Tips for Dealing with Debt in Retirement

Deborah Thorne knows a thing or two about debt’s dangers for older consumers. As an academic, she has studied the issue for decades, and she’s the lead author of a recent study documenting a surge in bankruptcy filings among older Americans.

And yet, at the age of 57, Thorne herself is approaching retirement carrying a load of debt. “I’ll be 65 before my student loans are paid off, and I did not take out huge student loans,” says Thorne, an associate professor of sociology at the University of Idaho. What’s more, “I will be going into retirement with a mortgage,” she says, a move she believes is “financially foolish.”

The debt persists despite Thorne’s frugality, and the financial anxiety it generates touches every aspect of her life. She plans to work until age 70, and she teaches extra classes so that she can boost her savings. She drives a 1989 pickup truck and took only a two-day vacation this year. She sticks to a vegetarian diet and exercises “out of fear” of medical bills, she says. “A lot of people are living on the edge,” she says, “and we’re scared.”

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For a growing number of retirees, the golden years are awash in red ink. Four in 10 retirees cite paying off debt as a current priority, according to a recent survey by the Transamerica Center for Retirement Studies. Older Americans are increasingly filing for bankruptcy, and their representation among the bankrupt population is at an all-time high, according to the recent study by Thorne and her colleagues, which is based on data from the Consumer Bankruptcy Project. One in seven bankruptcy filers is 65 or older, the study found, a nearly five-fold increase over 25 years ago. “If I’m 65 and get really sick and have unexpected medical bills or don’t have enough retirement savings, there’s no rebound,” Thorne says. “There’s no room to screw up in retirement.”

Declining income and medical expenses are the leading causes of older Americans’ financial distress, the study found. In inflation-adjusted terms, the median income of households in their fifties to mid sixties still lags below 2010 levels, according to Harvard University’s Joint Center for Housing Studies. Unplanned early retirement, often caused by job loss or health problems, contributes to retirees’ debt woes, says Catherine Collinson, chief executive officer of the Transamerica center. Nearly 60% of retirees retired sooner than planned, according to the Transamerica survey.

Ideally, you would enter retirement debt-free, with the possible exception of a low-interest-rate mortgage. But if job loss, surprise medical bills or other obstacles have made that seem like a long shot, don’t despair. Savvy financial moves and strategic belt-tightening can tame even the most fearsome debt loads and help put your golden years back in the black.

“If someone is facing a mountain of debt, the first step is taking an inventory,” Collinson says, listing all sources of debt, amounts owed, interest rates and repayment terms. From there, she says, “you can start prioritizing how you’re going to pay it off,” focusing first on high-interest debt.

Credit cards. For those in financial distress, a credit card can be like “a loaded handgun in your pocket with the safety off,” says Robert Bell, 59, a retired patent attorney who lives in Jekyll Island, Ga. He should know. After selling some investment properties about a decade ago, he was socked with a $40,000 capital-gains tax bill that he couldn’t afford to pay. So he put it on a credit card. After one late payment, the card issuer jacked up his interest rate, “and I couldn’t get out from underneath” the debt, he says. “I was making a $500 credit card payment, and $250 of it was interest.”

As of July, the average credit card interest rate for borrowers with decent credit was a record 17.76%, says Ted Rossman, industry analyst at CreditCards.com. Baby boomers are less likely than younger consumers to carry credit card debt, but when they do, they owe higher balances: $3,900 on average, versus $3,300 for Gen Xers and $2,500 for millennials. Younger boomers approaching retirement are in the biggest hole, with an average $4,500 in credit card debt, Rossman says.

Older consumers are using credit cards to supplement their income as well as to help adult children with cell-phone bills, car payments and other expenses, says Melinda Opperman, executive vice president at Credit.org. If that sounds familiar, your first step may be to rein in your financial support of the kids (see “Don’t Let the Kids Wreck Retirement” ).

