8 Effective Strategies for Becoming Debt-Free in Retirement

Debt is a pervasive issue affecting individuals of all age groups nationwide. The burden of high-interest credit cards and lingering student loans can impede the ability of ordinary Americans to purchase a home, go on vacations, or even establish an emergency fund.

According to a recent survey conducted by AARP’s Financial Security Trends in January 2024, 42% of Americans admit to having more debt than they can handle. Although this issue predominantly affects individuals in their 30s and early 40s, many retirees aged 60 and above also grapple with debt. This year alone, 31% of Americans in the 60-plus age group confess to unmanageable debt, representing a 4% increase from the previous year.

Here are the common types of debt seniors face during retirement. While credit card debt tops the list, some seniors are burdened with mortgages, personal loans, and even student loans.

# 1 Credit Card Debt: 

If you have a credit card balance that you carry over from one month to the next, it can be quite expensive. This is especially true if you are using a high-interest card, as the average interest rate for such cards is currently above 20%. Unfortunately, 38% of individuals aged 60 and above are burdened by credit card debt. Rising housing and food costs further contribute to this trend, as credit cards have become an easy, albeit expensive, solution to manage escalating expenses.

#2 Mortgage Debt: 

Many retirees still have outstanding mortgage balances to pay off, even if they initially anticipated a mortgage-free retirement. Relocating or refinancing during their 40s or 50s often results in retirees carrying mortgage debt into their later years. Approximately one-third of Americans aged 60 and above are still grappling with mortgage payments, which can significantly impact their fixed income since the median monthly mortgage payment in the U.S. is $1,672.

#3 Student Loan Debt: 

While college days may seem like a distant memory during retirement, a surprising 3% of seniors are still burdened with student loans, whether they are federal or private, these loans continue to remind retirees of their past educational pursuits.

#4 Other Debt: 

Retirees commonly face car loan debt, with 24% of individuals aged 60 and above still carrying an auto loan. Additionally, medical debt can be an added financial burden, considering that medical costs tend to rise during this stage of life. Moreover, 10% of seniors have personal loans from banks to repay, and 4% juggle loans from family or friends. Shockingly, only 31% of individuals aged 60 and above claim to be completely debt-free.

To alleviate the stress of managing debt during retirement, here are eight effective strategies:

#1 Cease Accumulating New Debt:

The first step in reducing debt during retirement is to refrain from acquiring new debt. While inflation may pose challenges, using credit cards or taking out personal loans should be limited to necessities when no other payment options are available.

#2 Reduce Expenses: 

Review your monthly spending habits to identify where to cut back. Allocate the newfound savings towards paying down credit card debt. Adjusting auto insurance, reconsidering gift-giving practices, and reducing entertainment expenses are practical ways to reduce costs. Making energy-efficient home upgrades can significantly reduce monthly utility spending.

#3 Downsize Your Home: 

Consider selling your house, especially if it’s close to being paid off or if you have lived there for an extended period. Selling while the housing market is high allows you to reinvest the money in a smaller, more manageable home. Downsizing reduces property taxes and maintenance costs, and the surplus funds can be allocated toward paying down debts or bolstering your monthly budget.

#4 Explore Reverse Mortgages: 

If you require additional monthly income to avoid relying on high-interest credit cards, applying for a reverse mortgage may be a viable option. With reverse mortgages, you can access the equity you’ve built in your home, providing tax-free money. However, it’s important to consider the downsides of reverse mortgages, such as high upfront costs, potential limitations on leaving the house to heirs or surviving spouses, and the risk of foreclosure. Before obtaining a reverse mortgage loan, consulting with an elder attorney or trusted financial advisor with no vested interest in the transaction is crucial.

#5 Secure a Part-Time Job: 

If you have trimmed expenses as much as possible but still struggle to avoid new debt or pay off existing debt, consider seeking additional income beyond your Social Security benefits and retirement income. Taking on a part-time job, becoming a contractor, renting out your home through platforms like Airbnb, or monetizing your hobbies can bridge the financial gap. You can develop a plan to address your debts while ensuring a steady income by consulting with a financial advisor.

#6 Consolidate Your Debt: 

If you have multiple high-interest debts, you may benefit from either debt consolidation loans or balance transfer credit cards that offer lower interest rates. However, it’s important to be cautious and carefully evaluate the risks involved. Credit cards that offer balance transfers require a minimum credit score of 670. Another option is to consider strategies like the debt avalanche, debt snowball, or pain point method to prioritize paying off your debts strategically.

#7 Utilize Your Retirement Fund: 

Although your retirement fund is meant to sustain you through your later years, accessing a portion to pay down debt may be worth considering if you are burdened with debt early in retirement. However, ensure you still have enough savings to support your retirement needs. Otherwise, you may need to reduce expenses further or seek additional sources of income, such as downsizing or obtaining part-time employment.

#8 Tap into Your Life Insurance Cash Value: 

If you possess a permanent life insurance policy that has accumulated cash value over the years, you may be able to borrow against or withdraw cash from it. Alternatively, surrendering the policy would provide immediate access to the accrued cash value. Consult with an agent to fully understand these options’ implications and financial impact.

It’s essential to consider what happens to your debt in the event of your passing. Debt does not disappear upon death, and the responsibility of repayment falls on the deceased individual’s estate. Consulting an attorney or legal aid organization can help determine your legal obligations regarding a deceased person’s debt.

By implementing these strategies and seeking professional guidance, you can navigate the challenges of debt and work towards achieving financial freedom during your retirement years.