• 10 Ways to Deal with Debt in Retirement

  • by Lindsay Schachinger
Debt in Retirement

The amount of debt carried into retirement continues to trend upward, forcing many baby boomers into financial distress during a time in their lives when they should feel the most financially secure. Generally, debt is divided into three distinct categories: credit card debt, housing debt, and installment debt. A blessing and a curse – your home not only is your biggest asset, but also your greatest liability. Because of this, mortgage debt tends to make up the largest percentage of overall debt for many people. Facing your finances is a stressful task, but implementing any one of these ten strategies – and getting advice from your financial advisor – can help guide you to a more wholesome retirement.

#1 – Reverse Mortgage

A study conducted by the Consumer Financial Protection Bureau found the median mortgage debt among older American’s approximately $79,000 in 2011. One of the main benefits of a reverse mortgage is its ability to consolidate debt. A reverse mortgage allows you to take advantage of the equity you’ve built up in your home and eliminate your monthly mortgage payments (though you are still responsible for your homeowners insurance, property taxes and maintaining the property).

#2 – Debt Snowball Method

The debt snowball method works by gradually eliminating all of your debt. To start, you’ll need to make a list of all your debts. Second, you’ll make the minimum payments on all of your debts – except you’ll pay any extra money you have on the smallest debt until it is paid off. Once that debt is paid off, you’ll use the money you would be putting towards the minimum payment for that debt and instead start paying off your next smallest debt (on top of that minimum payment) and so forth. This method changes the way you approach debt by structuring the process differently and allowing you to see substantial progress. A modification to this strategy would be paying off your debt in terms of the highest interest rate, not the size of the balance. Higher interest rates are dangerous because you get charged more interest for borrowing money.

#3 – Part Time Job

Living on a monthly income can be extremely difficult when trying to climb your way to a debt-free retirement. Consider re-entering the workforce and give your income the extra boost it needs. There’s a silver lining to everything – right? Make going   to work fun. Apply to your dream job, the career you were never able to have because it couldn’t pay the bills. Whether it’s working at a dog day care, non-profit charity, being a part-time nanny, or freelance writer, make it an adventure.

#4 – Take Advantage of Free Money

Who doesn’t love free money? What many older American’s don’t know is their eligibility for discounts on a variety of different products and services – all you have to do is ask. You could be saving on clothing, groceries, transportation, utilities, and instead using the money you save to pay off your debt.

#5 – Create a Budget

The best way to manage debt is to track what you are spending. Staying aware of where your money is going can help you make conscious decisions on how you should actually be spending your money. A common rule of thumb to avoid debt is to never let your expenses exceed your income. Creating a budget can help you stay in control of your finances and allow you to set spending limits on certain categories each month including clothing, utilities, entertainment, and savings. By setting aside money each month towards savings, you’re able to use that money to pay down any outstanding debt you have.

#6 – Be Weary of Credit Cards

Credit cards are a slippery slope – especially when used the wrong way. They have one of the highest interest rates when it comes to loans, making them that much harder to pay off. When managing your credit cards, you should follow two golden rules to avoid overspending:

  • Keep your credit balances around 30% of your spending limit on any one credit card.
  • Pay off your credit card balances in full every month.

These rules will help you manage your credit cards more effectively, and in the process, you may even improve your credit score.

#7 – Establish an Emergency Fund

Generally, financial planners recommend putting three to six months of living expenses into a savings account for those unexpected times in your life when the car breaks down, your home needs repair, or you get sick. This will help you from going into more debt because you will have the money there to spend when needed.

#8 – Decrease Fixed Expenses

Although fixed expenses are a lot harder to lower than variable expenses, they can still make a substantial dent in tackling your debt, giving you the extra financial flexibility you need. You can make small energy efficient improvements around your home to lower your monthly household utility bills, use coupons when grocery shopping, give up cable, or switch cell phone carriers for a cheaper option. Those are just a few ideas on how to lower monthly costs.

#9 – Make Extra Payments

Making an extra payment every month on one form of debt, whether it be a credit card or your mortgage, can do wonders with conquering your debt faster.

#10 – Consult a Financial Professional

In the end, it never hurts to contact a financial planner to help you make well-informed decisions about improving your financial health. They are able to provide guidance and help allocate your money appropriately for your unique financial situation.