Debt: How to Handle It During Your Retirement Years

It’s one thing to be carrying debt while you still have a full-time income. But it’s quite another to be facing mounting debt when you’re retired and living on a fixed income.

Talk about sleepless nights and anxious days! For many retired persons, what should be “The Golden Years” are often mired in debt, at least according to a recent retirement survey.

Statistics show that four in 10 retirees say that trying to pay off their existing debt is one of their largest priorities. Americans past the age of 62 are also increasingly filing for bankruptcy. In fact, one in seven filers for bankruptcy is also said to be 65 or older which is five times that for the same age group only 25 years ago.

What’s the major culprit?

Unexpected medical bills paired with diminished retirement savings. Solutions? Today, we will explore a few ways to pay off debt during retirement years!

How to Pay Off Debt During Retirement

When it comes to paying off debt of any kind, the key is cash flow, liquidity, and the ability to directly target your specific debts.

One popular option is for debt-ridden retirees to apply for a reverse mortgage. Available to anyone 62 and older, this loan allows homeowners to tap into their equity in the form of one lump sum payment or monthly disbursements.

Not only do you get to stay in your home, but the loan isn’t expected to be paid off until you decide to move or the borrower passes away (this is what my grandfather did in order to afford his in-home nursing care).

For someone over 62, they can find out how much of a reverse mortgage they qualify for right here using a reverse mortgage calculator.

Obviously, in a perfect world, you should plan on entering into retirement entirely debt-free, although carrying a low-interest-rate mortgage is perfectly normal (unless you decide to go for the reverse mortgage).

However, if you lose your job, or unexpected medical bills come your way, or perhaps one of your children is in dire financial trouble due to outstanding student loans, you shouldn’t panic. There are several financial maneuvers you can take to reduce the sudden onslaught of debt and get you “back in the black.”  

Credit Card Debt 

Says retired patent attorney Robert Bell, for people in financial trouble, a credit card can be akin to “a loaded handgun in your pocket with the safety off.” Bell is no stranger to debt. Having sold off a portion of his investment properties ten years ago, he was socked with an unexpected capital gains tax bill of $40,000. He didn’t have enough cash to pay the debt off. 

He made the grave mistake of settling the debt with a credit card. All it took for the card issuer to jack up the interest rate was one late payment. “I was making a $500 credit card payment,” Bell went on, “and $250 of it was interest.”

If you’re desperately trying to pay off large credit card debt, you need to transfer your balances to cards that offer zero percent introductory rates for a specific number of months.

Next, divide the amount you owe by the number of months that zero percent applies. Lastly, you must discipline yourself to pay off the required amount each month prior to the rate rising.

Mortgage Debt

Many retirees are carrying mortgage debt into retirement which can be a real burden for those on a fixed income. But with low interest rates, homeowners 62 and older should consider either refinancing or going with a reverse mortgage loan. 

But if you’re still 15 years away from retirement, and have 20 years left on your mortgage, it’s possible you can refinance to a 15-year, lower interest loan. That way, you’ll be debt-free by the time you hit your golden years.    

But if you’ve already hit your retirement years and still carrying a mortgage, you might consider selling your home and moving into something much smaller. You can also move to a cheaper state like Texas. Or you can even sell your home, give apartment living a shot, and invest your profits. 

Mortgage Debt Over 60: Depending on how much you owe, mortgage debt over the age of 60 may or may NOT be worth paying off. It really depends on numerous factors however, if you're able to get mortgage free the one downside is the loss of an interest rate deduction on your taxes. On the other hand, housing is still the most expesnive item for retirees.

Medical Debt 

Says the Consumer Bankruptcy Project, for older Americans who have had no choice but to file for bankruptcy, almost two-thirds of them attested to medical bills being the culprit. While Medicare reform seems to be on the way, at present it falls short of paying off the health care costs for seniors. 

In fact, as recently as 2013, more than a third of traditional Medicare recipients were forced to spend 20 percent of their savings on out-of-pocket health care costs. If Medicare is not reformed, that number is expected to balloon to 42 percent by 2030.     

In the meantime, you can take some steps to fight off medical debt. For instance, if your insurance provider has denied your claim for a medical expense, you have the right to appeal the decision. You can also call your state health insurance assistance program to find out what options are available to you. Also, many health care providers are open to negotiating a payment plan that suits your income.

The Verdict –

Do what is best for you and your family's needs when it comes to paying off debt. You have to prioritize your retirement income because let's face it, you are on a fixed budget in most cases once you enter the golden years.

Using a reverse mortgage could be a great solution in some cases, or a not-so-great solution in other instances. Like anything, what works for some might not work for you. Leveraging equity to pay off debt is actually a common practice, but it needs to be the best thing for you, your family, and your retirement needs!

Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $200,000 in student loans with his wife in less than four years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post and more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their chocolate lab named Morgan, working out, helping others with their debt and recommend using Personal Capital to track your finances.