debt in retirement

Average Retirement Debt for Older Americans is Higher than Ever Before

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What to Do if You Fear Your Debt Will Get in the Way of Your Retirement Plans

When it comes to retirement, the most common worry among workers tends to be whether they’re saving enough. However, with new reports showing that the average retirement debt is on the rise, many workers nearing retirement have an added concern to consider. According to the Federal Reserve Bank, Baby Boomers are carrying more debt into retirement than ever before.

Debt is often a serious source of contention and stress and carrying debt into retirement could be quite detrimental to achieving retirement dreams and goals. It can affect a retiree’s ability to pay necessary living expenses, keep their home, and even influence whether or not they can afford independent- or assisted-living facilities, should their health prevent them from living alone.

If you’re concerned about bringing debt with you into retirement, here’s how to tackle it ahead of time so that your retirement dreams can become your retirement reality.

Retirement Debt by the Numbers 

The data referenced above from the Federal Reserve Bank shows that the total debt burden for older Americans has increased dramatically, especially for the time period between 1999 and 2019. In that time, debt levels have risen by 471% for those in their 60s and a whopping 543% for those over 70. While other age groups have also seen significant increases in debt levels, the increases for older Americans are especially pronounced. 

The Boston College Center for Retirement Research reported in an earlier survey that 8 in 10 middle-income Boomers currently have some level of debt. The report also showed that a quarter of Boomers surveyed recorded having more than 20 years remaining on their mortgages, and 3 in 10 reported that they devote more than 40% of their monthly income to paying off debt. While more than half claimed that they intend to retire debt-free, the reality is that only one-quarter of retired Boomers are actually able to do so.

Here’s the breakdown of average debt by age, as reported by the Federal Reserve:

  • Ages 18-23: $9,593
  • Ages 24-39: $78,396
  • Ages 40-55: $135,841
  • Ages 56-74: $96,984
  • 75 and older: $40,925

It’s easy to see how these levels of debt could negatively impact a retiree’s standard of living, even requiring more working years than originally planned.

Why Debt is Increasing

You may be thinking that debt levels are increasing simply as a result of poor choices, such as racking up credit card debt, but the data tells a different story. The primary sources of debt in retirement can be attributed to homes, education, and medical bills.

Mortgage Payments

The consistent increase in real estate prices and the longer-term mortgages that accompany home purchases today mean that seniors are often still making monthly mortgage payments even after they retire.

Student Loans

Often, when we think of student loan debt, we think of Millennials. However, a recent report released by the Government Accountability Office showed that Boomers are the fastest-growing group with student loan debt. This means that there is a significant group of retirees who are still paying off their student loans – or those taken out for their children – well into retirement.

Medical Bills

While most retirees depend on Medicare to cover their medical expenses, Medicare coverage can be restrictive and limiting. It doesn’t cover every medical expense or procedure, leaving a large portion of the retired population with thousands of dollars’ worth of unexpected – and unplanned – medical bills.

Here is a rough breakdown of debt by category for people between the ages of 40 and 69:

  • Auto Loans: $5,000
  • Credit Cards: $4,000
  • HELOC: $2,000
  • Mortgage: $47,000
  • Student Loans: $4,000
  • Other: $2,000

So, How Worried Should You Be?

As previously mentioned, dealing with debt can cause an incredible amount of stress. This is especially true if you’re making debt payments on a fixed income and you cannot generate new income – a scenario many retirees face. Getting ahead, or even simply living comfortably, can be difficult to achieve with a burden of debt on your shoulders.

If you’re still working and a significant amount of your income is directed toward debt payments, rather than being used to solidify retirement savings or pay for living expenses, you could be at risk of your debt consuming your retirement dreams.

SEE ALSO: Retirement Planning in A Volatile Market

 

Additionally, carrying large amounts of debt could seriously impact your credit score in a detrimental way. This could cause challenges when it comes time to apply for independent- and assisted-living facilities, where credit checks are a typical part of the application process. Even if approved, having to pay off debt might make it impossible to afford such a facility, as adult care facilities often cost tens of thousands of dollars per year, depending on the level of care you need.

