Rosalind Evans
As the golden years of retirement approach, many Americans envision a debt-free life. Historically, a single 30-year mortgage and a stable job were the cornerstones that led to a debt-free retirement. However, times have changed. The Federal Reserve reports a significant increase in debt among those aged 65 and older, with the percentage of indebted households jumping from 38% in 1989 to 61% in 2016 and the average debt rising to $86,797 from $29,918, adjusted for 2016 dollars.
Confronting debt during retirement can be daunting, with limited income streams and the high costs associated with debt interest. Despite the challenges, nine strategies offer hope for managing and overcoming this burden.
Curtailing Further Debt
Paul Miller, a New York-based CPA, stresses the importance of not accumulating more debt in retirement. Contrary to the expectation that expenses will drop post-retirement, Miller notes, “Many people think that when they retire, their expenses go down, but they tend to increase.” The temptation to splurge on travel or upgrade to a dream retirement home should be avoided in favour of downsizing and living within one’s means.
Avoiding Compounding Mistakes
Miller cautions against desperate attempts to rectify inadequate savings, such as engaging in day trading or hiding risky financial moves from spouses. These actions often lead to irreversible consequences.
Supplementing Income
Part-time work is a viable solution for those with insufficient savings to generate additional income and mitigate debt without depleting retirement funds.
Judicious Use of Retirement Funds
Using retirement savings to clear debt can be tempting, but it risks losing potential investment gains. Chris Chen, a CFP with Insight Financial Strategists, advises, “There’s an incentive to keep the mortgage instead of committing other assets.”
Downsizing the Living Space
Homeowners are encouraged to downsize, especially in high-value real estate markets, to reduce maintenance costs and leverage home equity for financial relief.
Considering Consolidation Loans
Debt consolidation loans can be effective if they result in lower interest rates, but they must be approached cautiously to avoid exacerbating the debt situation.
Utilizing Reverse Mortgages
Reverse mortgages offer a way to access home equity without the immediate need for repayments, offering relief for cash-strapped retirees.
Liquidating Life Insurance
Cashing out life insurance policies is an option, albeit with potential fees and tax implications that must be carefully evaluated.
Bankruptcy as a Viable Option
While not a first choice, bankruptcy can provide a clean slate for those overwhelmed by debt, with social security and retirement accounts generally protected during the process.
Navigating debt in retirement requires a balanced approach and a well-thought-out plan. “A lot of people have this, ‘I want to leave this for my kids’ mentality,'” Miller reflects. However, he advises that retirees should focus on stabilizing their financial health as the priority. Seeking advice from a financial planner or CPA and adhering to their plan can pave the way for a more secure and fulfilling retirement.
