How to Manage Debt in Retirement

Retirement is the time most working people picture as the moment when they have enough money to enjoy life without having to work. Yet many people retire and still carry home equity loans or even student loans, despite having worked for many years. Life demands make it harder for older Americans to retire, even if they have worked a lifetime. Carrying debt into this phase of life can be a significant source of stress.

Having a large amount of debt when you are ready to retire can present a retirement planning challenge. Here are some tips on paying down debt in retirement.

Key Points: 

•  Lower your expenses to fit your new lifestyle in order to pay off debt in retirement.
• Using your retirement to pay off debt can be tricky but with help from a budget, you may be able to cut down on expenses enough to cover the payments.
• If you feel you can’t afford to retire, it may be time to explore your options.

Assess Your Financial Situation

Before implementing any retirement plan strategy, have a clear picture of your financial situation. Make a list of all your sources of income, such as Social Security benefits, pensions, and any part-time work. Then, compile a list of all your debts, including balances, interest rates, auto loans, home equity loans, or other personal loans. This overview will help you know what is left in your savings accounts and prioritize your debt repayment strategy.

If you have debt that needs to be repaid, you should likely postpone costs like holidays, traveling, and eating out until you are on top of your debt. Once you have paid off your debt, you have more financial wiggle room to live your retirement as you planned.

How to pay off debt in retirement

A good place to start when you need to pay off debt in retirement is checking your account regularly, updating your budget or creating a budget if you haven’t already done so. Keep in mind that your lifestyle as well as your income will be changing once you retire.

Some ways you can lower your expenses are by:

• Downsizing your home for a more manageable mortgage, or no mortgage at all.
• Using your senior discount whenever possible but especially in recurring bills such as groceries.
• Cooking at home more now that you have more time in the day.

Lowering your expenses will leave more of your income to go to your debt payments, allowing you to pay debt off faster. You can also use the early stages of your retirement to prepare for the future.

• Get a part-time or temporary job to increase your income, as this will help pay off your debt faster. Once you pay off your debt, you can put more in savings for the future.
• Create a savings or emergency fund if possible to cover any unexpected or large bills that could increase your debt or put you back into debt in the future.

If your income is not high enough, it may be better to choose between saving or paying down your debt. Both planning solutions can be beneficial, depending on your financial situation.

Refinance Your Mortgages

If you have built your home equity line, you could tap into it with a mortgage refinance. The cashback you get can be used to pay off credit cards or travel credit card debt. Home mortgage debt has a much lower interest rate compared to credit cards because they are secured. You can use this to your advantage and pay off any high-interest-rate debt.

Mortgage refinance is a viable option as long as you know that you can repay your mortgage, or you risk foreclosure on your home. So, make sure you have taken into account all the financial implications first.

Balance Transfer Credit Card 

If you have a good credit score, you can apply for a credit card with an introductory 0% APR for the first year. Transfer the balances of your existing line of credit cards to this card and make payments without incurring interest rates.

It would be best if you aimed at repaying the balance on the new credit card before the end of the introductory period, by which time the standing balance will be charged interest.

Using retirement to pay off debt

Because of taxes and penalties, you shouldn’t really use your retirement savings to pay off debt. If you are considering doing so, you should ask for financial advice or explore other debt relief products and services like a debt settlement plan with ClearOne Advantage. A Certified Debt Specialist can give you a savings estimate over the phone at 866-481-1597.

Instead of withdrawing money directly out of your account, you could use any retirement income you are receiving to pay down debt. The trick is getting your expenses low enough to make an impact on your debt. Keep in mind that you need to pay more than the minimum monthly payments your creditor asks for each month if your goal is to pay down debt.

If you lower your expenses enough, you may be able to use your retirement account to pay off your debt. The two main methods for credit card debt relief are the debt snowball method and the debt avalanche method. 

Here’s a brief comparison of each, so you can choose the right one for you:

Debt snowball method

• Starts off with smallest debt amount and works up to the largest-sized debt.
• Interest rate is not a factor in this method.
• More rewards up-front may keep you on track.
• Paying off an account may free up more income to pay off the rest of your debt.

Debt avalanche method

• Starts with the debt with the highest interest rate and works to the lower interest rates.
• May save you money since you you pay off high-interest first.
• May take longer to pay off your first account, which may cause you to lose focus.

Whichever option you choose, just make sure your fixed income in retirement can cover your usual expense plus your debt payment each month.

Can't afford to retire?

If you think you have too much debt to retire, you need to explore your options.

• Delaying your retirement just a bit could help you save a little more in your fund. You may even get more out of Social Security, depending on your age!
• If your current income is not enough, you can take on a second job. Whether it’s a one-time gig or more of a permanent position, any extra income is beneficial to paying off debt. You also may be able to put more into your retirement fund.
• Professional debt relief such as ClearOne Advantage, which may allow you to pay off your debt in as little as 24 to 60 months.

When you are about to enjoy retirement, you shouldn’t have to deal with a student loan, credit card interest, or debt consolidation loans. However, don’t be discouraged. You still have options like checking account reviews, finding the best mortgage lenders, or even tapping into savings accounts to help you pay off debt. If you have a small business, the right lines of credit or student credit cards may also be helpful. Additionally, look for rewards credit cards or best travel credit options to maximize your benefits. Finding the best life insurance can also be part of a sound financial plan.

If you are struggling with debt in retirement, or can’t retire because of debt, talk to a ClearOne Advantage Certified Debt Specialist at 866-481-1597 today to discuss your situation, explore your debt relief options, and get a free savings estimate.

1. https://www.nerdwallet.com/article/finance/retirement-account-pay-debt