Common sense tells you that retiring with debt is a bad idea.
But mortgage and credit card debt is a harsh reality for more than a quarter of retirees, according to a new survey from the National Association of Retired Persons.
“Many people are feeling financial pressures from inflation, which could be exacerbating the debt some retirees still have,” Mike Morrone, vice president of business development at Nationwide, told Yahoo Finance.
Sobering findings: Nearly one-third of retirees expect their financial situation to be less stable in retirement than their parents’ or grandparents’ generation, and one in five currently worry about paying their monthly bills.
Morrone said those concerns lead people to make short-sighted decisions based on emotion, like spending down funds in retirement accounts too quickly.
This has serious implications for your retirement, which could span up to 30 years, but there are strategies you can implement to chip away at your debt and protect your savings.
Read more: Retirement Planning: A Step-by-Step Guide
Nationwide (nationwide)
5 ways to manage debt in retirement
Curb spending
A report released last fall by the Boston College Center for Retirement Research found that most of the increase in borrowing among older households is due to rising mortgage debt, but other unsecured debt, including credit card, student loans and medical debt, is also on the rise.
“There is no one-size-fits-all solution,” said Anqi Chen, one of the report’s co-authors. “Debt counselling and debt consolidation can help, but many people struggle to meet their basic needs and need more resources.”
These days, couples may retire at different times, making retirement planning more uncertain than ever. But long-term debt can have serious repercussions when you no longer receive a paycheck.
There is one solution: spend less.
Nearly four in 10 retirees are spending less on entertainment, and more than a third are taking fewer trips or vacations, according to Nationwide.
“Cutting back on lifestyle expenses is often a difficult decision,” Morrone says. “The change can impact your quality of life and mental health. For many people, the retirement dream includes the freedom to enjoy these experiences, so cutting back on spending can feel like a big sacrifice.”
Read more: The best way to pay off credit card debt
Nearly four in 10 retirees are cutting back on entertainment spending, and more than a third are taking fewer trips or vacations, according to Nationwide. (Getty Creative) (AscentXmedia via Getty Images)
Please continue your work.
It may seem obvious, but delaying your retirement by a year or two can help you put a debt repayment plan in place that can significantly reduce your debt and make life easier later on.
This allows you to continue contributing to your retirement savings and also put off withdrawals from your retirement accounts.
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Use a retirement account
If you’re over age 59 1/2, you can withdraw money from tax-deferred accounts without penalty, but you’ll pay taxes on the amount you withdraw. For many people, this may be the quickest and easiest way to pay off high-interest credit card debt. Given the growth in your retirement account balances over the past year or so, it might make sense to take some of the gains and use them to write off the principal.
Important warning: Using retirement accounts to pay off debt will drain your retirement savings and give up the potential gains on your invested money over the next few decades.
However, if you are still receiving income from work, you may be able to replenish your account balance to some extent.
More info: What is the retirement age for Social Security, 401(k) and IRA withdrawals?
First, make a comprehensive list of all your debts, including balances and interest rates. (Getty Creative) (shapecharge via Getty Images)
Crunching the numbers
Paul Brahan, a financial advisor at Fort Pitt Capital Group in Pittsburgh, says you should start by making a comprehensive list of all your debts, including balances and interest rates. “Prioritize your debts by interest rate and pay off the highest ones first. Still, make minimum payments on the others, and if you have any money left over, put it toward your higher-interest debt. Then tackle the next highest-interest debt on your list,” Brahan says.
Automate monthly payments of recurring bills from your checking account and pay more than the required minimum.
“Even a small increase in your monthly payment can significantly speed up the process of paying off your debt,” he added.
Contact your credit card issuer and negotiate a lower interest rate. “Explain your commitment to paying down your debt and ask if they can lower your interest rate,” says Brahan.
The average interest rate on a credit card in the U.S. is 24.8%, so lowering your interest rate should be a priority.
Buy a 0% interest balance transfer card
If you qualify, apply for a 0% balance transfer card, which lets you move your existing high-cost credit card debt to a new card at a promotional rate of 0% for up to 21 months. There’s a 3% to 5% transfer fee, but the long interest-free period is well worth it.
Nonprofit credit counselors may also be able to negotiate with credit card issuers to lower your interest rate, but they charge a service fee. The Department of Justice has a list of licensed credit counseling agencies on its website.
Dealing with debt before retirement
Before retiring, people should analyze their expenses and determine whether their savings will meet their cash-flow needs, said Carolyn McClanahan, a certified financial planner with Life Planning Partners in Jacksonville, Florida.
“Too many people have no idea how much they’re actually spending and whether their savings will cover those expenses,” she says. “And because many people spend more in retirement, they need to continue to monitor their spending even after they retire.”
With today’s high interest rates, people have plenty of cash to spare, so whether they should pay off their mortgage early depends on the mortgage interest rate, McClanahan said. “If it’s below 3.5 percent, keep paying, but if it’s above 4 percent, you should pay it off,” he said.
Last resort: If your debt hole is truly out of reach, filing for bankruptcy can provide relief and a reset. (Getty Creative) (RealPeopleGroup via Getty Images)
Declaring bankruptcy when leaving the company
Forgive me for broaching the topic of filing bankruptcy, a place no one wants to go in. If you’re in a debt hole with no end in sight, filing bankruptcy can bring you peace of mind and a reset.
Generally, under federal law, retirement accounts are left untouched in bankruptcy: Pensions, 401(k), 403(b), SEP-IRAs and qualified profit-sharing plans are exempt from creditors under the Employee Retirement Income Security Act (ERISA).
Traditional and Roth individual retirement accounts up to about $1.5 million are also protected. The amount is adjusted for inflation every three years. Social Security benefits are also exempt.
However, there are some cases where your 401(k) may not escape bankruptcy intact, such as unpaid federal income taxes, child support or alimony payments, and a bankruptcy attorney can help you navigate this issue.
Kelly Hannon is a senior columnist for Yahoo Finance. She’s an expert on career and retirement strategy and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old to Get Rich.” Follow her at X. Kelly Hannon.
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