Steps You Can Take to Tackle Debt in Retirement 

If you find yourself retired or nearing retirement with a debt load that makes you nervous, there are steps you can take to ensure that your debt doesn’t destroy your retirement plans:

  1. The best way to reduce your debt balance is to stop adding to it. While this isn’t always possible, a good way to lower your temptation to use credit cards is to remove them from your wallet and keep them “hidden” somewhere else.
  2. Make a list of all of your debts and prioritize paying off those with the highest interest rates first, or use the snowball method and pay off your smallest balances first.
  3. Don’t Worry About Your Mortgage. While entering retirement mortgage-free is a goal for most people, it’s likely that the interest rate on your mortgage is a quarter of the rate charged by credit card companies. Additionally, credit card interest isn’t tax-deductible like your mortgage is. So, try to worry a little less about paying off your house and focus on your credit card and other high-interest debts first.
  4. If you really do want to tackle your mortgage debt, it might seem scary to increase the size of your loan. However, since your mortgage interest rate is likely much lower than what you’re paying on other loans, it might behoove you to consider cash-out refinancing on your mortgage. You can then use that cash to pay off your credit cards and other expensive debt and ultimately come out ahead, even with a larger mortgage.
  5. Transfer Your Debt. It may benefit you to take advantage of low introductory credit card balance transfers. Some credit card companies will allow you to transfer higher-rate balances to a new card and get zero percent interest for a year. If you do this, make sure you have a plan to pay off the balance during that interest-free period, otherwise, you run the risk of compounding your problems by running up new charges on the old account.
  6. Work Longer. While it may not be ideal, consider working longer or getting a part-time job to help you lower your debt. Each year you continue working is another year that your retirement nest egg can grow – and more income that can ultimately be used to pay off those debt balances.
  7. Pay on Time. It is essential to pay your bills on time. Late payments result in fees that will only increase your debt balance and hurt your credit score. If you think you might start falling behind on payments, talk to your creditors about hardship or forbearance options.
  8. Put Medical Expenses on a Payment Plan. If you can, try not to charge medical expenses to credit cards unless you have a feasible plan for paying them off. Talk to your medical providers about assistance plans to help you pay your bills. Try to avoid in-office financing through doctors, dentists, and other medical providers, however, as it can often be more expensive in the long run than personal loans.
  9. Establish an Emergency Fund. This can be especially difficult to do when you’re focusing on paying down debt, but having an emergency fund can help you avoid tapping credit cards should unexpected expenses come up.
  10. Reduce Your Expenses. Create a budget and stick to it. Work on reducing any unnecessary living expenses by creating a conservative budget to live within your means.
SEE ALSO: Ways to Reduce Your Household Expenses

 

  1. Practice Saying No. While it might be difficult to say no to loved ones who need your help, be sure to think twice before doing things such as co-signing loans or going further into debt to help adult children or grandchildren. It might feel good to help in the moment but, by doing so, you risk putting yourself in an insecure financial situation.
  2. Ask for Help. If you’re seriously struggling to meet your financial obligations, try contacting a non-profit credit counseling service. They can help you develop a personalized plan to deal with your current financial situation and get you back on firm financial footing.
  3. Retain Your Savings. It may be tempting to cash out your 401(k) and other retirement accounts to pay off your debt, but try to avoid this. For starters, if you’re under the age 59½, you’ll be charged an additional 10% penalty in addition to income taxes for any withdrawals from 401(k) and traditional IRA accounts. Furthermore, taking large distributions from a qualified plan could result in you landing yourself into a higher tax bracket, which could ultimately hurt you.

 

Final Thoughts on Debt in Retirement

For most Americans, accumulating debt is an inevitable part of life, so it’s nothing to be ashamed of. Of course, if your earning years are behind you – or they’ll be ending soon – you’ll need a plan. The sooner you develop a strategy for dealing with your debt, the easier it will be to tackle and the likelier you are to achieve the retirement of your dreams. If you’re in need of motivation or you’re unsure where to begin, try the NewRetirement retirement planner to see what your future finances will look like both with and without debt.

Here at Peak Financial Freedom Group, our number one priority is helping you achieve the dream retirement you deserve. If you’d like professional assistance establishing a plan that acknowledges your debt and looks to your future retirement dreams, consider scheduling a meeting with one of our financial advisors today.

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