Are you nearing retirement age and are burdened by debt? If so, you are not alone. According to a recent study by the University of Michigan Retirement Research Center, millions of seniors entering their retirement years are burdened by debt.
The study found that 1 in 3 Americans who are 50 or older carry non-mortgage debt on a monthly basis. Credit card debt seems to be a major issue. According to the study, some 40% of 50 or older Americans carry at least $5,000 in credit card debt with 22% owing more than $10,000.
Risk of Entering Retirement in Debt
In retirement, you will probably be living on a reduced or “fixed” income comprising benefits from Social Security, a pension plan, a 401(k), etc.
The combination of a lesser income with significant debt could jeopardize your financial security. You could find it difficult to make your new income stretch to pay regular living expenses plus your monthly debt payments. This is especially true if you have debts with high interest rates. Interest rates on debts, such as credit cards, tend to rise faster than the earnings from retirement assets. This could make it difficult for you to earn an adequate return on your retirement investment.
Things could get even more difficult if you incur unexpected expenses. Unexpected medical expenses are especially common in retirement. Many retirees may have Medicare but it only covers a percentage of healthcare costs leaving the rest to be paid by the retiree.
Ways to Reduce Debt before Retirement
The best thing you can do to secure your retirement is to reduce your debt as soon as possible. Here are options to consider taking:
- Focus on paying down debt before investing. Many retirement planners suggest prioritizing paying off debt, especially high-interest credit cards, before saving more in retirement funds unless it is a 401(k) matched by your employer.
- Continue working a few more years. While this may not be an option that appeals to you, it could make a significant difference in your financial security after you retire. You would have the continued income to pay off your debts before officially retiring. Also, according to the Social Security Administration, those who wait to receive benefits at the age of 67 instead of 62 receive almost 30% more each month in benefits.
- Start downsizing. The first step in downsizing comes from checking all your lifestyle expenses to see what you can reduce or eliminate. But, at this season in your life, it may also be possible to downsize your home and car saving you money on mortgage and car payments.
- Get debt elimination help. In some financial circumstances, filing bankruptcy may be the better option of getting rid of your debt before retirement. This is especially true if you are burdened by unsecured debt such as credit cards and medical bills. Unsecured debt can be discharged through bankruptcy at no cost to you or at a reduced rate. Bankruptcy should not affect retirement assets as most retirement accounts are protected by exemptions.
To see if bankruptcy might be an option to help you eliminate your debt before retirement contact us for a free evaluation of your financial situation.