How to Pay off Debt in Retirement

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The amount of debt older Americans have is at an all-time high. According to data from the Federal Reserve Bank of New York, the total debt burden for adults 60 and older has increased more than 150% over the past 10 years to nearly $3.6 trillion as of the second quarter of 2021. Yes, that’s trillion with a T.

Not surprisingly, mortgages make up the largest portion of the debt owed by older adults. However, this age group also has a lot of auto loan and credit card debt—a combined $54 billion.

Dealing with debt can be a challenge for anyone. However, it can be especially difficult for older adults who are retired and living on a limited income to balance paying for necessities and paying down debt. 

To get suggestions for how older adults can tackle their debt, Carefull reached out to credit expert Gerri Detweiler, who is the education director for Nav. Below is an edited version of her interview with Carefull.

Why is debt in retirement a problem?

‍Cameron Huddleston, Carefull’s family finance expert: If you're near retirement or already in retirement, why should you be worried about whether you have debt in retirement considering that so many people have debt? 

‍Gerri Detweiler: I think one of the big challenges if you're nearing or in retirement is that you just may not have the time necessary to tackle some of that debt. It can be difficult to bring in additional income to help retire that debt. And if the cost of the debt is high, you may be making minimum payments or small payments on a debt that could last for decades. So that's the big challenge: figuring out what is manageable for your situation. 

Now, in many cases, if you die with debt, unless you have a spouse or a co-signer responsible for that debt, it may not become the responsibility of someone else. However, in many cases, creditors can go after what's left in your estate. So if you were hoping to leave the house to your kids, perhaps that could be jeopardized in some way by this debt. And at a minimum, it could create some financial hassles for those who are left behind after you pass. So tackling the debt, while it's not always easy, can bring some peace of mind at least to let you know what the situation is and what your options are.

Should you use retirement savings to pay debt?

‍Cameron: What are some things that people can do if they are near retirement or in retirement with a limited income to pay off debt? And are there debts that you should be focusing on first?

‍Gerri: First I would encourage you to think very carefully and get some advice before you tap retirement funds to pay debts—even if those debts feel particularly pressing. 

For example, let's say you have an account that's gone to collections. You're getting lots of collection calls and you think, “I’ll just take money out of my retirement account to pay this debt so this debt collector will leave me alone.” Really think carefully about that because, in most cases, that money is protected from creditors, and you're going to need it. If you're like the average American or even an American who is doing pretty well, you're going to need that money in retirement. So that's a don't.

A “do” would be to get some help. So that would be a call to a credit counselor. There are nonprofit credit counseling agencies around the country that can walk you through your situation and help you understand whether there's a feasible plan to pay off your debt in a reasonable period of time. 

It's not perfect for everyone because you do have to pay back your debt over typically three to six years under one of these programs. At least you'll have someone objective to review your financial situation, review your budget and help you determine whether there is a plan that could help you pay off that debt in a reasonable period of time.

‍Which debt should you pay off first?

Cameron: Are there certain debts that people should be prioritizing?

‍Gerri: One debt that is particularly difficult for most Americans is medical debt. It is the No. 1 source of collection accounts on credit reports. It's a huge problem for many Americans. As you grow older and have increasing medical needs, it could be very important. The challenge here is balancing that debt with your future medical needs. 

For example, if you're in a rural area and you decide not to pay these debts, you could find it difficult to find another provider who will see you because you didn't pay those debts. In that case, I would definitely get some advice—perhaps even some legal advice about the debt—to determine how you can work with that provider. Perhaps you can get on a payment plan. Perhaps you can work out a settlement with them to pay less than the full balance. Perhaps that debt can be appealed with insurance so that you can get more funding to the provider so you can continue your medical care. 

‍How do you pay off credit card debt?

Cameron: What about credit card debt? Should you be focusing on that before you focus on paying off a mortgage or other types of debt that you might have?

‍Gerri: Credit card debt may actually be one of the easier types of debt to deal with. It's unsecured debt, which means there's no collateral behind it. There's not a house. You don't have to worry that if you don't pay your credit card, that you can't go shopping at your local grocery store again. No one's going to know that you didn't pay back that credit card debt. 

