Is It Possible to Retire if You Are in Debt?

Why do People Have Debt in Retirement?

Retirement is supposed to be a golden phase in life. It’s when years of hard work are rewarded and things are supposed to get a little easier. That is entirely possible, even if you owe money. The Federal Reserve Bank routinely conducts what is known as a Survey of Consumer Finances. Part of this report measures the number of people with outstanding debt, while in retirement.

For many people, the notion of retirement is a pleasant one. You’ve worked hard your whole life, and now you are going to reap the fruits of your labors. Debt is an ever-present reality that people have to contend with. Mortgage debt, healthcare-related debts, automobile debt, credit card debt, and personal loans comprise the bulk of debts that people owe, even in retirement.

Clearly the ideal situation is to enter retirement with as little debt as possible. This utopian setting would allow retirees to reap the full rewards of their 401(k)s, personal savings, social security payments, and other sources of income. Debt eats into personal disposable income, and if managed improperly can place a tremendous burden on your lifestyle in retirement. For this reason, most financial advisers recommend aggressively paying down debt in the pre-retirement phase, so that your retirement is as comfortable as possible.

Potential Solutions for Managing Debt in Retirement

A 2018 study sheds interesting insights into the levels of debt that are being carried by the average retiree. Figures ranging between $65,000 – $100,000 tend to be the norm, even with lowly Social Security payouts of $1,300 per month. This presents financial challenges to retirees. Without a stable source of income to rely on, retirees are compelled to think outside the box for solutions to debt management. Financial advisers recommend the following solutions for managing debt in retirement:

  • Mortgage debt – if you currently owe a substantial sum of money on your mortgage, in an era of unprecedented low interest rates, consider refinancing to a lower mortgage rate to reduce your overall monthly burden. Known as a Refi, these refinancing options will be particularly beneficial to anyone who purchased fixed or moveable assets on credit before 2018, when interest rates were much higher. Today, in 2020, it is possible to lock in a fixed interest rate at less than 3% with the right mortgage lender. By adopting this approach, more personal disposable income is available for other necessities such as living expenses.
  • Credit card debt – if you find yourself in the unfortunate position of owing a substantial sum of money on your credit cards, with higher interest repayments, help is at hand. There are many ways to roll over credit card debt to 0% APR credit cards for set periods of time. True, there is a commission for the amount of debt that needs to be rolled over onto a new card, but the fact that there is zero-interest repayment will save heaps of money in your retirement. This is highly recommended with the right credit card provider.
  • Debt consolidation – one of the main problems with debt is that it accumulates from many different sources. When all of this debt is combined, it’s usually a sizeable amount that we would rather not be dealing with. One way to reduce the burden of debt is through debt consolidation loans. You simply sum up all the debt that needs to be repaid every month, and the interest that is repayable on that debt.

Next, search for debt consolidation loans that will cover all the outstanding personal loans, credit card debts et cetera, at a lower rate of interest than you’re currently paying. The cost savings, convenience of single monthly payments to a single loan provider, and easier-to-manage nature of debt consolidation loans are worth the effort. Have a look for more information about how to pay off debt in retirement.

  • Reduce expenses – during your productive years, it’s much easier to maintain a large property than it is in retirement. As you reach retirement, your ability to generate income typically diminishes and is fixed at a certain level. Before you hit this point in your life, consider downsizing from a big home to a condo, apartment, or retirement community. The less expense you have to incur the better. The savings can be re-routed into repaying your debt, reducing your financial burden, and your stress levels.

By the Numbers: How Are Older American Doing with Debt?

CNBC author Greg Iacurci penned an article titled, ‘Debt among oldest Americans skyrockets 543% in two decades.’  Among the key points listed are an increase of 543% in date for American 70+ years of age from 1999-2019. The declining social safety net has adversely affected seniors, and the absence of cash flow can be devastating in retirement. By 2019, the total debt burden for American 70+ years of age increased to $1.1 trillion, while debt for people in their 60s increased by 471% to $2.14 trillion. These numbers are particularly troublesome, but there are pervasive for all age groups. Any time debt exceeds 40% of income, it is deemed troubling, and the number of people in this predicament is steadily rising.

By adopting the strategies listed above, it is possible to reduce the ballooning debt problems faced by retirees in modern times. People are living longer, which means that their money needs to last longer. This is pushing the retirement age later into the 60s, with a growing number of people choosing not to retire if they don’t have to. Fortunately, it is not necessary to retire with no debt whatsoever. That’s an ideal situation which rarely comes to pass. Provided the cash flow is sufficient to cover expenses, debt is really just a part of life that we all have to deal with.

About Retire Early Lifestyle

Billy and Akaisha Kaderli retired three decades ago at the age of 38 and began traveling the world. As recognized retirement experts and internationally published authors on topics of finance and world travel, they have been interviewed about retirement issues by The Wall Street Journal, Kiplinger's Personal Finance Magazine, The Motley Fool Rule Your Retirement newsletter, nationally syndicated radio talk shows and countless newspapers and TV shows nationally and worldwide. They wrote the popular books The Adventurer's Guide to Early Retirement (Your Simple Path to FIRE) and Your Retirement Dream IS Possible.
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