Americans claim they can’t manage their debt, according to a report from OPPLoans.
Everyone lives with some financial obligations, from young adults fresh out of college to retirees in their late 60s.
And given the current state of the economy, debt is necessary. For many, it is the only way to buy a house, pay for education, get a car and fulfill other wants.
So, debt isn’t inherently a bad trade-off. But what’s concerning is when you get into debt without a financial plan, and your obligations keep piling up, threatening to crash into retirement, causing financial stress.
The situation worsens when those obligations include bad debt.
Bad debts, like credit card debts and payday loans, carry hefty interest rates that can consume a significant portion of your monthly cash flow. Thus, you’ll have less to spend on health care, travel, and leisure activities.
And the worst scenario is you’ll end up drawing down retirement accounts faster than planned, run out of money, and face significant lifestyle changes to make ends meet.
So, allowing bad debts to pile up is a big no-no.
Good debts, or debts that allow you to increase your net worth and improve your life, do not need the same treatment as bad debts. This is because debts like a mortgage or student loans have lower interest rates that you can afford to pay down gradually, even in your retirement.
However, to make the repayment without any financial strain, you must devise a plan.
Isn’t it Possible to Make Minimum Monthly Payments and Let Debts Die With You?
State laws vary, but creditors usually have a few months after someone dies to file a claim against the estate for what they are still owed.
Usually, creditors can use your estate to pay off the debts before your heirs receive any share. Medical bills that remain unpaid at the time of your death can also be taken from your estate. And anyone who cosigned a debt or is a joint account holder will still be responsible for those debts after you die.
But creditors usually won’t be able to get to accounts and assets with a named beneficiary or a “payable on death” designation.
A life insurance policy is another way to ensure that your heirs get something when all your money goes to paying off your debts.
In short, unless you take steps, your debt won’t go away even after your death, and your estate and heirs will be left to bear the burden.
Tips to Avoid Debt From Ruining Your Retirement
Prioritize and Strategize
Most Americans have a mix of credit cards, student loans, mortgages, and other debts. If you are one of them and want to get into retirement debt free, it’s a high goal to achieve.
But, by prioritizing and strategizing, you can significantly reduce the debt burden.
Make a list of your debts in descending order starting with the one with the highest interest rate and ending with the lowest. Now strategically chalk up your budget to pay down the high-interest loans first while keeping up with minimum payments of the rest.
Once you pay off a high-priority debt, you will have the extra money in your monthly budget. Instead of splurging, add the money to the monthly amount you pay on the next debt on your list. As you knock off one debt after another, keep applying this principle to everything, including your mortgage.
This strategy will help you pay off your high-interest debts when you hit retirement. And, ideally, also you’re low-interest debts if you start early.
Create a Budget
A reasonable budget is the essence of a fulfilling financial life.
Writing down your daily expenses in a notebook or creating a spreadsheet of monthly costs will give insight into where your money is going. You can then spot unnecessary expenses, cut down on them and direct that money into paying off your debt.
Debt.com polled a thousand Americans, and most participants said that they are now tracking their finances, and their budgeting habit has helped them get out and stay out of debt.
Maintaining a budget can help you find aspects that need to be fixed in your financial life.
Ask yourself, are you spending more than you can afford? For example, if you spend $100 a week on restaurants, you can easily save that money to pay your dues by making it a habit to plan meals and grocery shopping.
But don’t stop your extra spending, or you’ll risk failing to keep up with the significant change. Instead, start small and gradually work your way up.
For example, take one vacation a year instead of two, or cut back on the amount of money you extend your adult child to help them out.
Don’t Make Mortgage Debt A Priority
Mortgage rates are usually low, and most people getting close to retirement will get more value by investing and building their emergency fund than by paying off their mortgage faster. An early mortgage payoff can also have tax implications.
But it’s up to you to decide. If not having a mortgage when you retire will make you happy, do it.
Here are some things you can do to pay off your mortgage faster: You can pay more than the minimum amount (if you have the money). If you make four extra payments in one year, you could cut ten years off your payoff date. Refinancing to a shorter-term mortgage with a lower interest rate is also good if your cash flow can handle the payments.
