Tackle your debt before retirement

Adults today are nearing and entering retirement with more debt than previous generations.

Americans ages 50 to 59 had $3.4 trillion in debt in 2021’s first quarter, twice as much as 20 years ago after adjusting for inflation, according to data from the New York Fed Consumer Credit Panel and Equifax. For people 60 and older, it was $3.6 trillion, more than three times as high after inflation compared to first quarter 2001.

Much of that is mortgage debt. The number of adults carrying a mortgage in retirement has doubled in the last 20 years, says Caezilia Loibl, a professor of consumer sciences at The Ohio State University in Columbus. Mortgage debt in retirement is tied to increased food insecurity and trouble paying for medications. “Being able to borrow against the equity in your home can be important later in life,” she says, because it “eases other financial burdens for an older couple.”

“Debt is kind of evil when you go into retirement,” says Mike Riffel, private wealth manager at Lucco Financial Partners in Highland, Illinois. “You are stuck with a guaranteed payment you have to make when the focus in retirement should be to minimize your expenses. That is something that will haunt you until it’s repaid.”

How much debt is too much? One gauge is your debt-to-income ratio, which measures how much of your monthly gross income goes to debt payments, says Jonathan Howard, a financial planner at SeaCure Advisors in Lexington, Kentucky. To calculate, divide your monthly debt payments by your monthly pretax income — retirees should include pensions and Social Security benefits. The lower this number the better, though a ratio under 15% is healthy, Howard says.

If you own your home, refinancing the mortgage can reduce the interest rate and the monthly payment. The savings can be used to pay off higher-rate debt like credit cards. Don’t refinance your home unless you can lower the interest rate by at least three-quarters of a percent, Riffel says. Also, avoid lengthening the term of your loan, says Paul Humphrey, founder of Humphrey Financial in Forest Lake, Minnesota.

To repay debt, use the avalanche method. Under this method, you attack your debt with the largest interest rate first, regardless of the amount owed. If you have medical debt, experts say you should never pay those bills using a credit card. Instead, contact the provider and discuss repayment options. Most medical providers are open to working out a repayment plan, often with little or no interest.

If you can’t make any headway repaying the debt, get professional help from a nonprofit credit counseling agency, preferably one affiliated with the National Foundation for Credit Counseling. Counselors charge a startup fee, usually about $20 to $40, and then a monthly fee, ranging from $20 to $30, for a debt management plan. Budgeting plans are free.

Jackie Stewart is a senior editor for Kiplinger’s Retirement Report. For more on this and similar money topics, visit Kiplinger.com.