How Do I Handle Debt in Retirement?

How Do I Handle Debt in Retirement
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Rising interest rates may be excellent for boosting savings accounts, but they’re unkind to credit card balances. Older Americans, especially those on a fixed budget, should beware.

MarketWatch’s recent article entitled “Interest rates are rising – how older Americans should handle their credit” reports that roughly seven in 10 older Americans have some form of debt. According to a Senior Living survey of more than 1,000 adults in 2021, of the participants aged 60 years and older, 25% had an auto loan, 43% carried credit card debt, 13% had medical debt, and 38% held a mortgage.

The number of seniors with debt dropped from the first survey conducted the year before, during the height of the pandemic when that figure was 79%. The Federal Reserve then began steadily raising the federal-funds rate.

Consumer debt is unwelcome for those on a fixed budget in retirement. We should prioritize paying down those debts as quickly as possible. A way to do that is by analyzing the money coming in and out every month, cutting expenses wherever reasonably possible, and allocating a higher portion to credit card balances. Consumers can also contact their credit card company or a credit counselor to learn more about debt repayment plans.

Retirees should avoid tapping into their retirement nest eggs to avoid tax consequences. While refinancing may sound like a good idea, it might not make sense until rates have dropped.

There are two popular methods for paying down debt:

  1. The avalanche strategy, where you put most of your repayment money toward the loans with the highest interest rates (after making minimum payments for all of their debts); and
  2. The snowball method is when people throw the extra cash toward the smallest debts.

Not everyone can afford to pay off their debt quickly. However, having a plan makes a huge difference in eventually getting that balance down to $0.

Home loans aren’t seen the same way as credit card debt, although some Americans are more comfortable bringing a mortgage into retirement than others.

Many mortgages are fixed, which means the interest rate and monthly payment remain the same throughout the life of the loan. A homeowner’s net worth grows when he pays his mortgage since part of that payment goes toward the property’s principal.

Reference: MarketWatch (Oct. 3, 2022) “Interest rates are rising – how older Americans should handle their credit.”