If you’re retired or expecting to retire with debt, you’re far from alone. More than 6 in 10 households headed by 65-year-olds and older are carrying debt, with a median debt load of over $31,000 per household. That’s 2½ times more debt than they had in 2001, and almost 4½ times 1989 levels.
Credit card debt has been on the rise in recent years. Increasingly, older Americans are carrying more and more student loan debt into retirement – which is often not dischargeable in bankruptcy.
This increasing debt load is taking a toll on older Americans, both financially and emotionally.
While many people aren’t terribly worried by a modest low-interest home mortgage on an appreciating asset, credit card and other forms of higher-interest consumer debt are increasingly eating into senior retirement incomes. The average credit card interest rate had soared to more than 21% in early 2020, according to recent reports.
At that rate – several times the average 30-year mortgage rates – it’s nearly impossible for retirees to pay off using cash flow from investments. That’s putting a strain on retirement portfolios across the country.
So if you’re one of these older Americans struggling with debt in retirement, what can you do to turn things around?
Take an inventory of each debt, the monthly required payment, and the interest rate on each. That’s step one to taking financial control.
You can key in all your debts and interest rates in a number of debt reduction calculators online. Enter a payment you can afford. That should give you an initial debt repayment date: The date by which you should be debt free, if you make the payments you keyed into the system on time.
If the problem is significant, get some help from a reputable debt counseling organization. Consumer Credit Counseling Services is one such organization. It can help you negotiate payments and settlement offers with creditors, and possibly help you find options to consolidate debts to a lower interest rate. (Note: Do not consolidate federal student loans into another loan without speaking with an expert first. Consolidating federal student loans means you could lose important benefits, like income-driven repayment options, public service loan forgiveness or the ability to put loans into forbearance during tough times.)
Be sure to use reputable credit/debt assistance vendors. Most are legitimate, but there are a few scammers out there. The some Federal Trade Commission offers good advice on how to spot and avoid them.
Once you have your debts organized, it’s easy to decide a game plan. Mathematically, the optimal approach is to pay minimum payments on everything except the highest-interest debt. Throw every spare penny at that debt, such as a 20%-plus credit card, until it’s zeroed out. Then move on to the next highest debt.
Some experts, including personal finance radio personality and author Dave Ramsey, advocate the “debt snowball” approach. With this method, you organize all your debts from smallest to largest, make minimum payments on everything except the smallest debt you have. And then scrape up every dollar you have and eliminate that debt first. That gets you an early victory. Then you take everything you were throwing at your smallest debt, plus your minimum payment and everything else you can scrape up, move on to the next smallest debt, and so on.
Ramsey and others acknowledge that this isn’t the optimal approach mathematically. But it may be more effective because it harnesses emotional energy. It gets debtors an early victory on the board. This can be incredibly motivating. You may be inspired to get out of debt even faster, using the debt snowball method.
Take advantage of balance transfer credit cards. Some cards offer zero interest for anywhere from six to 18 months on balance transfers. You may have to pay a fee of 3% to do the transfer, but if you’ve got high interest credit cards, car loans or other debts, and you can knock them out before the introductory rate expires, that can be a very good move, says Beverly Harzog, author of "The Debt Escape Plan How to Free Yourself From Credit Card Balances, Boost Your Credit Score, and Live Debt Free."
More and more Americans are continuing to work to their Social Security full retirement age and beyond. Working into retirement can help keep you physically and mentally sharp, generate money to reduce debt with, and reduce the pressure on your retirement nest egg. It can also help you delay taking Social Security until you reach full retirement age, which produces a bigger monthly benefit that is adjusted for the cost of living each year, and that you cannot outlive. Every year working allows you to delay taking Social Security benefits should increase your income at full retirement age by 8%.
You should consider the effect of taxes on your Social Security benefits: Taking ordinary income, either from work or from tax-deferred retirement accounts – can trigger taxes on up to 85% of your Social Security benefits.
If you’re retiring in debt, it’s probably time to have a frank conversation with your children. They may have other sources of credit, and may be able to work harder or take a second job. But you can’t borrow your way to a successful retirement. It may be time to exercise a little tough love – for your sake and theirs.
With the kids grown, maybe you don’t need a big house in the suburbs anymore. Selling and buying a less expensive home might free up tens of thousands – and sometimes hundreds of thousands of dollars – in equity that you can use to knock out debt, and support a stable and secure retirement income.
If you want to stay in your home and you are age 62 or older, you may consider a Home Equity Conversion Mortgage (HECM) loan. This strategy converts your home equity into a steady income for life. It’s a loan against the equity in your home. You don’t have to pay it back, though: The reverse mortgage company is repaid when you die, or when neither you nor your spouse are living in the home. This can generate income that you can live on, or use to eliminate higher-interest rate debt. Your children won’t be able to inherit your home, however, unless they repay the loan.
Note that this isn’t a debt-reduction strategy. Technically, taking on a reverse mortgage is increasing debt. But it also increases cash flow, which you can use to pay off higher interest debt.
An Alliance America financial advisor can assist you in maximizing your retirement resources and help achieve your retirement goals. Alliance America’s planning process is focused on personalized retirement income planning. As fiduciaries, our advisors are required to act in your best interest, and we are dedicated to helping you achieve the retirement lifestyle you seek. You can request a no-obligation consultation by calling 888-864-2542 today.