“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 2022, the average debt in families where the head of the household was 75 or older was $94,620. According to the National Council on Aging’s 2023 analysis, 80% of households with older adults are financially struggling or at risk of economic insecurity due to insufficient resources to handle financial shocks such as long-term care needs, health issues, or loss of income from divorce or widowhood.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.
Credit Cards
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
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.
Mortgage
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.
Budget
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.
When grappling with a substantial debt burden, exploring significant life changes can be a viable path towards financial stability. One impactful option is downsizing, which often involves relocating to a more affordable living situation. This could mean moving to a different state with a lower cost of living and more favorable tax policies. For instance, some states levy no income tax at all, while others have significantly lower rates compared to the national average. Conducting thorough research on such states can reveal opportunities to reduce your financial obligations beyond just housing costs.
Even within your current city, you might find more affordable neighborhoods. These areas typically offer lower rent or property prices, which can free up a significant portion of your monthly income. Downsizing your home is another aspect to consider. If you own a larger property than you need, selling it and moving into a smaller, more modest home can not only reduce your housing expenses but also potentially generate additional funds if you have substantial equity in your current home.
If you have a mortgage but a healthy amount of equity, leveraging that equity through a sale and subsequent move to a less expensive property can be a strategic financial move. However, it's important to note that downsizing isn't limited to homeowners. Renters can also benefit from moving to a smaller apartment or a more affordable complex. While relocation does come with upfront costs, such as moving fees and potential security deposits, these initial expenses can be offset by the long - term savings in living costs. By reducing your monthly housing expenses, you'll have more money available to pay off your debts, thereby improving your long - term financial health.
Consolidating your debts is another powerful strategy for getting your finances in order. There are multiple ways to streamline your debt into a single, more manageable payment. For individuals juggling debts across several credit cards, balance transfers can be an attractive option. By transferring all your credit card debts onto one card, you simplify your financial management. Instead of keeping track of multiple due dates, minimum payments, and interest rates, you now have just one monthly payment to focus on.
One of the significant advantages of debt consolidation through balance transfers is the 0% APR period that many credit cards offer. During this promotional period, which can last anywhere from a few months to over a year, you won't accrue any interest on the transferred balance. This gives you a valuable window of opportunity to focus on paying down the principal amount of your debt without the added burden of interest charges.
However, it's crucial to carefully consider all the factors before deciding on debt consolidation. You need to assess whether the fees associated with balance transfers, such as transfer fees, are worth it in relation to your current debt load and interest rates. Additionally, you must be aware of the terms and conditions of the new credit card, including what the APR will be once the 0% period ends.
Another option for debt consolidation is available to homeowners. They can tap into the equity in their homes through a home equity line of credit (HELOC) or a reverse mortgage. These financial tools can provide the funds needed to pay off existing debts, consolidating them into a single loan. But it's important to approach these options with caution. Using your home as collateral means that if you're unable to make the payments, you risk losing your home. Therefore, it's essential to thoroughly understand the terms, risks, and long - term implications before using these methods for debt consolidation.
When your debt situation seems insurmountable and none of the self - help options appear feasible, seeking professional assistance is a wise decision. Financial advisors and credit counselors can offer valuable guidance and expertise. However, it's essential to ensure that you choose a reputable professional who has your best interests at heart.
Look for advisors or counselors who are accredited and certified, and who hold the necessary licenses to operate in your state. This certification indicates that they have met certain professional standards and have the knowledge and skills to provide reliable advice. Additionally, find someone who is transparent about the services they offer, including their fees and the scope of their assistance. A trustworthy professional will take the time to understand your unique financial situation, explain your options clearly, and work with you to develop a personalized plan for getting out of debt. With the right outside help, you can gain the confidence and support needed to take control of your finances and work towards a debt - free future.