While it's stressful if you can't pay it because you will get collection calls, it is one of the easier types of debt to deal with. Two options there: One is that the credit counseling agency that I recommended earlier can help you figure out whether there's a reasonable payment plan. And that would typically involve paying it all off over three to six years. 

Another option, particularly for re retirees, maybe settling the debt. That's where you get the credit card companies to agree to accept less than the full balance. The advantage that retirees may have in this situation is because they don't have a lot of income coming in from multiple sources and that income is typically protected from creditors,  they may be able to negotiate with the collection agency. 

Now, this can be a little tricky. I don't think it's entirely a DIY plan, but there are some reasonable options out there to help you navigate it. And it may allow you to pay off that credit card debt at 10, 20, 30 cents on the dollar. That will impact your credit scores. There potentially could be tax implications; although most people can get around that by filing certain paperwork with the IRS. But it could be a way to put credit card debt that's really unmanageable behind you so you can save your money for the things that are most important for you. 

Should you pay off your mortgage?

‍Cameron: If you don't have a lot of consumer debt or don't have any consumer debt, but you still have a mortgage, is it worth it in retirement to try to quickly pay down that mortgage? Or should you be putting that extra cash that you have elsewhere?

‍Gerri: Mortgages these days typically carry pretty low interest rates. The risk potentially with a mortgage is, of course, if you can't keep up with the payments for whatever reason, then you could lose your home. 

I think the biggest problems we see with mortgages are when people tap their home equity for other expenses and the payments may become unmanageable, or perhaps they get into a predatory lending situation where someone's convinced them to keep taking cash out of their house. It becomes expensive and unmanageable, and they just aren't able to sustain it. 

It feels great to have a home that's paid for in full, but in some cases it does make sense to carry a mortgage. It may even be a means of protecting that home because in some states, some of your equity is protected from creditors. Some isn't in other states. I live in Florida. It has a very generous homestead exemption, where, in many cases, your entire homestead is exempt or protected from creditors. It varies by state. So that would be a situation where I would probably get some financial advice to determine what the best use of those funds are to make sure that you aren't just focused on it for the sole purpose of living mortgage free but that you have a better plan for that money.

‍What professionals can help with debt relief?

Cameron: When you say get financial advice, are you talking about perhaps reaching out to a financial planner? Are you talking about maybe reaching out to an attorney who specializes in debt relief? Who would that professional be? 

‍Gerri: So if your debt is in a situation where you're worried about paying it, or you're seriously thinking about tapping retirement funds to pay it, you're being sued, you have multiple charge-offs or collection accounts, then I would absolutely reach out to an attorney with experience in consumer credit law. You may be able to hire them for an hour just to go over your situation and answer those questions. In some cases, you can get help from legal aid to answer those same questions. There are some excellent legal aid offices around the country that will help you answer those questions. If you're at risk of any type of legal action over that debt, then I would definitely recommend that you get legal advice. 

On the other hand, if your question is, “Should I pay my mortgage off early or should I invest that money?,” that's a great question for your financial planner or financial advisor who can help you weigh the pros and cons.

What are strategies to pay down debt?

‍Cameron: If you're trying to tackle your debt on your own, are there some good strategies that you should consider? 

‍Gerri: If you can pay off your debt while you're able to earn extra income, that's probably going to give you a big advantage in the long run. So if you are able to either continue working, maybe it's part-time or with a side hustle of some sort, you probably won't regret that in the long run. 

That isn't always an option for everybody. There can be a variety of reasons. You could be taking care of grandchildren, a spouse, you could have physical reasons why you can't work, or maybe you just lost your job and can't find something comparable. In that situation, you're going to focus on spending because that's where your leeway is going to be as far as looking at what you might change. 

When I mentioned the credit counseling agencies earlier, one thing that people don't realize is that they will go over your budget with you and give you ideas. So don't rule that out even if you feel like, “Oh, I can do this on my own.” It might be helpful just to get an extra set of eyes on your budget to give you some ideas. And this is what they do all day long. So they probably have ideas that you hadn't thought of. 

Another thing that may help is community resources. So in your community, there may be resources available for older adults that can reduce the costs of certain utilities, for example, or property taxes, or get you free housekeeping or things like that. Those would also be worth exploring to see whether they might give you some room in your budget.

I wish there was an easy answer for every situation, but really getting creative and seeking out those resources can go a long way toward making your retirement a lot less stressful financially. 

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