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Managing Your Debt in Retirement

If your debt is anywhere near the $50,000 “red line,” you could have a problem on your hands. The key is to tackle debt systematically – starting before you retire. Here are some ideas of where to begin.

 by: Paul Humphrey, CFEd®
May 19, 2021
The following information was developed by an independent third party. The opinions are of the listed author and are independent from and not necessarily those of RJFS or Raymond James. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Raymond James Financial Services, Inc. does not provide advice on mortgages.

If you’re retired or getting ready to retire, sailing off into that sunset takes a lot of preparation. One aspect of retirement that you may not consider is how outstanding debts can hamper your retirement plans. It’s a good time to think about this, because retiree debt is on the rise: In the course of 2020 alone, average retiree debt rose by $9,979 to nearly $20,000 — an increase of 104%.

While some of that increase can be attributed to the COVID-19 pandemic, retiree debt has been rising over time. It’s important for you to look at your outstanding debts right now and take steps to make sure they don’t weigh you down as you head into your golden years.

Debt can negatively impact your ability to live off the sources of income you’ve established to pay your bills after you stop punching the clock. Debt payments subtract from the income of Social Security and savings in an IRA or other investment vehicles that you really need to be living your best life. Even having a mortgage, which is the most common type of debt among retirees, can impair your financial flexibility.

The proverbial red line here for retirement savings-endangering debt is $50,000 or more of either mortgage or non-mortgage debt. Fortunately, there are approaches that can help you manage or eliminate your debt.

Strategy #1: Pay Off Any Non-Mortgage Debt

In the course of a working lifetime, it’s amazing how much debt you can rack up. The most common sources of debt include a car loan or lease, credit card payments, medical debt, student loans and personal lines of credit people have taken out for various immediate expenses. Whatever the source, however, it’s important to get a handle on any of these you might have before they can endanger your retirement lifestyle.

Every debt payment you make in retirement sucks up income that you may need to fund your lifestyle. If you’re like many retirees, debt payments that last into retirement can leave you with little to spend beyond the basics. That might translate to cutting back on travel, shopping and even nights out. Without those activities, life in retirement may not live up to your goals.

Let’s consider an example. Suppose Sue and Rick can generate $6,000 a month in retirement income from their savings, investments and Social Security. However, they also carry debt, including a home equity line of credit with two years of $350/month payments along with two more years on a car loan of $400/month. In addition, they co-signed a private loan three years ago so that their youngest could finish college. Those payments are $200/month for the next 10 years.

Add those obligations up, and that’s $950 out the door without spending a cent each and every month. That cuts their monthly income down to $5,050 a month. While that might not sound too bad, remember that in addition to all the fixed expenses — such as utilities, internet, food, gas and so forth — there are also tax obligations that include property tax and federal income tax.

If I had advised Sue and Rick before their retirement, I would have recommended that they pay off the home equity line of credit and the car loan. That could be done by making additional payments earlier on in the life of the loan. Another option is postponing retirement for six months to a year to get those debts paid off. That could have worked for Sue, who was a state government clerical employee.

Ideally, they should also move the student loan payment off their books. At this point, their daughter Kaitlyn has a stable job with benefits as a physical therapist for a local hospital system. They would be wise to ask her to assume responsibility for these payments.

Strategy #2: Pay Off A Mortgage or Home Equity Line of Credit Exceeding $50,000

There are two ways you can avoid having mortgages or other home loans, such as a line of credit, following you into retirement. The first way is to use your savings to take care of it. If you have excess savings that allow you to maintain a fund for emergency expenses while still paying down your mortgage, you should do this before you plan on retiring. An emergency fund is generally considered to be three to six months of salary, so do the math to find out whether this is a viable option for you.

Even if this path isn’t available to you right now, you can still take steps to reduce your obligation and thus eliminate some future stress when you are retired. Consider making extra payments on your mortgage or home equity loan, which will pay down at least some of the balance before you retire.

Strategy #3: Manage Higher Mortgage or Home Equity Line of Credit Amounts

But suppose you have home-based debts that step over the red line of $50,000, as many near retirement do. The first major step here is to gain awareness of the impact the payments might have on your lifestyle in retirement. If these payments are projected to go beyond several years, you’re looking at payments deep into your retirement years, which will likely impact your ability to spend when you need to in the future, for example on medical expenses, which rise the longer you live.

One step you can take in this situation is to refinance. If your current home loans are at rates of more than 2 percentage points higher than prevailing rates and you have strong credit, you have the option of refinancing to get your payments down. Then, to pay that debt off as quickly as possible, continue to make the same payment you are making now.

For those fortunate enough to receive a legacy or financial gift, you can take that inheritance and apply it to your outstanding mortgage or line of credit debt. Consider the case of Mary, who had spent years helping take care of her mother, who passed away at the ripe old age of 94. Mary received a legacy of $75,000 from her mother’s estate, which enabled her and her husband, Peter, to pay off their outstanding mortgage balance of $65,000 three years before they retired.

If those options don’t work for you, consider allocating a small ongoing portion of your income toward those debts. Even $50 or $100 a month, when allocated to interest payments, can make a difference over the long term. If such additional payments allow you to pay off your debt even a few years earlier than you otherwise would be able to, that is well worth the effort. You may be able to pick up a bit of extra income by driving for Uber or Lyft or renting out a room on Airbnb or selling craft items on Etsy. Those amounts can also be dedicated to loan repayment.

Free Yourself from Retirement Debt

The point of retirement is to enjoy life. Even if your debts don’t seriously threaten your retirement lifestyle, having to worry about them can reduce that enjoyment of this time of life. By taking some of the steps outlined here you can cruise into retirement debt-free and avoid taking on any other obligations once you’ve arrived.

Licensed insurance professional. We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
About the Author
Paul Humphrey, CFEd®
Financial Adviser, Humphrey Financial LLC
Paul Humphrey specializes in helping union members and their families plan for their future. He has been in the financial services industry since 1999. He holds FINRA Series 7 and 66 licenses, as well as life and health insurance licenses. Paul is a Certified Financial Educator through the Heartland Institute of Financial Education. Humphrey Financial LLC is an independent financial services firm built on a stable foundation of consideration, care and knowledge.