July 23, 2024
Finance

Many people retire in debt. Here’s how to manage it.


Horse sense says that retiring with debt is a bad idea.

Mortgage and credit card debt, however, are a cold reality for over a quarter of retirees, according to new research from the Nationwide Retirement Institute,

Many are “feeling the financial heat with inflation, which may be exacerbating the debt some retirees are still carrying,” Mike Morrone, Nationwide Insurance’s vice president of business development, told Yahoo Finance.

The sober findings: Nearly a third of retirees expect to be less financially secure than their parents and grandparents were in their retirements. And 1 in 5 fret about making payments on their monthly bills right now.

These are the kind of concerns that cause people to make short-sighted decisions based on emotion, Morrone said, such as draining retirement accounts too quickly.

That has serious implications for a retirement that might stretch three decades, but there are strategies to implement to chip away at your debt and preserve your nest egg.

NationwideNationwide

Nationwide (Nationwide)

While much of the growth in borrowing among older households is due to rising mortgage debt, other unsecured forms of debt — such as credit cards, student loans, and medical debt — have also increased, according to a brief published last fall from the Center for Retirement Research at Boston College.

“No one-size-fits-all solution exists,” said Anqi Chen, one of the brief’s co-authors. “Debt counseling and consolidation may help, but many struggle to meet basic needs, so they need more resources.”

Spending in retirement is murkier than ever these days with couples retiring at different times. But lingering debt has serious repercussions when you’re no longer earning a paycheck.

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.

“Reining in lifestyle spending often means making tough decisions,” Morrone said. “This shift can impact their quality of life and emotional well-being. For many, the retirement dream includes the freedom to enjoy these kinds of experiences, so scaling back can feel like a big sacrifice.”

Mountain range behind is lit by the morning lightMountain range behind is lit by the morning light

Nearly four in 10 retirees are spending less on entertainment and more than a third are taking fewer trips or vacations, according to Nationwide. (Getty Creative) (AscentXmedia via Getty Images)

It may seem obvious, but by delaying retirement for a year or two you can create a debt pay-off plan and make a serious dent in your debt that will smooth the road for later on.

This can also enable you to continue making contributions to retirement savings, and put on hold taking withdrawals from your retirement accounts.

If you’re over 59½, you can pull from your tax-deferred accounts penalty-free, although you will pay tax on the amount you withdraw. For many people, this may very well be the fastest and easiest way to wipe out high-interest credit card debt. Given the run-up in retirement accounts in the past year or so, it might make sense to take some profit and use it to wipe the slate clean.

An important warning: Using your retirement accounts to pay down debt depletes your retirement savings, and you jettison the possibility for potential returns on those invested dollars in the coming decades.

If you’re still earning income from a job, however, that might allow you to replenish your account to some degree.

Home finance, budget and couple with laptop for real estate, mortgage or house financial paperwork analysis, planning and teamwork. Senior people reading investment report, contract or tax managementHome finance, budget and couple with laptop for real estate, mortgage or house financial paperwork analysis, planning and teamwork. Senior people reading investment report, contract or tax management

Start by creating a comprehensive list of all your debts, including their balances and interest rates. (Getty Creative) (shapecharge via Getty Images)

Start by creating a comprehensive list of all your debts, including their balances and interest rates, Paul Brahan, a financial adviser at Fort Pitt Capital Group in Pittsburgh. told me. “Prioritize your debts by interest rate, paying off the most expensive ones first. Still make minimum payments on all other debts while directing any extra cash you can at the high-interest one,” he said. “Then move on to the next highest interest debt on your list.”

Automate your monthly payments from your checking account for recurring bills and pay more than the required minimum.

“Even a small increase in your monthly payments can significantly speed up your debt payoff,” he added.

Contact your credit card issuers and attempt to negotiate lower interest rates. “Explain your commitment to paying off the debt and see if they’re willing to reduce the rate,” Brahan said.

The average credit card interest rate in America is a breath-catching 24.8%, so trimming your interest rate should be a priority.

Sign up for a 0% balance transfer card, if you qualify. These allow you to move your existing high-cost credit card debt over to a new card with a 0% promotional rate lasting as long as 21 months. There’s a 3-5% transfer fee, but that long interest-free period is well worth it.

A nonprofit credit counselor may also be able to negotiate with your credit card issuers to give you a break on rates, but you will pay a fee for the service. The Justice Department website provides a list of approved credit counseling agencies.

Before people retire, they should analyze their spending to determine whether their savings will support their cash flow needs, Carolyn McClanahan, a Certified Financial Planner at Life Planning Partners in Jacksonville, Fla, told me.

“Too many people have no idea how much they are really spending and whether their savings would support that spending,” she said. “Also, when they retire, they need to continue to monitor spending as many people increase spending when they retire.”

With current high interest rates, people are making good income on cash, so whether or not you should pay off your mortgage early depends on your mortgage interest rate, McClanahan said. “If it is 3.5% or lower, I would continue making payments, but if the mortgage is more than 4%, it should be paid off,” she said.

A mature Caucasian man is shown sitting at his desk at home, looking troubled and stressed as he goes through his paperwork, likely related to his billsA mature Caucasian man is shown sitting at his desk at home, looking troubled and stressed as he goes through his paperwork, likely related to his bills

Last resort: If you really see no end in sight to your debt hole, filing for bankruptcy protection can provide relief and a reset. (Getty Creative) (RealPeopleGroup via Getty Images)

Forgive me for taking this topic to a place no one really wants to go — filing for bankruptcy. If you really see no end in sight to your debt hole, it can provide relief and a reset.

In general, retirement accounts are untouchable during bankruptcies under federal law. Pensions, 401(k)s, 403 (b)s, a 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 worth up to roughly $1.5 million are also protected. The dollar amount is adjusted for inflation every three years. Social Security payments are also exempt.

There are a few times when your 401(k), though, may not escape unscathed during bankruptcy, including if you have unpaid federal income taxes or unpaid child support or alimony. A bankruptcy attorney can sort this out for you.

Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist, 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 on X @kerryhannon.

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