How to Manage Debt When You're Retired
Most people think of debt as something that younger people deal with. By the time you retire, you should be out of debt, right? Not necessarily. There are plenty of reasons why you may carry debt into retirement, or even create new debt while retired.
If you purchased a new home or car shortly before retiring, you might be dealing with the monthly payments. An increasing percent of seniors still have a mortgage on top of other debts. If you’ve had medical issues that weren’t completely covered by insurance, that can create debt.
Because of your limited income (and reduced ability to generate additional income), debt can be that much harder to deal with once you're retired, but it's not a lost cause. Here are a few ways to successfully manage debt when you’re retired:
Know How Much You Owe
Create a spreadsheet to help you see all of your debt as a whole. Create a five-column sheet that shows your creditor’s contact info, the type of debt, your monthly payment, your total balance, and your interest rate.
This will help you determine what needs to be paid first and help you get the big-picture view of your debt situation. The last thing you want to do at this stage is create additional costs through late fees and other avoidable charges.
Pay Off the Right Debt First
As you’ve probably figured out by now, not all debt has the same impact on your financial situation and credit score. Your mortgage, for instance, is secured, provides an asset that grows over time, and has some tax-deductible benefits. You probably don't need to prioritize paying off your house at this stage. Credit card debt, on the other hand, is unsecured and doesn't represent an asset with increasing value. It's just a burden on your bottom line.
Work on paying off your highest interest debts first, like your credit card balances. This will save you money over time. Your mortgage may be at a 6 percent interest rate while your credit cards can be as high as 18-24 percent. Plus, credit card debt can impact your credit score, your ability to get loans or lines of credit in the future, and have no other benefits like tax-deductions.
Downsize as Much as Possible
If you no longer need all the space you have, consider downsizing. Selling your large home to purchase a smaller one can reduce or eliminate your monthly mortgage payment. You might even walk away with extra cash to pay off other debts or put into savings.
As you pack for your move, consider getting rid of items you no longer need or want. They can bring in extra cash. Artwork, electronics, furniture, and other household items can all be valuable assets that can be used to reduce your debt.
Decide What Debt to Keep
As previously mentioned, some debt has benefits, like reducing your tax liability. But there can other benefits to consider as well. If your interest rate on a loan is low and the interest you earn on an investment is high (or at least higher than your loan interest), you’ll come out ahead by investing your money instead of paying off the debt. You can then use your investment payout to pay your loan and have cash left over.
Another reason to hold on to debt is to reduce your risk. You don’t want to reduce your savings to pay off debt; you may need that money for an emergency or even simple living expenses.
Get a Job
Taking a part-time job in retirement can help you manage and reduce your debt. Jumping back into the workforce may not be an exciting prospect once you've decided to retire, but you can put any of that non-retirement income towards your debt, reducing your monthly payments quickly and bringing your budget into a positive place.
Get Out of Debt Before You Retire
If retirement is on the horizon, do yourself a favor and make a plan to be debt-free before you officially leave the workforce. The sooner you start, the easier it'll be to implement an effective debt repayment plan that fits your timeline.
If you need help making that plan a reality, MMI offers budget-friendly debt management plans that can help you shake off your credit card debts once and for all.