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Debt Consolidation for Retirees

Retirees are usually on a fixed income, so paying off debt after retirement often looks different. Here’s everything to know about debt in retirement.

May 16, 2022

This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment adviser before making investment decisions.

One of the greatest shifts in our adult lives comes with retirement. We suddenly find ourselves with more free time and less consistent income. 

In retirement, most of us rely on a mixture of retirement funding sources — Social Security, pensions, our own retirement savings plans, etc. But instead of earning a steady paycheck each month, we must decide how much to withdraw from retirement accounts and how much we can afford to spend. 

While some expenses are flexible, others are fixed. If you have debt in retirement, debt repayments might take up a significant chunk of your monthly expenses. 

In this case, anything you can do to reduce your monthly payments could be highly beneficial to your retirement budget. If paying off debt after retirement is on your financial to-do list, consolidating your debts may be worth looking into. 

Tips for paying off debt after retirement

Paying off debt after retirement might look different than it would for someone who’s still working. Here are just a few of the reasons why:

  • Retired people may be on a fixed income with little flexibility

  • Some retired people may have substantial savings/investments and could pay off debt with a lump sum

  • Eliminating a monthly debt payment could have a considerable impact on the quality of life

  • Qualifying for a refinance or debt consolidation may be trickier without employment income

With these differences in mind, here are some helpful tips for paying off debt after retirement. 

Stop adding more debt

First, it’s wise to stop digging the debt hole deeper. That means paying off credit cards in full each month (if using them at all), not taking out optional loans (like a new car loan), etc. 

This might require cutting back on optional expenses and/or increasing withdrawals from your retirement accounts. 

Consider paying off debt with retirement savings

You may have some funds in your 401(k) or pension, IRA or other retirement accounts. If you’re over the age of retirement (59½ in most cases), you can start to withdraw these funds. 

The conventional logic is to use these funds only for living expenses during retirement. However, it can make sense to pay off debt in some cases. 

For example, let’s say you have $10,000 in credit card debt with a 17% interest rate. That’s costing you approximately $1,700 per year in interest alone. If you were to take an extra withdrawal from your retirement account to pay off that debt, you’d eliminate that interest expense. 

This can also make more room in your budget because it eliminates the monthly debt payment. 

Consider utilizing your home equity

More than 79% of Americans over age 65 own homes. If you own a home, you’ll have some equity (value) built up, even if you still have a hefty mortgage. In this case, you can consider something like a mortgage refinance or a home equity line of credit (HELOC). 

These products allow you to borrow against the value of your home equity. You could then use this cash to pay off higher-interest debt and repay the home equity loan over time. 

Consider a 401(k) loan to pay off debt

Another option, if you have a 401(k) retirement plan, is to take out a 401(k) loan. Not all plan providers support this feature, but if they do, it’s well worth considering. 

Taking a 401(k) loan is basically like taking a loan from yourself. You “borrow” money from your 401(k) plan and then pay it back within the designated time frame by returning funds to your 401(k). You’ll pay interest, but the interest goes back into your account. 

This option allows you to eliminate high-interest debt, then repay the 401(k) loan over time with money that you save by no longer having those monthly debt payments.  

Find a side source of income

Just because you are retired doesn’t mean that you can’t earn income. Sources of side income could be selling items you no longer need, consulting part-time, selling crafts, or other options. 

If you can, funnel 100% of these extra earnings into debt payments to eliminate your debt faster. 

Debt consolidation in retirement

Debt consolidation is the process of combining multiple debts into one loan. It’s generally worthwhile when you can use it to save money on interest.

For example, if you retired with credit card debt, you may be paying a high interest rate on that debt. If you consolidated those balances into a lower-interest line of credit, you could reduce your monthly debt payments substantially. 

Debt consolidation for retirees is particularly beneficial for two reasons:

  • It can help simplify monthly bills and your financial picture

  • It can help reduce monthly costs via lower interest rates

Consider refinancing your mortgage or applying for a HELOC if you own a home. You could then use this money to pay off other types of high-interest debt.

Bottom line

Debt can certainly complicate the financial picture during retirement, but you can overcome it if you utilize the tips in this guide. 

Ultimately, you’ll want to weigh all your options and determine what’s best for your situation. That could mean utilizing your home equity to pay off debt, consolidating loans into a single lower-interest loan, or withdrawing from retirement savings to pay down debt. 

Because of the potential tax effects, it’s wise to discuss your plans with a qualified tax adviser before moving forward.