Dealing with Debt in Retirement

The prospect of living with debt on a fixed income can be rather sobering. This is why most financial experts strongly advise paying off all of your obligations before retirement. But what if you have no other choice? How can you go about dealing with debt in retirement?

Keep Calm and Think It Through

The good news is you have a whole lot of free time now. You can still do things to improve your financial situation, even as you enjoy many of the benefits of a retirement lifestyle.

Let panic fall by the wayside. Instead, consider some ways to generate some extra cash to deal with your remaining debt without biting into your nest egg. To accomplish this most effectively, you’ll need to assess your situation and develop a plan.

Review Your Situation

The first thing to do is get a handle on exactly how much cash you have on hand to spend each month.

Next, make a list of all of your recurring living expenses — food, entertainment, utilities, and the like and total them up.

Then, make a list of all of your debts such as credit cards, car loans, mortgages and the like. Record each of them in order from highest to lowest balance, taking note of the monthly payment, the outstanding balance and the interest rate they carry. Add all of the monthly debt servicing payments together to determine the total amount they require each month.

Once this is accomplished, find the sum of those two outgoing categories and compare them to your income. You’re in good shape if you have more coming in than going out, and it will continue to be that way for the long term. If you have more going out, or it’s really close to parity, you’ll need to come up with a strategy for dealing with the debt in the most expeditious manner possible.

Develop a Spending Plan

“Budget” is such an ugly word with its connotations of doing without. “Spending plan” sounds like fun; hey, we’re getting something because we’re spending — yay!

You’ll be in a better position to see what you need to do to kill those bills as soon as possible with a handle on your coming in and your going out. Just make sure all of your needs are covered completely before you go on to the next step.

Craft a Strategy

This should be based upon the amount of room you have left in your spending plan once all your needs are met. Debt snowball or avalanche methods might be viable in some cases.

U.S News & World Report describes each of these as follows:

  • Avalanche method: This involves making minimum payments on each debt except the one with the highest interest rate. To tackle the debt with the highest interest rate, pay off as much as you can each month. Once that debt is wiped out, focus on the balance with the next highest rate. Continue this strategy until all debt is paid off.
  • Snowball method: For this strategy, you pay the minimum on all balances. With any extra funds, you pay off the smallest balance first. Then you pay off the second-smallest debt. The idea is that you gain momentum along the way, much like a snowball rolling down a hill, and eventually pay off the largest debt.

Both can be effective, assuming you have the wherewithal to implement them. Taking a part-time job to help boost your income to accomplish this is a good idea, if your health permits.

Otherwise, you might need to avail yourself of outside assistance.

Debt negotiation or debt settlement might be your best option in extreme cases. If you decide to go this route, you’ll want to do everything possible to ensure you sign with a legit debt relief company to avoid making your bad situation even worse.

Proceed Very Carefully

Do everything possible to solve this problem with cash before you bite into your nest egg. Cracking your savings open could inadvertently trigger tax consequences and/or disrupt an investment plan.

Before you do any of the above, talk to a debt counselor about dealing with debt in retirement. Their services can often be had for free and the good ones have solid advice to share.

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