The Dangers of Debt in Retirement

Entering retirement with debt could increase your risk of running out of money.


You should have two primary financial goals for retirement: Retire with enough money to meet your retirement dreams, and retire without debt. Sadly, many people are choosing to ignore the second piece of advice and are retiring with a large amount of debt. And we're not just talking about an affordable mortgage payment. A growing tendency among new retirees is retiring with credit card and other consumer debt. This is an alarming and dangerous trend that can quickly derail even the best laid retirement plans.

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Debt is a killer of retirement dreams. Very few retirees walk away from their job and immediately begin earning the same amount of money in retirement. Most people rely on lower incomes in retirement–either in the form of a pension or withdrawals from a nest egg. The problem is that debt can eat up a large portion of your cash flow each month, which reduces your cushion of available money. You might be fine for awhile, but inevitably something unexpected will happen or cost increases will reduce your excess cash flow.

Delay retirement until your debt is retired. If you are contemplating retirement and you still have consumer debt, then it is almost always worth working a few more years before retiring. These extra years of work offer multiple financial benefits. The first is paying off your debts. Being free of consumer debt should increase your cash flow when you enter into retirement. This is important because falling short on cash flow the first year or two you are retired can start up a snowball effect that causes you to get deeper into debt or forces you to begin withdrawing too much money from your nest egg too soon.

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Working a few more years can give you a higher standard of living while you are still working, and potentially earn you a larger pension or larger Social Security payments because you pay more into the system. You will also have more opportunities to contribute to your employer-sponsored retirement plan, such as a 401(k) or Thrift Savings Plan, as well as contribute to an IRA.

Are you retired with debt? There are options for you if you are already retired and you have debt. The first thing to do is assess your situation. Is your debt manageable? If you are meeting your monthly obligations and have sufficient cash flow, then your debt situation might not be too bad. However, it should still be eliminated as quickly as possible. Most retirees are on relatively fixed incomes and missing a payment or other increased expenses could cause financial problems down the road.

Find ways to eliminate your debt more quickly. If you are struggling with your debt, then you need to find ways to accelerate your debt repayment. There are two basic ways to do this: Pay less interest or increase your income.

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You can reduce the amount of interest you pay by refinancing your mortgage, using a debt consolidation loan, or using balance transfer credit cards to reduce your credit card interest rate to 0 percent. However, while refinancing may lower your monthly payments, it will reset the duration of your loan, meaning it will take much longer to pay it off in full.

Take a part time job or consulting gig. Perhaps the best method of repaying your debt faster is earning more money. A part-time job or consulting gig can help you earn a little extra money so you can repay your debt more quickly. Not only will this help you earn more money, but it will help you maintain your skills and keep you energized.

Ryan Guina is a U.S. military veteran, writer, and professional in the corporate world. He blogs at Cash Money Life and The Military Wallet.