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How to manage debt in retirement

If you are retired or hoping to retire soon, it can be a good idea to take a fresh look at your overall household debt. Debt doesn't have to stop your retirement plans, but you might want to consider your overall financial situation and make a plan to get out of debt before you decide to retire.

Depending on your income, credit score, and other aspects of your financial life, there are options to pay off your debt faster, refinance your debt at a lower interest rate, and otherwise manage your balances. Debt management should always be a part of your retirement plan. 

Types of debt

Credit Card Debt

Consumers in their 50s have the highest levels of credit card debt, according to a recent study of credit card debt statistics. Fortunately, if you are nearing retirement age with credit card debt, you can still improve your situation. The more money you put toward paying off your credit card debt, the better. You might also try to negotiate a lower interest rate or consider a balance transfer credit card at low interest to help you pay off your debt more quickly and save money on interest.

Mortgage Debt

If you currently hold a mortgage on your home, do you have a plan to pay it off? 

Mortgage debt is generally considered “good debt", but if you want your house to be fully paid off before you retire, put together a plan to make it happen. Or, if you are comfortable with carrying a mortgage for a few more years into your retirement, consider refinancing your mortgage at a lower interest rate or with a faster loan payoff.

For example, if your retirement date is approximately 10 years away, and you have 20 years left to pay on your current mortgage, you might be able to refinance and get a similar monthly payment on a 15-year mortgage that will hasten the final payoff.

Student Loans

Many parents have borrowed money to help their children go to college. Unfortunately, sometimes this student loan debt can linger, causing financial difficulties for parents who want to retire.

Student loans are also considered “good debts" because they help people qualify for better-paying jobs and more secure careers. But sometimes these debts can become a long-term problem for families. Student loans generally cannot be discharged in bankruptcy.

If you have taken on debt to help your children go to college, review your loans. If your children are graduated and working, talk to them about helping to pay off the debts or removing your name as co-signer so the debt responsibility is with them. 

Managing Debt Payments in Retirement

Being in debt doesn't mean you have to delay your retirement plans. But make sure your debt payments are at a manageable level based on your expected retirement income. Ask yourself key questions:

  • Are your payments at a manageable level?
  • Can you refinance the loans at a lower interest rate?
  • Do you hold any "bad debts" like credit card balances?

And estimate your debt levels in retirement:

1. How much retirement income do you expect to have? Use the Social Security Retirement Estimator to figure out your estimated amount of Social Security Retirement Benefits. Also, add any pensions that you or your spouse may have, and any expected retirement income that you might receive from a 401(k), traditional or Roth IRA, annuity, or other workplace retirement plan.

2. How much debt do you have to pay each month? Add up your monthly debt payments — including mortgage, car payment, credit card payments, and other financial obligations.

3. Calculate your debt-to-income ratio. Divide your monthly debt payments by your monthly gross income (before taxes) that you expect to receive in retirement. What is this ratio? If your debt-to-income ratio is higher than 43%, this can be a sign that you are overextended. The federal government uses the 43% debt-to-income ratio as the cutoff point for the highest amount of debt you can have to still get a Qualified Mortgage.

Many people will have a lower income in retirement than they had while they were working; a general rule of thumb in financial planning is that retirees should plan to live on 80% of their pre-retirement income. Can you still manage your debt payments on that budget? If not, you may need to adjust your retirement plan or delay retirement until more of your debts are paid off.

Refinance, Consolidate, and Pay Off Debts Faster

If you have a lot of debt and you don't know how soon you'll be able to pay it off, you might want to consider refinancing your debt (getting a new loan at a lower rate) or doing a debt consolidation loan (combining multiple debts into one new loan). There are a few options, depending on your financial situation and goals. 

  • Refinance your mortgage with cash-out refinancing—get some money from your home equity and use it to pay off credit cards or other higher-interest debts. 
  • Get a personal loan to pay off high-interest credit cards at a lower interest rate.
  • Do a balance transfer to move your credit card debt to a low introductory rate credit card. But be careful—you need to pay off the full amount by the end of the introductory period to avoid owing interest charges. 

Keep in mind: not all debt is “bad," and you don't have to be completely free of debt to be able to retire. If your debt payments are at a manageable level and you have a plan to pay them off, you don't have to delay your retirement. But if you are currently planning to retire and you're concerned about how much debt you still have, remember that you have options to pay off debt faster. Doing so could help you build momentum for a more comfortable retirement.

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