If you decide to wait until you’re retired to pay off your mortgage, ensure you have enough money in your retirement savings to cover the payments.
Avoid Using Your Retirement Funds
Those retirement savings can be tempting if you try to get out of debt. But you need to remind yourself that those are for retirement, and raiding your funds before its time may lead to negative consequences.
For example, you’ll incur penalties and taxes and withdraw more than you need to pay off the debt. In addition, you will lose out on potential earnings.
Look for a Side Hustle
Side hustles are an excellent way to invest your time to earn extra money that you can use to pay your dues.
Here are some side hustles you can try: rent out a space you already have, provide child care, sell your service online, or become a pet sitter. Want some more inspiration? Here are 50+ Side Hustles Trending in 2022 for you to consider.
Try Debt Consolidation
Keeping track of it all can be stressful when you have more than one debt payment. Here, the method of debt consolidation can be helpful.
It’s the process of paying off several debts with a single new loan or using a balance transfer credit card, often at a lower interest rate.
For example, if you want payday loan debt relief, you can take out a single low-interest personal loan to pay off your debts and only make payments on the new loan.
Some lenders offer particular loans for consolidating debt, but most personal loans can be used to do the same thing.
Typically, borrowers who qualify for a balance transfer credit card get a 0% introductory APR for six months to two years. The borrower can choose which balances to transfer when opening the card, or they can move the balances after getting the card.
But it’s a good idea only if you have a high credit score and several high-interest loans. You also need a strict budget and stick to a tight spending practice to get the most out of this method.
Consider Debt Forgiveness
Bankruptcy is often seen as bad, but sometimes it’s the only option for seniors buried in debt.
Filing for bankruptcy can make it harder to get loans in the future, but this might not be as big of a deal for someone older.
What could be better for seniors in debt than getting a fresh start financially while keeping their home, social security, and other retirement accounts safe?
But remember that filing for bankruptcy does not eliminate student loan debt. Although if you’re having trouble paying your bills, you can turn your student loan into credit card debt and then file for bankruptcy.
Debt settlement is something else you can consider. This debt reduction strategy can help you pay off a small amount of your credit card, payday loan, or medical bill balance. It’s a deal where the creditor forgives some of the debt because the debtor is having trouble paying.
Leverage Government Programs
Paying off debt can be a severe challenge if your income-to-spending ratio is tight. In such a case, you might be able to get help paying your Medicare premiums, deductibles, copayments, and more through state-sponsored Medicare Savings Programs.
Another option is working with the Administration on Aging (AoA), supported by the U.S. Department of Health and Human Services. The AoA, which was created primarily to safeguard the welfare of senior citizens and retirees in America, provides assistance and resources for:
- Long-term care
- Health and nutrition
- Health insurance and medical needs
- Legal aid to prevent financial exploitation
Keep Monitoring Your Progress
Monitoring your progress will allow you to stay on the path to getting out of debt and assist you in figuring out what you can change to reach your financial goals.
Ask yourself if the amount you owe isn’t going down as quickly as you hoped. Could you speed up the process by cutting costs somewhere else? Or do you need to temporarily put less money toward paying off that debt because of other expenses coming out of the blue?
During the process, if you need to make changes, do so. But keep in mind the big picture as you do this.
You can always put off retirement if you need more time to pay off your debts. Even though it’s not the best option for retirees, it’s better than running out of money too soon.
You can also ease into retirement instead of quitting all at once. For example, you can work part-time for a while before retiring.
The Bottom Line
When figuring out how to pay off your debt, the first step is to be clear about your needs and retirement goals, analyze your current financial situation, make a plan, start putting it into action, and keep track of how it’s going.
Depending on their debt and how close they are to retirement, everyone’s plan for paying off debt will look slightly different. So, don’t just do what everyone else does. Make a plan that fits your needs.
But remember, time is of the essence. If you don’t start your journey to become debt-free soon, things will worsen over time.
You can ask for assistance from a financial planner or CPA if you feel overwhelmed by your debt. They can help you devise a plan to get your finances in order.
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