Here's what you need to know about managing your debts in retirement
Here’s what you need to know about managing your debts in retirement

Most Americans have debt, whether it’s student loans, a mortgage, a credit card, or a car loan.

But what happens to debt management when you are retired or close to retirement?

While many Americans were able to pay off some of their debt at the start of the pandemic when restrictions on activity and aid such as stimulus checks boosted household budgets, they are now seeing many types of debt increase. again.

Total household debt swelled by $333 billion in the fourth quarter of 2021 to $15.58 trillion, the largest quarterly increase since 2007, according to a report by the Federal Reserve Bank of New York. Credit card debt rose by a record $52 billion over the same period, the Fed reported.

Debt has also risen steadily in households where the head of household is aged 55 or over, rising from 53.8% in 1992 to 68.4% in 2019, according to a study from the Employee Benefits Research Institute.

“More and more, we’re seeing people with different types of debt in retirement,” said Shweta Lawande, certified financial planner and analyst at Francis Financial, a New York-based firm.

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Classify your debt

Some people may not be able to avoid debt in retirement. However, not all debts are the same.

For example, a fixed rate mortgage will be less of a problem in retirement than a credit card, student loan or medical debt.

“A mortgage will generally be a very stable payment over time,” said Shelly-Ann Eweka, senior director of financial planning strategy at TIAA, adding that it’s also something people would typically have budgeted for.

There are reasons why more Americans are now retiring with mortgages – people are buying homes later, and because interest rates are so low, it may make sense to pay them off slowly over time. time.

Also, it’s generally considered “good debt,” said CFP Diahann Lassus, managing director of Peapack Private Wealth Management in New Providence, New Jersey.

However, having a lot of high-interest credit card debt could continue to grow while you’re retired and add additional expenses to your budget.

More Americans are also entering retirement with student loan debt, either from their own education or from loans they took out to help their children or grandchildren go to school. Those with their own debt can consider different forgiveness programs that would cancel their loans after a certain period of time, such as 25 years of on-time payments.

Retirees should also avoid taking on more student debt or withdrawing money from investments to help family members pay school fees.

“You can take out loans for school, but you can’t take out a loan for retirement,” Lawande said.

Budget duties

Before reaching retirement, Americans should take a hard look at their finances and debt to make sure they are on track to exit the workforce. That should happen at least by age 55, according to Craig Copeland, director of wealth benefits research at EBRI.

“If you have a substantial credit card balance, that would be the one to attack first, then just pay your monthly mortgage as you go,” he said.

It’s important to do this a few years before you plan your retirement so you can adjust your schedule accordingly. For example, it might make sense to work an extra year or two to pay off a large balance on a credit card. Delaying taking your Social Security benefits will also set you up for a bigger check in the future.

“It’s ideal that these debts are paid off before retirement,” Eweka said. It’s also better than using money from a retirement account to pay off your debt, she said. This could result in penalties, depending on your age, expose you to a hefty tax bill, and take more money out of the market than necessary, which could impact your future retirement income.

Getting your finances in order before you stop working will also help you develop strong habits that will serve you well in retirement.

“I can’t stress this enough: expense management is truly the foundation of financial success,” Eweka said. “Living within your budget is key.”

Get professional help

If you’re worried you’re off track for retirement or struggling to manage your debt, working with a financial professional can help you develop a plan for your future.

“It doesn’t matter if you’re thirty years from retirement or five years from retirement, working with a financial advisor or financial planner will help you make sure your plan is appropriate,” Eweka said.

An advisor can also help you understand your current financial situation and use many creative projection and planning tools to help chart your course for the future, Lawande said.

“At the end of the day, it’s really hard to plan for retirement and make sure everything is okay if you don’t understand where you are right now,” Lassus said.

It’s also important that while you’re paying off your debts, you continue to allocate money to emergency savings and retirement savings, especially if you’re getting matching from the employer. This is because retirement savings, invested in the market, will grow over time and with compound interest, starting early means you’ll end up having more later.

Having emergency savings helps you avoid taking on more debt in the event of a market downturn or if you have an unexpected expense, such as a car breakdown.

“Make sure you have a cash cushion that can get you through a crisis,” Lawande said.

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