Avoiding Debt Problems during Retirement
How to manage debt in your golden years to promote financial stability.
Debt problems are never easy, but they’re made more difficult when you’re a senior living on a limited fixed income. That’s why it’s critical to take steps to ensure you have an effective debt management strategy and to take aggressive, early action if your debt starts to get out of control.
The tips below are designed to help you manage debt effectively in your golden years to avoid debt problems. If you’re already in trouble and need help to reestablish financial stability call us at or complete an online application to request a confidential debt and budget evaluation from a certified credit counselor at no charge.
Tip No. 1: Minimize debt before your paychecks stop
If you’re still working full or part-time close to retirement age, one step you should take before you leave your job for good is to minimize unsecured debts as much as possible. The less debt you have on your plate, the fewer bills you’ll have to worry about draining your Social Security and retirement assets.
- If possible, pay off your mortgage in-full. This will leave only taxes and insurance to pay on your home and you won’t have to worry about foreclosure issues.
- Before you retire, get a dependable car and pay it off. Although people change cars every few years, so you may need a few different vehicles during your golden years. Still, starting out retirement without an auto loan gives you less to worry about as you adjust to not having a paycheck.
- Don’t carry credit card balances into retirement. If you’re holding outstanding unsecured debt that you’re paying every month, make a plan to eliminate it quickly by paying bigger chunks while your paychecks are still coming in. No credit card debt when you retire will also mean no credit card bills!
- Make big purchases before you quit for good. Again, like a car, it’s likely you’ll need to make big purchases during retirement, but getting as many out of the way for your early retirement years before you leave your job will help you make the adjustment successfully. This includes things like furniture, appliances and major electronics.
Tip No. 2: Go part-time to pay it off
If you’ve already left full-time employment and find yourself struggling with too many obligations, take a part-time job to supplement your retirement income until you’ve paid off any debt overhang you may have.
Even if you have a lot of debt, it’s still finite – there’s a certain amount that you know you need to pay and then you’re done. So get a part-time job that you can keep for the time being while you eliminate debt. You can even use free tools like a credit card debt calculator and mortgage payment calculator to determine exactly what you need to earn and how long it will take to pay down what you owe.
Tip No. 3: Avoid new debt that will get you into trouble
Of course, you may not be able to avoid debt entirely, but you can at least avoid high-risk debt that often leads to problems. Here are the three biggest offenders when it comes to debts that cause problems for seniors:
- Second/third mortgages. This is also known as a home equity loan – where you borrow money against the value of your home. This looks like a good option because seniors often have paid off the majority of their mortgages and built significant equity over time. However, this puts your home at risk of foreclosure. Instead look into options for reverse mortgages, which are safer for you and your home if you’re eligible to use one (see below for more information).
- Student loans. Seniors often go back to school or take classes and that’s great for expanding your horizons, but it can also saddle you with burdensome student loan debt that’s often problematic to pay off and cannot be discharged by bankruptcy. If you can’t go back without taking out loans, it might be best to expand those horizons in other ways.
- Credit card debt. A little credit card debt is fine, especially if you’re financially stable and experienced enough with credit to use it strategically within your budget. So if you take on a small amount of debt each month on a specific purchase like gas or groceries to earn rewards or cash back, then pay off the debt each month that’s absolutely acceptable. What you need to avoid is running up large balances so you end up with debt that carries over and bills that are larger than what you can afford.
Tip No. 4: If you’re using your equity, go for HECM
A Home Equity Conversion Mortgage (HECM) is the official name for a federally-insured reverse mortgage. It’s like a home equity loan in that it allows you to access and use equity you have built up in the long-term value of your home. However, there’s one very significant difference – no monthly payments that can get you into trouble with foreclosure!
A reverse mortgage is a home equity loan option only available to seniors age 62 or older who own their home and live in that property as their primary residence. If you meet the requirements, you can borrow against your equity (the value of your home minus any remaining balance on your mortgage) in a relatively risk-free way.
- You still own your home.
- There are no monthly payments, so there’s no risk of foreclosure as long as you live the property.
- The money only has to be repaid after the borrower is no longer living in the property – so unless you decide to move, it will be taken care of once by your estate.
- You can take the amount out as a lump sum, monthly fixed disbursements or a credit line you can draw from as needed (or a combination of ways if you have different needs)
The only things you have to do to guarantee that you won’t have monthly payments to make is to maintain the home, pay the taxes and insurance and continue to live there as a primary residence. So while home equity loans are risky, Home Equity Conversion Mortgages are a much better and safer option.
Tip No. 5: Be selfish when you have to be
If you have children and grandchildren, then there’s a possibility that at some point during your retirement someone is going to ask you to help them out. Whether it’s giving them “loans” that may or may not ever be repaid or moving adult family into the house with you because they can’t afford to live on their own, this generosity is going to cost you… and on a limited fixed income that cost often ends up being too high for you to manage.
So while you don’t want your children (and worse, grandchildren) out on the street, you have to set some limits on what actually counts as a critical need. For instance, if your daughter lives loses her job and the family is about to get evicted, then you might have no other choice than to help about to avoid them becoming homeless. On the other hand, if the same daughter quits her job and then needs money to make the monthly payments on a luxury car she refuses to sell, that may be another story.
Tip No. 6: Stay up-to-date on scams
Fraudsters and thieves like to target seniors because (1) they have assets, (2) they’re often looking for new friends, relationships and interests, and (3) they’re not as savvy with new technology. So seniors are often easy-pickings for everything from internet phishing ploys via email to fake dating site profiles.
New technology often can’t avoided these days, so you have to know how to use the technology safely and how to avoid fraud or theft that can happen with the use of it. Consumer alerts can be helpful and websites like the AARP that have sections of their website dedicated to protecting seniors. In any case, avoid any scenario where your sending money or making transactions unless you’re absolutely sure you’re conducting the business or personal matter with a real, legitimate, above-board individual.