The Best Ways To Pay Off Your Debt In Retirement
Baby boomers are retiring with more debt than any other generation before them. A 2018 study showed that the average retiree is carrying between $65,000 to $100,000 worth of debt into retirement. This fact is made worse when one considers that the average social security benefit is only around $1,300 per month.
Debt in retirement can prove to be particularly burdensome because the individual no longer has a stable source of income. For those who’ve planned and saved well, this may be of little or no issue. However, unfortunately, that isn’t the case for a vast number of individuals.
Luckily, there are several options available for retirees who are looking to pay off or better manage their debt.
1. Debt Consolidation
Debt consolidation involves taking out one loan to pay off all outstanding debts, leaving the borrower with a single monthly payment. This solution can be particularly helpful for individuals who carry a large amount of high-interest debt, such as credit cards or payday loans.
- Lower Interest Rate: Most people will qualify for an interest rate far below that of credit cards and other high-interest debt
- Easier To Track: This is because all debts are combined into a single monthly payment, it makes it much easier to keep track of one’s payment obligations
- Lower Monthly Payments: One of the main benefits of a lowered interest rate is lowered monthly payments. This depends somewhat on the term of the loan, since short terms may increase monthly payments
- Lower Overall Cost: Another major benefit of a lowered interest rate is a lower overall cost. The less interest that is charged, the cheaper the loan will be overall
Certain debts, such as a mortgage or a car loan, can be refinanced for a lower interest rate. This is especially true for anyone who has taken out a mortgage or car loan before 2018, when interest rates were much higher than they are now. Due to the pandemic, interest rates have dropped to near-zero levels, offering many individuals a great opportunity to refinance.
- Lower Interest Rates: The whole point of refinancing is to take advantage of current market conditions and lower one’s interest rate
- Increased Payoff Term: Because refinancing is essentially the replacement of one loan with another one at a lower interest rate, the loan term can often be extended as well. This can result in smaller monthly payments, which may be tremendously helpful for some people
- More Manageable Monthly Payments: A decreased interest rate will result in smaller monthly payments, which will help those who were previously struggling to make their debt payment obligations
Downsizing to a smaller house or apartment is another way to manage debt in retirement. This is especially true if the retiree is still paying off an expensive mortgage. Even if they aren’t, downsizing will leave more money in one’s bank account at the end of the month, money that can be used to pay off debts.
- Saves Money: Switching to a smaller living arrangement can result in significant savings
- Helps Pay Off Debt Faster: The savings gained from downsizing can then be applied to paying down one’s debt. The smaller the debt is, the easier and less expensive it’ll be to manage
4. Better Budgeting & Expense Reprioritization
It doesn’t matter how much debt consolidating and refinancing one does. If you don’t have a solid, realistic budget to work with, you’re unlikely to have financial success.
Many people simply overestimate their access to financial resources when entering retirement, only to find that things are much tighter than they had anticipated. Anyone who finds themselves in this scenario must take a hard look at their financial situation and reprioritize certain expenses.
- Saves Money: By reducing one’s overall expenses, more money can be put towards paying off debt or applied to one’s savings account
- Lowers Debt Faster: When more money is freed up, the excess funds can be applied, in part or whole, to paying down one’s debt load. The more money that is put towards paying off debt, the faster the debt will be paid off
- Instills Financially Responsible Behavior: Just the process of looking for ways to save money and creating a budget helps people think in a more financially responsible and prudent way
Retirement should be a new chapter in one’s life. It’s the time when they can finally sit back, relax, and enjoy the product of decades of hard work. It’s for this reason that anyone entering, or already in, retirement should think long and hard about how best to deal with their debt.