You work hard all of your life to get to retirement. Those golden years are meant to be a peaceful and enjoyable time. However, that dream might be in jeopardy if you aren’t financially secure.
You need to have enough savings to enjoy retirement. According to one survey, most Americans think they need $1.26 million for a comfortable retirement. But beyond saving, there’s another thing to consider that will significantly impact your retirement: your debt.
Let’s take a look at how debt in retirement can impact your finances.
What is the Impact of Debt on Retirement?
If you have debt in retirement, it will impact your financial situation in many ways:
- Financial stability: People typically aim to stop working in retirement, which means they no longer receive a regular paycheck. Instead, you may live off a combination of your retirement savings, pension, or Social Security benefits. If you have debt repayments to manage, then you have less money left over to manage day-to-day expenses.
- Interest rates: If your debt has an adjusting interest rate, your budget is subject to market fluctuations. If interest rates suddenly rise, you might find it hard to repay your debt and manage all other expenses.
- Quality of life: Having to spread your budget in retirement across debt and expenses can have several negative consequences, reducing your quality of life. You may have to go back to work part-time, you might have to live an incredibly frugal life, and you might suffer from financial anxiety.
- Repossession, foreclosure, and garnishments: There could be serious consequences if you begin to miss out on your debt repayments. Depending on the type of debt, you could end up dealing with a foreclosure of a home, repossession of assets like a car, or garnishments on your wages. While these would be difficult to deal with at any time, they could be especially harmful during retirement when you don’t have the capital to recover easily.
Is It Possible to Retire With Outstanding Debt?
Yes, you can still retire if you have outstanding debt. In fact, more and more people are doing so. According to the Center for Retirement Research at Boston College, the number of Americans over 65 who carry debt has increased dramatically. In the late 1980s, it used to be 38% of households, and now it’s 63%.
For example, in previous decades, it was popular to aim to retire without a mortgage. However, recent economic hardships have meant people purchase property later in life, so being mortgage-free by 65 isn’t as easy anymore.
Still, it’s essential to know that retiring with debt isn’t ideal. You’ll want to prepare yourself as much as possible so that your budget can handle all of your living expenses and debt repayments.
Additionally, you may need to continue working part-time in retirement or delay your retirement a little later than you initially planned.
If retirement is still a ways away, do what you can to eliminate debt as soon as possible.
5 Steps For Planning For Debt in Retirement
If you believe that you’ll most likely retire with debt, there are a few things you can do to prepare better:
1. Understand Your Budget
It’ll be crucial that you plan a proper budget so you don’t deplete your savings. Get all of your debts onto fixed rates, so you’re not left handling unexpected increases in interest rates. You can always refinance down the road to a lower rate if interest rates drop significantly.
Also, make sure you leave room in your budget for flexibility in case unexpected costs arise.
2. Consider Lengthening Your Work Schedule
It might not be what you want to hear, but delaying your retirement by a few extra years may be the best option for your retirement planning. Those extra few years of earning a regular paycheck allow you to put a further dent into your debt repayment, hold off from touching your savings, and delay taking Social Security.
If you were planning to retire at 60, consider waiting until 65 or 67.
Alternatively, consider partially retiring and holding a part-time job for a few extra years to pay down debts.
3. Consolidate Debt
If you have multiple debts with different lenders, consider consolidating them into a single loan. There are a few benefits to consolidating debt, including:
- You may potentially have an overall lower interest rate
- Since there’s only one payment, you have a reduced risk of missing a payment or making a late payment
- You can easily see how long it will take for you to become debt-free
4. Consider Downsizing
One way to free up cash and feel more financially secure in retirement is to downsize your living space. Many couples choose to downsize to a smaller home or just a single household car. The extra cash from your sales might even pay off your debt.
5. Seek Professional Help
You don’t have to navigate this financial hardship on your own. There are many professional resources out there that can help you create a plan to get out of debt as quickly as possible. You can speak to a debt counselor or a financial advisor. Or, consider looking up free resources online and learning about debt management so you can become your own expert.
Planning is Key for a Stable Retirement
Debt in retirement may not be ideal, but it can be managed. If you’re not close to retirement yet, do all that you can to get out of debt now. But if you’re already about to retire, make sure you have a plan in place. You may have to make some sacrifices to your lifestyle, but as long as you plan ahead, you can still maintain financial security.
You might also be interested in: Planning for Phased Retirement: Your Guide to a Flexible Exit from Work
