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Managing Debt in the Face of Retirement

Ashley Altus, CFC
Ashley Altus is a personal finance writer who covered financial planning with a focus on money management and household finance for OppU. She is a Certified Financial Counselor through the National Association of Credit Counselors. Her work has appeared with O, the Oprah Magazine; Cosmopolitan Magazine; The Smart Wallet; and Float.Today.
Read time: 6 min
Updated on November 30, 2022
older woman pondering how to manage debt in the face of retirement
Understanding your cash flow and eliminating high-interest debt will help you properly prepare for retirement.

Paying off the house and building up savings is often the golden standard for retirement, but unfortunately, this isn’t reality for many Americans.

About 61% of Americans age 65 and older hold debt, according to the Congressional Research Service. Adjusted for inflation, the median household debt for elderly households was about $35,000.

There’s no one-size-fits-all plan to become debt-free before retirement. But these tips to manage your cash flow, replace income from your job, eliminate high-interest debt, and assess your mortgage, can help to set you up for success.

When Do People Retire?

Depending on your preparation and reliance on different income sources during retirement, the financial impact of the coronavirus may push back your retirement date.

“As policymakers continue to push down interest rates to spur the economy, it has the reverse effect on savers,” says Dan Doonan, executive director of the National Institute on Retirement Security. “If you are a retiree and you have money saved, it’s hard to generate a decent level of income [when interest rates are low].”

What do your retirement accounts say?

It’s increasingly common for Americans to have a defined contribution retirement plan, such as a 401(k) or 403(b), for which employees set aside money, rather than a defined benefit plan, such as a pension, where your employer pays out. In a defined contribution plan, the employee chooses how much money to set aside and the value of the plan wavers with the market.

Recent market fluctuations due to the coronavirus also may not shake your retirement plans.  Staying calm and being patient are the most important points to remember during times of economic turmoil, says Rui Yao, Ph.D., a certified financial planner, professor, and director of graduate studies in the department of personal financial planning at the University of Missouri.

“If people consider what they have accumulated by now is adequate, now might be the perfect time to retire,” Yao says. “If you have money in investments, don’t cash out. The market will come back and you don’t want to withdraw from the bottom.”

Deciding the right time to retire is one of the biggest decisions people make. If you’re in debt, weighing all the financial factors can help determine when is the best time to retire.

What to Consider Before Retiring

  1. Understanding your cash flow

Managing your cash flow is key to creating a retirement budget plan.

“You’ll want to solve backwards,” says Michael Foguth, founder of the Foguth Financial Group. “What’s your income in retirement and how much will you need to live.”

Often, older Americans will plan to live on a fixed income from a combination of a Social Security, personal savings, as well as a pension or employer-sponsored retirement savings plan. But only 7% of Americans will receive income from all three sources, says a National Institute on Retirement Security study.

After adding up all your sources for retirement income, it’s equally important to add up all your debts. Paychecks stop coming during retirement, but many of your other expenses, such as mortgage debt, credit card debt, car loans, and regular daily expenses, will continue. With this in mind, a debt payment that was manageable before retirement may take up a bigger percentage of your fixed income.

“Be prudent and compare accumulated savings and the present value of your spending carefully,” Yao says.

  1. Replacing income from your job

Before you retire, you’ll have the option to fall back on your income from the workforce.

While no one knows exactly how long they will live, mapping out your cash flow can help assess your spending patterns to determine if you’ll have enough savings to retire, or if it’s better to continue working.

“We like to think about your financial picture in retirement as replacing the income you’re not going to receive anymore from your job,” Doonan says.

For example, if you want to retire at 65 years old, and believe you’ll live to reach 100 years old, you’ll have 35 years of retirement to fund. If you work two more years, that’s two less years of living on a fixed income.

Many Americans will stay in their job longer once they figure out they don’t have enough money stashed away to retire. According to the Transamerica Center for Retirement Studies, 69% of Baby Boomers expect to work past the age of 65, have already worked past then, or don’t plan to retire. You may have to work more years before you can retire to help pay down debt, which will provide relief during retirement.

“After doing that calculation, if you don’t have the luxury to retire yet, delay retirement and stay in the workforce a bit longer,” Yao says. “When you detach from the workforce, it can be difficult to go back to work after retirement.”

The Federal Reserve Bank of San Francisco found evidence that older workers experience age discrimination, which may make it harder for the elderly to renter the labor force.

  1. Eliminate high-interest debt

It’s common for soon-to-be-retirees to have debt, but not all types of debt are the same. If you have a lot of credit card debt or other high-interest debt, it can strain your savings during retirement. It’s best to eliminate these types of debt before retiring or you may be forced to dedicate a larger portion of your fixed income toward repayment.

“The only source of money you can get in retirement is from reducing your spending or you’ll have to spend your future savings,” Yao says.

Student loans should also be a priority to pay off before retirement as to not take away from Social Security benefits. The government can garnish Social Security benefits up to 15% on defaulted student loans, according to the U.S. Department of Labor.

Student loan debt is the fastest growing debt for those 60 years and older, according to the Consumer Financial Protection Bureau. More than 2.8 million Americans over the age of 60 had $23,500 in student loan debt they were dealing with. Many times this debt came from their childrens’ education.

  1. Assess your mortgage

Debts with a fixed low-interest rate, such as a mortgage, are considered more manageable for those on a fixed income than other types of high-cost debt.

It may be better to invest the money than to put extra cash towards your mortgage. As you near the end of your mortgage term, you’re primarily paying the principal. Only the interest you pay on the loan is tax deductible.

“It’s not a necessity to pay off your house fast, just make sure the payment works with your budget,” Foguth says. “If you have high-interest debts, it’s more important to pay those off first.”

Depending on your financial situation, another tool for those over the age of 62 to consider is a reverse mortgage to gain extra income. If you’ve built up equity in your home, you can convert it to a tax-free loan without selling your home. Instead of making a monthly payment to your mortgage lender, the lender pays you. The money can be used for anything. Before taking out a reverse mortgage, consider the fees, additional interest you’ll owe, and what you’ll be leaving behind to your heirs.

Many seniors also opt to downsize during retirement. This may be another way to reduce mortgage payments.

Debt-free before retirement

Retiring with debt can not only impact your financial well being, but also prevent you from fully enjoying this time in your life. Even if you can't retire debt-free, eliminating some of your debt can make a huge difference.

Article contributors
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Dan Doonan is the executive director of the National Institute on Retirement Security (NIRS). With the Board of Directors, Doonan leads the organization’s strategic planning, retirement research, and education initiatives.
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Michael Foguth is the founder of the Foguth Financial Group in Brighton, Michigan specializing in retirement planning and working with clients, pre- and post-retirement, who desire to protect their money and ensure it is there when they need it most. He and his team pride themselves on building and maintaining long-lasting relationships with their clients. Foguth graduated from Central Michigan University and is a member of the Forbes Finance Council.
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Rui Yao, Ph.D., is a certified financial planner, professor of personal financial planning and director of graduate studies in the department of personal financial planning at the University of Missouri. She received her doctoral degree from The Ohio State University. Her research interests focus on individual and household financial decision-making and well-being. Specific topics include retirement preparation, saving and investment behavior and motives, risk tolerance, debt management, and consumption patterns.

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