Retiring with no debt is the American Dream. The reality is it’s not going to come true for millions of Americans.
Almost half of Americans expect to retire in debt, according to a 2022 survey by the financial site MagnifyMoney. Even worse, the Federal Reserve Bank reports total debt for Americans over 70, is more than $1.1 trillion. That’s a 600% increase in 20 years.
Don’t let those statistics discourage you.
Retiring debt-free is not an impossible dream, and paying off debt in retirement is also feasible. It just takes planning, determination and maybe a little helpful advice.
Is It Okay to Retire with Debt?
Retiring with debt is not ideal, but depending on what kind of debt you have, it might be manageable.
Mortgages and home equity lines of credit have relatively low interest rates and can work for you. The money you are borrowing is going toward something that should be appreciating in value. And many home loans are tax-deductible. That’s why economists call such bills “good debt.”
Credit cards and car loans are bad debt. They have high interest rates; they aren’t tax-deductible and you’re likely paying for items that are losing value.
The strategy for senior citizens needing financial help is simple. Don’t sweat the productive debt like mortgages but pay down bad debts like credit cards as quickly as possible.
6 Steps to a Debt-Free Retirement
The most common types of debt retirees hold are credit cards (67%), mortgages (37%) and car payments (32%), according to a survey by the real estate company Clever.
That means a lot of retirees are swimming in bad debt. If you’re one of them, don’t despair. There are ways to get out of the hole.
Set Up a Budget
Armies don’t go to war without intelligence, at least not if they want to win. It’s the same with retirees battling debt.
To win, you need to know the battlefield. That means setting up a budget that specifies monthly income and expenses. That will help you analyze where you’re spending and where you can save. Then adjust those habits to meet your financial goals.
Yeah, that’s much easier said than done. But with a budget, you’ll at least know your enemy.
Eliminate Credit Card Debt
The average credit card interest rate hit an all-time high of 19.9% in 2023 and is expected to stay in the 20% range for the foreseeable future. In other words, consumers are paying a dollar for every five dollars they borrow.
That makes credit card debt Public Enemy No. 1 in the war against debt.
If at all possible, take a pair of scissors to your credit cards and cut them into a half-dozen or so pieces. If that’s asking too much, cut your spending and pay with cash as often as possible.
Put every dollar you save toward paying off your credit cards. Start with the highest-interest card, then work down from there.
Pay Off Student Loans
Student loan debt hit $1.745 trillion in 2022, and people over 62 owed about $140 billion of that. The Biden Administration has promoted debt forgiveness, but there’s no guarantee it will survive court challenges.
A lot of senior citizens cosigned student loans for children, not that the government cares that a parent never stepped foot on campus. It just wants its money. Defaulting on a federal student loan could mean your Social Security is garnished by up to 15% until the debt is repaid.
Doing that is similar to the credit card battle. Tighten your belt and try to pay as much as possible.
If the loan was for a child, share that burden. They’re the ones who supposedly are benefiting from the loan. Paying for it should not be too much to ask.
Get Rid of Your Car Payment
Car loans aren’t the budget-busters that credit cards are, but you’re still borrowing money for something that’s depreciating in value. The good news is that transportation usually isn’t as vital when you retire and no longer need it to get to work and perform those duties.
If it’s just you and a spouse, one car might handle the daily transportation needs. The money you save on insurance would help pay any existing loans.
Downsize or Pay Off Your Mortgage
It sounds odd when you’re on a debt-clearing crusade, but mortgage debt actually offers some advantages. Millions of Americans locked in historically low interest rates prior to 2022. And, long-term, houses are usually good investments.
The key factors here are A) being able to afford the payment, and B) being comfortable with the debt.
A lot of retirees would rather not have that burden. Good for them. If they want to expedite that process, they could sell their home and use the proceeds to buy a smaller, less expensive one.
If they want to stay put, they can try to make an extra payment every year. Or they might consider refinancing, if a lower interest will reduce mortgage payments.
Set Up an Emergency Fund
A lot of things change with retirement, but some things never go away. One of them is unforeseen expenses.
Cars still break down. Plumbing pipes still collapse. Accidents and illnesses still require expensive medical treatment. Mother Nature can still blow the roof off a house.
An emergency fund can take the financial sting out of such misfortunes. Make it a goal to start one that is equal to a month’s income. That will keep you from having to pay for emergencies with a credit card. It will also give you peace of mind.
Talk to a Credit Counselor About Your Debt
As mentioned earlier, you need a plan or budget to get out of debt. You might also need someone to help you create that budget and execute it.
Credit counseling can do both. Nonprofits like InCharge Debt Solutions have experts who can analyze your finances, construct a budget, and devise a plan to meet your financial goals.
The debt management program can get on track to be debt-free before retiring. If you’re already retired and have debt, counselors can come up with a strategy and offer regular advice.
You not only could get rid of your debt, chances are you’ll sleep a lot better. That’s what happens when American Dreams come true.
About The Author
Tom Jackson focuses on writing about debt solutions for consumers struggling to make ends meet. His background includes time as a columnist for newspapers in Washington D.C., Tampa and Sacramento, Calif., where he reported and commented on everything from city and state budgets to the marketing of local businesses and how the business of professional sports impacts a city. Along the way, he has racked up state and national awards for writing, editing and design. Tom’s blogging on the 2016 election won a pair of top honors from the Florida Press Club. A University of Florida alumnus, St. Louis Cardinals fan and eager-if-haphazard golfer, Tom splits time between Tampa and Cashiers, N.C., with his wife of 40 years, college-age son, and Spencer, a yappy Shetland sheepdog.
- Roughley, T. (2023, January 9) U.S. News & World Report Survey: Retirement and Inflation. Retrieved from https://www.usnews.com/insurance/life-insurance/retirement-inflation-survey
- Candiloro, T. (2022, August 3) State of Retirement Finances: 2022 Edition. Retrieved from https://listwithclever.com/research/retirement-finances-2022/
- Dickler, Ja. (2023, January 5) Credit card interest rates are heading to 20% on average – here’s the best way to pay down high-interest debt. Retrieved from https://www.cnbc.com/2023/01/05/cutting-credit-card-debt-as-annual-percentage-rates-hit-record-highs.html
- McNair, K. (2021, November 8) Despite Lofty Dreams, 46% of Americans Expect to Retire in Debt. Retrieved from https://www.magnifymoney.com/news/dream-retirement-survey/#DespiteLoftyKeyfindings
- N.A. (ND) Center for Microeconomic Data. Retrieved from https://www.newyorkfed.org/microeconomics/hhdc/background.html