Managing Money

How to Avoid Debt in Retirement

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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 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. You may want to sign 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.

How can I avoid medical debt in retirement?

Medical costs weigh frequently on retirees’ minds, but there are several ways you can limit what you owe or avoid it altogether.

  • Invest in a Medicare supplement plan. Because Medicare still requires you to pay off your deductible and has a copay, enrolling in a secondary insurance plan may help fill the gaps in your current coverage. Just keep in mind that you’ll pay a premium on private insurance on top of your normal Medicare coverage.
  • Negotiate your bill. Medical bills often aren’t set in stone, and they can come to you riddled with mistakes. Carefully review each of your medical bills. If you notice anything wrong, speak up. And if you think you’re overpaying, your healthcare provider may be willing to negotiate the total amount owed for a single lump sum payment.
  • Sign up for a payment plan. Healthcare providers often offer payment plans and in-house financing options for their patients. If you can’t afford to pay your bill, reach out to your provider and ask if there is an option to break it into more affordable payments over the coming months.
  • Continue building your savings. Your HSA account — in addition to other savings — is a great way to avoid borrowing money for medical bills. Focus on maximizing contributions so that you can draw on it to cover copays and your deductible.
  • Avoid high-interest debt. While it may be tempting to use a credit card or short-term loan to cover smaller bills, interest costs can quickly balloon out of control when you’re on a fixed income. Instead, look into secured and unsecured personal loans, both of which tend to have lower interest rates.

If you find yourself dealing with unavoidable bills, there are some steps you can take to make medical debt more manageable.

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.

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