Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and heres how we make money.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not recommend or advise investors to purchase or sell specific stocks, securities, or other investments, nor does it provide advisory or brokerage services.
According to the Federal Reserve’s 2022 Survey of Consumer Finances, an increasing proportion of older adults are in debt during their retirement. %20The%20share%20with%20debt%20rose%20to%2065%%20in%202022,%20up%20from%2050%%20in%201989%20 (the%20first%20time%20this%20question%20was%20asked) among people ages 65% to 2074. For people 75 and over, 53% report holding debt in 2022 versus 21% in 1989. This is a big challenge, since people’s income in retirement is traditionally limited. But there are strategies for tackling your balance sheet later in life.
Take note: Not all debt is bad debt. “It’s not necessarily the worst thing to have,” says Jack Heintzelman, a certified financial planner in Boston. He suggests holding onto debt that qualifies for a tax deduction, such as a mortgage, while allowing your other investments to appreciate.
However, a pay-it-off plan is essential if debt is making it difficult for you to save for retirement or if your interest rate is high. Here are some methods that can help.
Retirement should be a time to relax and enjoy the fruits of your labor. But for many people, it’s a time of financial stress, thanks to the burden of debt. If you’re one of those people, don’t despair. There are ways to get out of retirement debt and regain control of your finances.
Using information from two reliable sources—Forbes Advisor’s “How to Pay Off Debt in Retirement” and NerdWallet’s “What to Do About Debt in Retirement”—we will examine several approaches to retirement debt in this guide. We’ll also give you extra advice and resources to help you deal with this difficult circumstance.
Understanding Retirement Debt
Before we dive into solutions, it’s important to understand the scope of retirement debt. According to the Federal Reserve’s 2022 Survey of Consumer Finances, a growing number of older adults are carrying debt into retirement. Among those aged 65 to 74, the share with debt has risen to 65%, up from 50% in 1989. For those 75 and over, 53% report holding debt in 2022, compared to 21% in 1989.
This trend highlights the increasing financial challenges faced by retirees. With limited income sources like Social Security and retirement savings, managing debt can be a significant burden
Strategies to Tackle Retirement Debt
Now, let’s delve into the various strategies you can employ to get out of retirement debt:
1. Generate Additional Income:
- Part-time work: Consider picking up part-time work to supplement your retirement income. This could involve consulting in your field, monetizing a hobby, or taking on hourly gigs.
- Downsizing: If you live in a high-cost area, downsizing to a smaller home or relocating to a more affordable location can free up significant funds to tackle debt.
2 Optimize Social Security Benefits:
- Timing your claim: Strategically claiming Social Security can provide additional income to pay off debt. Consider taking benefits early if you need immediate financial assistance, or wait for a higher payout later if you can manage your debt in the meantime.
3. Leverage Home Equity (Cautiously):
- Home equity loan/line of credit: If you have equity in your home, you could consider a home equity loan or line of credit to consolidate high-interest debt. However, proceed with caution, as defaulting on these loans could put your home at risk.
4. Prioritize Debt Repayment:
- Focus on high-interest debt: Prioritize paying off debt with the highest interest rates first, as these accrue the most interest charges over time.
- Debt consolidation: Consider consolidating multiple debts into one loan with a lower interest rate to simplify your repayment process.
5. Seek Professional Guidance:
- Financial advisor: Consulting a financial advisor can provide valuable insights and personalized strategies to manage your debt and overall financial situation.
Additional Tips:
- Create a budget and track your expenses.
- Explore government assistance programs for seniors.
- Seek credit counseling or debt management services if needed.
- Consider selling assets or taking out a reverse mortgage (with caution).
Remember, getting out of retirement debt requires a multi-pronged approach. By implementing a combination of these strategies and seeking professional guidance, you can regain control of your finances and enjoy a more secure retirement.
Resources:
- Forbes Advisor: How To Pay Off Debt In Retirement
- NerdWallet: What to Do About Debt in Retirement
- National Council on Aging: Benefits & Resources for Seniors
- Consumer Financial Protection Bureau: Managing Debt in Retirement
Disclaimer: This guide is for informational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor for personalized guidance on managing your retirement debt.
Consider moving or downsizing
One of your largest expenses is typically your house, and if you live in a high-cost area, you may have to pay high property taxes and maintenance fees, which reduces your money for other things.
Your budget may have more room if you relocate to a smaller house or to a place with a lower cost of living. You might also get better weather, to boot.
According to Houston CFP Crystal McKeon, “we have a fair amount of clients who are moving down to places like Florida from more northwestern states with a higher income tax and colder weather.” Florida, she notes, has no state income tax and noticeably warmer weather.
Plano, Texas CFP Andrew Herzog remembers a client who is thinking about downsizing to a smaller, easier-to-maintain home near his daughter, and maybe without a mortgage if he can sell his current home for a sufficient amount of money.
“Downsizing can absolutely work,” Herzog says. “It’s best when you do it for multiple reasons.”
Pick up side work
The conventional retirement model, which calls for working for 40 years before quitting permanently, might not be the best course of action these days. You can stretch your money farther and pay off any outstanding debt by adding part-time employment to your Social Security benefits and retirement savings.
For some people, consulting in their field is a natural step between full-time work and full-time play. Other people can monetize an interest or pick up hourly work a few days a week.
“We have a client who earns a part-time income from a music repair shop,” says Colin Day, a CFP in St. Louis. “They get to explore their hobby while also getting some level of income. ”.
Should I Use My Retirement Funds To Pay Off Debt?
FAQ
Can I take money out of my IRA to pay off debt?
Is it worth cashing out 401k to pay off debt?
Can I do a hardship withdrawal from my 401k to pay off debt?
How can I pay off my debt in retirement?
Work up a plan and follow it to wipe out debt. Here are some steps you can take to pay off loans and enjoy the remainder of your retirement days debt-free. Look over your accounts. If you’re not sure how much debt you have, start by adding up all loans, mortgages and credit card bills. Then check the interest rates attached to each balance.
How do I start a debt-free retirement?
[Read: 6 Steps to a Debt-Free Retirement .] Make sure you have a budget. If you already have a budget in place, look for ways to start putting money toward paying off one of your debts each month. And if you don’t have a budget, now is a good time to create one. Start with what you bring in each month.
Should you pay off debt before retirement?
So let’s change that old axiom about paying off debt before retirement: Keep working, at least a little, when you have high-interest debt to pay. An added benefit of stretching out your working life is you may be able to obtain health insurance to bridge the gap to Medicare age.
Should you use your retirement money to knock out debt?
In this case, if you have the option to use the money that you’re putting toward retirement to knocking out your debt, there’s little immediate cost other than missing out on a few months’ retirement savings, and the saving on interest could make it worth your while. However, Renfro cautions against making this choice without a plan.