Planning For A Debt Free Retirement


March 11, 2015 – By Brian O'Connell

Retired couple calculating debtToo many of us are retiring before we get to retire our debt.

“Americans are nearing retirement or living in retirement while carrying greater amounts of mortgage debt, student loans or credit card balances,” TIAA-CREF says. “If you’re nearing retirement and still paying down debt, how should you plan to juggle both? How can you avoid racking up more debt after you stop working, when generally you can’t count on a salary increase to help pay down your obligations?”

The answers to those questions aren’t easy, but Americans retiring with ample debt need to answer them.

Why the sense of urgency? Because so many workers nearing retirement have accumulated too much debt.

Data from the Employee Benefits Retirement Institute show that 64% of households headed by Americans 55 or older have significant household debt, with almost 10% reporting household debt of 40% or more (a sure sign of financial trouble, EBRI says).

That puts much of the nation at a 23-year high when it comes to excessive debt in households nearing retirement.

“The percentages of families whose debt payments are excessive relative to their incomes are at or near their highest levels since 1992,” EBRI notes. “Consequently, even more near-elderly and elderly families are likely to find themselves at risk for severe changes in lifestyle after retirement than past generations.”

The key to mitigating, or better yet, eliminating debt in retirement? It’s not exactly a state secret.

“Start now — don’t wait to address your debt situation in retirement,” says Kent Allison, national leader of PwC’s employee financial wellness practice. “You will have far less options after you retire.”

The best way to do that is to examine your budget immediately. “First and foremost, start living within your means,” Allison advises. “Better yet, try to bring your expenses down to a level that will be below your retirement income now.” He also recommends building an emergency fund to deal with unexpected expenses, such as health care costs. “Medical expenses are one of the biggest contributors to bankruptcies in retirement,” Allison says.

If you have entered your golden years and still have debt, you’ll need to continue to pay it down. And that may well mean finding creative legal ways to add income and reduce debt burdens, says Katie Ross, education and development manager for American Consumer Credit Counseling.

She offers the following advice:

  • Get a part-time job to help supplement your earnings.
  • Contact your creditors and see if they will negotiate a lower interest rate.
  • Sell household items to help pay back debt
  • Cut, cut and cut more. Eliminate or reduce all of those unnecessary extra expenses; cable, entertainment, subscriptions, and other costs.

Also, try what Ross calls the “snowball method” of debt reduction: “You tackle your smallest balance first and pay as much as you can on it, while still paying the minimum on your other balances,” she explains. “Once you tackle this balance, you work on the next and so on.”

Alternatively, you can try the “avalanche” method, in which you pay off debt with the highest interest rate first, since this debt costs the most over the long run. “Once you pay this off you move to the balance with the next-highest interest rate until all are paid off,” Ross says. “The decision on which method is best is a personal one and one that only you can make.”

The end game here isn’t an easy one, but it is easily identifiable. “In a perfect world you’d have zero debt upon retirement, or you will very shortly after that magical retirement date,” says Michael Brady, president of Boulder, Co.-based Generosity Wealth Management. “That being said, I’m a big believer in getting to the core behavioral issues that led to still having that debt upon retirement.”