9 Ways to Deal With Debt in Retirement
What do you want to do when you retire? I'm guessing paying down debt isn't on your short list. Unfortunately, for many Americans it is. Mortgages, credit card debt, student loans and supporting elderly parents are affecting the retirement plans of many baby boomers. The financial crisis devastated home values and retirement accounts, and a general lack of planning left little time for boomers to recover the losses.
A Fidelity Investments survey showed that almost half of all baby boomers who have pensions expect to retire with debt, with one if five of them saying they did no planning before retirement. Also, a 2012 Demos study found that people 65 and older have more credit card debt than any other age group -- $9,300 on average. Demos suggested that the recession reduced savings and forced those in or near retirement to cut back.
"I don't think people are making a conscious decision to carry debt," Lori Trawinski, senior strategic policy adviser at AARP Public Policy Institute, told Kiplinger. "People have no choice, because they have other obligations they need to take care of."
If you are nearing retirement or already retired, how do you pay down debt? Here are eight ways to get some relief.
How to Pay Down Debt in Retirement
1. Consult a professional. A certified financial planner can help you build a retirement plan, including specific benchmarks so you can dig out of debt and build savings. A CFP can also help you build an overall retirement spending plan that includes debt payments, fixed expenses and anticipated sources of retirement income.
2. Know your benefits. The National Council on Aging, a nonprofit service and advocacy organization that improves the lives of older adults, runs a website called BenefitsCheckup.org. The site has a tool to help you make sure you are receiving all the benefits you are entitled to. These benefits can help you pay for medications, health care, food, utilities and more.
3. Downsize. This is a very emotional decision but selling your house and moving into something much smaller and more affordable will free up cash for living expenses. Ditching your high-maintenance house means you will be free of high mortgage payments and expensive maintenance, insurance and tax bills.
4. Accelerate your mortgage payments. This is only a good option if you have mortgage debt and cash in the bank; this route is not for retirees with other kinds of high-interest debts or low cash reserves. If you compare the interest rate on your mortgage with the current rates on savings accounts and CDs, you might save more money paying down the mortgage instead of keeping the money in the bank. Just don't withdraw from your retirement accounts to pay off the house -- the tax owed on the distributions will cancel out the mortgage savings.
5. Refinance your mortgage. Some retirees have enough equity to refinance their homes, pull out cash, invest the money and try to live off the investments. Retirees might want to avoid using mortgage relief firms, as some debt settlement programs can leave you paying more than the original debt owed. If you do use a mortgage settlement firm, know that the FTC bans these firms from charging upfront fees. Also, be wary of short-term interest rate deals -- those rates can spike later.
6. Get a reverse mortgage. There are risks associated with reverse mortgages: They generally have high fees and interest rates. Also, the loan must be repaid with accumulated interest when the owner passes away, sells the home or no longer uses it as his primary residence. Reverse mortgages are one of the biggest scams targeted at the elderly.
Still, they are an attractive option because retirees do not have to make monthly principle or interest payments while living in the home, although they must stay current on tax and insurance premiums. Retirees considering a reverse mortgage should consult a government-approved housing counselor for help.
7. Postpone retirement. Postponing retirement gives you more time to bring in income and pay down debts. Working later means you can also delay claiming Social Security benefits or other sources of retirement income, which gives your savings extra time to compound. This might be a tough pill to swallow if you've had your eye on retiring sooner rather than later, but just a few extra working years might be all you need to eliminate your debts.
8. File bankruptcy. Senior citizens are the fastest growing number of bankruptcy filers. It's an attractive option to retirees, because chapter 7 bankruptcy liquidation does not affect 401(k) accounts, social security benefits or home equity. IRAs are also protected up to more than $1 million. Eliminating debts through bankruptcy makes sense for some boomers, who don't have a chance to increase their income so late in life. There are some exemptions to which accounts are or are not affected, which vary by state. It's best to consult a bankruptcy attorney to understand all the implications.
9. Ask for help. There are several nonprofit counseling agencies that help people establish a manageable schedule for repaying debts. Just avoid debt negotiation firms that charge high fees or are scams. Some trusted sources include the Association of Independent Consumer Credit Counseling Agencies and the National Foundation for Credit Counseling. Debt counselors can review your budget and spending and come up with an action plan; some can even offer a reduction or waiver of interest charges and penalties.
"No one should be worried about making a credit card payment versus paying for medicine," Leslie Linfield, executive director at the Institute for Financial Literacy, told Kiplinger. "You've contributed to the system your whole life. It's okay to ask for assistance."