Retirement finance used to be simple: When you retired, so was your mortgage and the remainder of your debt. That way, you’d have plenty of free cash from your pension and Social Security to do things like travel to exotic places and eat out.
But the growing cost of nearly everything from college to healthcare has put the kibosh on that widely desired goal for millions of retirees. Now more Americans than ever are dealing with debt in their golden years, and the debt is coming from a variety of sources.
According to a recent analysis by MagnifyMoney, 42% of Americans age 56 to 61 carry debt, with an average debt load of more than $17,000. Although credit card debt among families aged 55 and older is lower than younger age groups, it’s still on the rise: A recent survey conducted by YouGov for CreditCards.com found that some 62% of those surveyed aged 55 and older are holding credit card debt, while 47% still have mortgage debt.
Student loans also are a growing burden for some. While still a relatively rare form of debt for retirees, federal college debt held by this group grew to $18.2 billion in 2013 from $2.8 billion in 2005, according to the most recent Government Accountability Office report. More than 700,000 households headed by those age 65 and older hold these loans.
Debt is creeping onto the balance sheets of older households for a number of reasons. For starters, living expenses have climbed faster than incomes for many middle-class families. Households haven’t been able to keep up with increases in medical care, college and home expenses. When adjusted for inflation, wages have only grown a paltry 0.5% since 2010, reports the Bureau of Labor Statistics. The cost of living over that period has grown a cumulative 12% during that time.
When income lags inflation, people may need to borrow to make up the difference, or put ongoing expenses on credit cards. Higher debt burdens are also why an increasing number of families have not paid off their mortgages by retirement age. Mortgage debt for households age 55 and older increased 8 percentage points between 2011 and 2013 alone, reports the Center for Retirement Research at Boston College. Now some four in 10 households in that age group have housing debt.
Here are a few practical things that retirees or pre-retirees with debt on the books can do to reduce the burden in retirement.
Target Your Highest-Cost Debts Aggressively. This usually means drawing a bull’s-eye on credit card debt: The average card APY remains above 16%, according to creditcards.com. Remember that the more debt you rack up and push into another month, the more this debt compounds. And you also could be nailed with late and over-limit fees. Pay off the highest-interest cards and small balances first. Keep in mind that “plastic” debt is the least desirable debt to have.
Reduce Spending. Here’s where you have to be unabashedly honest. Is your spending level sustainable in retirement on a fixed income? You will have to do a retirement spending inventory and see where you can cut the fat. There may be some surprises, but you can likely find savings.
“Everybody has a different idea of a standard of living,” says Carolyn McClanahan, certified financial planner with Life Planning Partners in Jacksonville, Florida. “You need to tackle spending. What’s not necessary? Shopping, travel’ and frivolous spending can be killers.”
When you’ve identified areas where you can reduce spending, McClanahan advises that you divert those savings toward paying off debt and create either a spreadsheet or worksheet that details your spending.
Look at the whole picture of your spending, including taxes, insurance, healthcare, entertainment, food, household expenses, maintenance and travel. Here’s a helpful worksheet.
Examine Your Student Loan Repayment Options. If you’re paying off federal student loans, there are a number of repayment and consolidation options that can lower your total costs. But you have to navigate the government’s repayment plans to find the best option for you. Find more information here.
A good place to start is the government’s income-based repayment plans, which allow you to adjust loan payments based on current income. Although they won’t immediately lower your balance, you may be able to get a lower monthly payment. You can also consolidate several loans. Private loans can also be refinanced, but you may have to go through a third party to do so if your bank won’t offer you better terms. Explore every option that will help you repay the loans. It’s well worth the homework.
Refinance Your Mortgage. While mortgage rates are still reasonably low, they are expected to rise. According to Bankrate.com, the average 30-year, fixed-rate loan was 4.73% at time of this writing. But don’t just focus on the rate. You can make additional payments to principal to pay off the loan sooner. For example, you’d pay an average 4.16% rate on a 15-year loan and cut years of interest and payments off the note.
When you simply add extra money to your monthly principal payment, you don’t need to take out a new mortgage, which can involve thousands of dollars in closing fees. It’s a matter of simple arithmetic to create your own “accelerated” payoff schedule. That will ease your debt burden.
McClanahan sees a paid-off home as a “safety net” for most retirees. Home equity can also be used in obtaining reverse mortgages if the cash is needed. The bottom line with mortgage debt is to find the best way to pay it off in the shortest period of time. Here’s a calculator from Bankrate.com that can help you do the math and see the savings from adding additional payments.
Work Longer. Although McClanahan insists that her clients retire debt-free, it’s not always possible.
“It’s challenging to consider retirement without considering debt,” she adds. Working longer allows you to not only have more disposable income for a longer period of time, but you can sock away more money in your retirement accounts. Recent research suggests that working an additional six months is the equivalent of saving an additional 1% over three decades.
You can contribute up to $18,500 in a 401(k)-type account in 2018; add another $6,000 as a “catch-up” contribution if you’re older than 50. The advantage of working longer is that you get a side bonus for delaying Social Security: If your planned retirement age is 66 and you wait until 70, your benefit will be substantially higher. In the interim, you’ll have more time–and disposable income–to pay off your debts.
You’ll need to ask some important questions to plot the best debt-reduction strategy. How much will debt repayments eat into your retirement income? Will your post-retirement income support your current spending and lifestyle? If not, you’ll need to make some changes.
If you’re facing crippling debt, you’ll need to “dig down deep to address spending to find out what got you into trouble in the first place,” McClanahan adds. Many financial planners and debt counselors can help with this issue along with “financial therapists” who focus on the psychology of overspending. Debt counselors can also help you set up debt repayment plans.
The best way to avoid problems if you’re eyeing retirement? Run the numbers. It’s better to plan ahead than to fall behind when you’re not working anymore.