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How to avoid debt in retirement
Prepare ahead of time, prioritize high-interest debt and don't be afraid to ask for help.
Paying off debt during retirement can be more challenging than when you were in the midst of your career. But there are steps you can take before you retire to minimize the effects and strategies to save on debt payments going forward. And if you’re really struggling, you might want to consider professional help by signing up for credit counseling.
4 steps to take before you retire
Taking these steps before your retirement party can make it a lot easier to pay off debt in your golden years.
Step 1: Consolidate your debt.
Consider taking out a debt consolidation loan to pay off your high-interest debt, especially credit card debt. A debt consolidation loan can get you more favorable rates and terms and help you pay off your debt faster — ideally, before retirement. If you can’t pay it off before, a long-term debt consolidation loan can lower your monthly cost to an amount you can afford on your retirement income.
Doing this before you retire is key. That’s because it’s a lot harder to qualify for a competitive rate on a loan if you rely on a pension, Social Security or other government benefits as your main source of income.
Step 2: Pay off high-interest debt ASAP.
Debt consolidation is one method of managing your high-interest debt. But if that’s not an option for you, start making extra repayments toward this debt as soon as possible. High-interest debt comes with a cost that adds up faster than debt with a lower interest rate. This means the faster you repay it, the more you’ll save overall. This is usually a lot easier to do while you have a steady income than in retirement.
Step 3: Avoid unnecessary borrowing.
Now is the time to be paying off debt, not piling on more. While you should generally avoid debt that isn’t a necessity, it’s particularly important now. Adding an extra monthly expense limits your income and eats into the retirement savings you worked long and hard to build. This especially includes borrowing from your 401(k), unless you’re absolutely confident you can repay it before you leave your job.
Step 4: Take out essential loans before you leave your job.
While inessential borrowing is a bad idea, now is the time to take out any vital loans you may need now or in the future. This is because it’s easier to qualify for a more competitive rate and term when you have a regular paycheck rather than just retirement savings.
4 ways to manage debt after you retire
If you still have debt after you retire — or need to take out a loan — follow these tips to save and stay on top of your repayments.
1. Continue to prioritize high-interest debt
Focus on paying off debt with higher interest rates first. This might mean prioritizing credit card debt over medical debt or student loans, which tend to have lower interest rates.
Also, consider benefits when figuring out which debt to pay off first. Some types of debt like mortgages and student loans allow you to deduct interest payments from your taxes. If it comes down to making extra payments on your mortgage or a student loan with the same rate, consider which allows you to save the most on your taxes.
2. Get a post-retirement job
If your repayments are too much to handle, consider getting a part-time job. It doesn’t have to be the start of a new career — think of it as a way to explore something you never got the chance to while you were at work. Having a regular paycheck can also make it easier to qualify for a new loan or credit card if you need to.
3. Back your loans if you need to borrow
Put up assets as collateral or consider borrowing with a cosigner if you need to take out a loan. These can help you meet lender eligibility requirements and get a better rate if you don’t have a job. Many lenders have employment and minimum income requirements that you might meet on your own with an unsecured loan.
4. Take advantage of financial assistance programs
If you’re still struggling with repayments and don’t know where to begin, consider looking for personalized advice. Consider signing up for credit counseling at a nonprofit agency near you. A credit counselor can help you go over your options and come up with a payment plan that makes sense for your budget. The Department of Justice has a searchable list of government-approved agencies on its website.
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Updated November 21st, 2019
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Bottom line
Taking steps to pay down your debt before retirement can be key to staying on budget. But if you need to borrow after you leave the workforce, consider getting another source of income or backing your loan to avoid a high interest rate. And prioritize paying off high-interest debt first to save the most overall.
You can learn more about how borrowing works by reading our guide to personal loans.
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