Most personal finance experts recommend that you should eliminate all (or at least most of) your debt before you retire. But if you’re already retired and are still living with debt, you need to deal with the situation promptly so you can enjoy a worry-free lifestyle in retirement.

Baby boomers had an average of $94,880 in debt in 2023. The rising cost of living only contributes to the problem.

Starting your retirement with substantial debt can be worrying, but if you have a plan in place to repay your retirement debt, you’ll have a better chance of truly enjoying your golden years.

Fortunately, there are many resources available to enjoy a debt-free lifestyle. Debt relief strategies like debt consolidation and debt settlement can help.

What Is Retirement Debt?

Retirement debt is any money you owe to lenders, such as credit card debt, health care bills, personal loans, auto loans, and mortgages.

The average credit card balance was $6,501 in 2023. While it may not seem like a lot, if you still make mortgage payments and have other debts, it can be challenging to make payments on all of these obligations together each month.

Not All Kinds of Debt Are Equal

Good debt is low-interest, fixed-rate secured debt that is used for financing the purchase and maintenance of appreciating assets such as mortgage loans or an asset that will help you maintain or increase your income (e.g., an auto loan is considered a “good debt” because it will help you get to and from your job, or you can use it earn money in a side-gig, such as driving for a ride-share company or for making food deliveries). 

Bad debt usually consists of high-interest (often variable-rate) unsecured debt that is used for purchasing consumables such as specialized electronics/single-use appliances (e.g., a cotton candy maker, hot-dog cooker, bread maker), lottery tickets, dining out/hotel room service, expensive home exercise equipment, or other frivolous products and services. 

Essentially, a bad type of debt is any debt used to finance something that doesn’t provide any kind of return on the investment you make in it.  Determining which debt you carry can help you determine the right course of action for dealing with retirement debt.

10 Tips for Paying Your Debts in Retirement

Whether retirement is looming far off on the horizon or already a reality for you, you need to deal with retirement debt as soon as possible. Stop living with financial stress with these ten tips.

1. Stop Accumulating More Debt

One of the most important things to do if you want to tackle retirement debt is to stop gaining more debt. Spending can be a difficult habit to break. For some, it can even be an addiction.

Create a budget to review your retirement expenses and income and see what you can afford without having to rely on credit cards. 

Stick to this budget. This will allow you to focus on repaying your debt without ignoring your financial necessities. For example, if your budget reveals that you have $1,000 left after your expenses each month, forgo discretionary expenses temporarily to make extra payments towards debt.

2. Reduce Your Spending

Another reason why making a budget is so important is that it will give you an overview of where you spend your money the most. Review each expense category to see where you can trim costs.

Review your insurance policies, groceries, and discretionary spending. Cut down on non-essentials such as needless shopping and dining out. While these may seem like small expenses, they can add up quickly. 

For example, if you dine out twice a week and your average bill is $40 each time, you’re spending just over $320 each month. If you were to pay $320 extra towards your credit cards, you’d be able to bring down the balance much faster. 

3. Find a Way To Earn an Extra Income

One of the best ways of dealing with retirement debt is by finding a new income stream to supplement your retirement income. Consider starting a part-time job. 

While this may not be an ideal situation for your retirement, it can help you pay off your debt without dipping into your retirement savings. Another benefit of working in your retirement is that it may give you access to health insurance if you’re not already enrolled in the U.S. Medicare program.  If you are already on Medicare, this extra income can help you pay for Medicare deductibles, out-of-pocket medical expenses, and/or Medicare Supplement insurance policy premiums. 

For example, you may be able to start a small consulting business from home, using the work experience you gained throughout your career before you retired, to bring in extra cash.

4. Downsize

Consider downsizing your home to manage some of the bigger expenses you may be dealing with, such as mortgage debt, home insurance, and property taxes.

Other than the financial benefits, downsizing offers added benefits. You’ll no longer have to worry about maintaining a large property, and as a result, you probably won’t have as many unanticipated expenses related to your home as you did before.

Find a smaller condo that is comfortable and affordable. Carefully consider condo HOA fees or rental fees before you decide to make a move.

