What to Do About Debt in Retirement

A growing number of older adults are in debt in retirement, according to the 2022 Survey of Consumer Finances from the Federal Reserve. Among people ages 65 to 74, the share with debt rose to 65% in 2022, up from 50% in 1989 (the first time this question was asked). For people 75 and over, 53% report holding debt in 2022 versus 21% in 1989. This is a big challenge, since people’s income in retirement is traditionally limited. But there are strategies for tackling your balance sheet later in life.

Take note: Not all debt is bad debt. “It’s not necessarily the worst thing to have,” says Jack Heintzelman, a certified financial planner in Boston. If it’s debt that earns you a tax deduction, he says, like a mortgage, it may be fine to hang onto it while you give your money elsewhere a chance to grow.

But if debt is straining your retirement budget or you’re paying a high interest rate, a pay-it-off plan is key. Here are some methods that can help.

Pick up side work

The traditional retirement model — work for 40 years and then quit forever — may not be the most appropriate approach anymore. Supplementing retirement savings and Social Security benefits with part-time earnings can make your money go further and help you pay off remaining debt.

For some people, consulting in their field is a natural step between full-time work and full-time play. Other people can monetize an interest or pick up hourly work a few days a week.

“We have a client who works in a music repair shop for part-time income,” says Colin Day, a CFP in St. Louis. “They get to explore their hobby while also getting some level of income.”

Consider moving or downsizing

Your home is usually one of your biggest expenses, and if you live in a high-cost area, you might be paying high property taxes and maintenance costs, which eat into your ability to pay for other things.

Moving to a smaller home or to an area with a lower cost of living can free up room in your budget. You might also get better weather, to boot.

“We have a fair amount of clients who are moving from more northwestern states with a higher income tax and colder weather down to places like Florida,” says Crystal McKeon, a CFP in Houston, who notes that Florida has no state income tax and decidedly warmer weather.

Andrew Herzog, a CFP in Plano, Texas, recalls a client who’s considering moving to a smaller home that’s closer to his daughter, easier to maintain and potentially mortgage-free if he can sell his current house for a high enough price.

“Downsizing can absolutely work,” Herzog says. “It’s best when you do it for multiple reasons.”

Time your Social Security benefits

The Social Security equation — when to claim, when to wait — depends on your health, your marital status and your savings. But debt can also affect your plans.

Taking Social Security early might give you the income you need to get rid of your balances. “As long as I’m not blowing up my plan by drawing Social Security early, it could help sustain me by not having to draw down my investment assets,” Day says.

On the other hand, waiting to claim means you’ll have a higher Social Security check later — benefits increase by 8% per year after full retirement age until age 70. Depending on the type of debt, it may be better to wait until you can throw more money at it. Talk to a financial professional about the best option for you.

“I would do the calculations,” Herzog says. “That’s a pretty big asset for people when you’re older.”

Tap home equity — cautiously

If you have equity in your home, you might be able to get a home equity loan or line of credit to help you consolidate or pay down higher-interest debt. Take your time in considering this, however, since an inability to keep up with these payments puts your home at risk of foreclosure.

“You have much more to lose if you mess that up,” Herzog says.

Keep in mind, too, that the interest on a home equity line of credit is only deductible if you use it for home improvement-related expenses. And this is a better option for a one-time debt, not ongoing expenses.

“Those living expenses are just going to continue,” McKeon says. “Home equity loans should not be a first priority.”