Of all of the strategies that retirees can employ while arranging their finances for retirement, eliminating debt is among the most important. Almost all financial planners agree that carrying debt into retirement is a very dangerous move, one that can imperil your financial future and drain your retirement savings.
But to someone already in retirement, the need to eliminate debt may appear to be insurmountable. Fortunately, there are a number of methods that retirees can use to eliminate or reduce the burden of their debt.
Debt is a major threat to retiree’s financial security. In retirement, your income is normally reduced to a fixed level, derived from Social Security, pensions, and other retirement savings that have been amassed over the years.
A fixed income means that you will not have more money tomorrow to pay off the debt than you do today. You will simply be paying more interest – wasting money every month you carry the debt.
Furthermore, retirement income usually represents a reduction from the income you had while still working. Accordingly, debt that might have been manageable while you were still employed will become a proportionally larger cost, and may even become completely unmanageable, particularly if your debt is in the form of high-interest debt, such as credit cards or negative amortization loans.
In addition, many types of mortgages or debt have interest rates that adjust upwards automatically after a period. Retirees on fixed incomes are much less able to handle sudden increases in their interest rate, and can rapidly fall behind on their debt servicing payments, which in turn can increase their debt burden through fees and penalties. It is therefore very important to consider eliminating, altering, or reducing your debt, whether you are preparing for retirement or already retired.
If you are still working, you can alter your budget or delay your retirement to pay off the debt.
If you have already retired, it may seem like it’s too late to do anything about your debt. There are however a number of options available to retirees that can mean the difference between a secure retirement, and one under the shadow of unmanageable debt.
By far the simplest and cheapest way to eliminate debt is to pay it down directly with existing savings. Obviously, this is not an option available to all retirees, but if you have the means to eliminate or even reduce your debt by simply paying it off, most financial professionals would suggest that you do so.
Paying off your balances now eliminates the interest payments that you would otherwise have to make over time, and can preserve your estate into the future. Should you be unable to completely or even partially mitigate your debt through direct payments however, you might consider some other options:
One common use for a Reverse Mortgage is the elimination of non mortgage debt, particularly credit card or other high interest debt.
Reverse Mortgages are useful for non mortgage debt elimination purposes because, unlike other types of home mortgages, they entail no monthly payments against their balances. This enables retirees to use them to eliminate their existing debts without burdening themselves with additional monthly payments. In addition, Reverse Mortgages have entirely different qualification requirements than normal mortgages, making them especially attractive to retirees who are on a fixed income, or who may have bad credit ratings.
If you already have an existing mortgage, then refinancing may be a solution. Refinancing your mortgage can possibly permit you to access home equity to pay off other more expensive debt. Refinancing may also reduce your interest rate and therefore the amount you have to pay each month on your mortgage. There are many dozens of different types of mortgage refinancing programs available, some of which are available only to seniors or retirees. Refinancing won’t allow you to completely eliminate mortgage debt, but it may allow you to eliminate other debt, reduce your interest rate, your monthly payments, or both.
Returning to work or finding a part- or full-time job could be a great way to eliminate your debt while preserving your retirement savings and other assets.
A common strategy used by retirees for whom the above options are unpalatable or unworkable is Debt Consolidation. Broadly speaking, debt consolidation is the process of replacing certain kinds of debts with others, usually at a lower interest rate.
You can, for instance, take out a loan at a 6% rate of interest so as to pay off credit card debt at a 10% rate of interest, thus saving yourself a substantial amount of money in interest. There are a number of companies – some legitimate, some not -- that can perform or assist with debt consolidation services, but it is also possible to consolidate debt by yourself.
Something as simple as moving all of your credit card balances onto one, lower-rate card, or transforming your credit card debt into some other form of debt (for example, by taking out a home equity loan or personal line of credit), can save you a lot of money in retirement.