5. Use Retirement Funds Selectively to Pay Off Debts

Using your 401(k) to pay off your debts comes with a few risks. When you withdraw funds from your retirement accounts, you lose that portion of your nest egg, plus any future market gains you may earn on that money. If you withdraw money before you are 59 ½, you can also face a 10% IRS-imposed early withdrawal penalty on the full amount of your withdrawal, depending on the type of account you pull it from.

There may also be tax consequences involved with withdrawals from your pre-tax retirement accounts. If you are taking money out of your Traditional 401(k), 403(b), or 457 account or from your Traditional IRA, you’ll likely get a large tax bill. 

Even withdrawals from Roth-based accounts can cause you to realize–and pay taxes on–withdrawals from these accounts.  Weigh all the pros and cons and seek advice from a fully licensed and experienced financial advisor or Certified Financial Planner (CFP) practitioner before you consider this option.

6. Debt Consolidation

If you have multiple types of debt, one way to reduce your monthly payments is with debt consolidation.

If you have “fair” to “good” credit (a FICO score of 680+) or better, you can apply for a low-interest debt consolidation loan. This will allow you to combine multiple high-rate debts into a single loan with more affordable debt payments and a lower fixed interest rate. For example, with a “good” to “excellent” credit score of 720 or better, you could borrow a personal loan at a 15% interest rate and use the funds to pay off credit cards with 25% APR.

If you are eligible, 0% balance transfer credit cards can also be used to consolidate debts. You’ll need the discipline to ensure that you pay off the entire balance before the 0% APR introductory period ends. Most of these types of balance transfer cards offer promotional zero-interest periods of 12-18 months, and any balances left on the card after the 0% rate expires will begin accruing interest at the standard annual percentage rate (APR) for the card, which is often 24% or higher these days.

A debt relief company can help you find the best debt consolidation loan for your specific needs. 

7. Use a Reverse Mortgage

A reverse mortgage can be used by those over the age of 62. This option allows you to borrow against your home equity, and the repayment of any amount borrowed is not required until you move or sell the house.

You can free up some money by replacing your mortgage with a reverse mortgage. The money you no longer pay towards mortgage payments can then be used to pay your other debts. In case of an emergency, you can even apply for a reverse mortgage home equity line of credit.

8. Seek Credit Counseling

If you’re overwhelmed with all the options available and not sure where to start, seek credit counseling.

Many nonprofit and for-profit companies offer credit counseling services that can help you with budgeting, debt repayment, and money management.

Your credit counselor can review your budget and can even enroll you in a debt management plan to help you pay off your debts faster.

9. Consider Debt Settlement

If you have over $10,000 in high-interest debt, you may want to consider debt settlement. A debt settlement company can negotiate with your lenders on your behalf to accept a lower settlement amount.

If you have a high amount of unsecured debt (i.e., credit cards, medical debt, student loans, etc) and are at risk of defaulting or bankruptcy, this is a good solution. Debt settlement can reduce your overall debt by 50% before fees so you can pay it off faster and save money in the process.

For example, if you owe $12,000 in credit card debt and you’re able to settle it for $7,000, the remaining $5,000 will be forgiven by the lender. 

10. File for Bankruptcy

Bankruptcy has serious, long-term consequences for your credit profile and credit scores, but it may make sense for seniors with a lot of debt who have tried other debt-relief alternatives to no avail. Although it can damage your credit reports and FICO scores for up to 10 years after you file for bankruptcy, you may not be so worried about applying for future loans as a senior.

Your retirement accounts and Social Security will be protected when you file for bankruptcy. Depending on your personal situation, you may be able to file for Chapter 7 or Chapter 13 bankruptcy.

Consult a Professional For Retirement Debt Relief

With counseling, budgeting, and effective debt relief programs, it’s possible to repay your debt even if you are retired. Consult a credit counselor or a fully licensed and experienced Certified Financial Planner (CFP) practitioner for personalized advice based on your financial situation.

If you are dealing with debt in retirement, connect with TurboDebt for a free consultation today. Our team can offer counseling, consultation, and financial planning services to help you pay off your debt faster.

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