Resist the urge to pull out the plastic when faced with an unaffordable tax bill or medical bills. An IRS installment plan will likely give you a lower rate and may allow you to pay off your tax tab over a period of up to six years. For medical debt, you may be able to negotiate discounts or payment plans directly with health care providers or benefit from government programs that help eligible families with medical bills. If you slap these debts on a credit card, you may lose access to such options.

If you’re trying to pay off hefty credit card debt, see if you qualify to transfer your balance to a card that offers a 0% introductory rate for a certain number of months. Divide the amount owed by the number of months that the 0% rate applies, Rossman says, and “be really disciplined” about paying that amount each month to wipe out the debt before the rate rises.

The Citi Simplicity card offers one of the more generous introductory periods, Rossman says, with a 0% rate on balance transfers for the first 21 months. But it also charges a 5% fee on the amount transferred. The Chase Slate and Amex EveryDay cards charge no balance transfer fee and offer a 0% rate on balance transfers for the first 15 months.

Bell transferred his credit card debt to a 0% interest card, aggressively paid down the balance and ultimately was able to retire debt-free. Although he still has a credit card, he says, “I treat that thing like it’s a bomb ready to go off.”

Mortgages. A growing number of homeowners are hitting retirement with a heap of mortgage debt. More than 40% of homeowners age 65 and older had a mortgage in 2016, up from 20% in 1989, according to the Joint Center for Housing Studies. And older homeowners’ loan-to-value ratio tripled over that period, to 39%.

For some wealthier homeowners with low-rate mortgages and sound financial plans, carrying a mortgage into retirement may be little cause for concern. But many people with more moderate income—and even some higher-net-worth retirees—find it problematic. Rick Brooks, a principal at Blankinship & Foster, in Solana Beach, Calif., works with a client who had a sizable mortgage on his primary residence and put most of his taxable savings into a down payment on a second home. “In every other meeting since he retired, the question has come up, ‘How do I get this debt monkey off my back?’ ” Brooks says. Unfortunately, “every dollar he spends comes out of a retirement account,” he says, “so the tax cost of getting that monkey off his back is enormous.”

When considering whether to pay off a mortgage before retirement, look at your expected cash flow in retirement, says Ilyce Glink, chief executive officer of financial-wellness firm Best Money Moves. If you have guaranteed income that’s more than sufficient to cover the mortgage and other essential expenses, there may be little pressure to pay off the note before you retire. But many people spend too much cash in the early retirement years, Glink warns.

Be wary of the argument that you should hold on to a lower-rate mortgage because you can earn more in the market than you’re paying in interest. Sure, Standard & Poor’s 500-stock index was up about 18% this year through mid August, but “next year the S&P might be down 15%, and you’re still paying that mortgage,” Brooks says. Also consider how you’re actually investing the money that you would use to pay off the mortgage. If it’s in conservative bonds or certificates of deposit, you’re unlikely to earn more than your mortgage interest rate.

For some homeowners, the 2017 tax reform also tips the scales toward paying off the mortgage. Mortgage interest can still be deducted if you itemize, but tax reform raised the standard deduction and put a $10,000 cap on state and local tax deductions, limiting or eliminating many taxpayers’ ability to itemize deductions.

With mortgage rates falling, homeowners approaching retirement might consider refinancing as part of a plan to pay off a mortgage before they retire, Glink says. Let’s say you’re 15 years from retirement and have 20 years left on a mortgage with a 4.5% rate. You might be able to refinance that down to a 15-year loan with a rate closer to 3%, she says, and be debt-free by the time you stop working.

If you’re just a few years from retirement, refinancing may not help you retire debt-free. But if you live in one of the many areas of the U.S. where home values have skyrocketed, Glink says, you might consider downsizing. Sell your home, and use cash to buy something smaller and less expensive. You would save yourself years of mortgage payments, plus the taxes and other expenses of living in a larger property, and you can plow the savings into your retirement kitty.

Medical debt. Among older Americans who have filed for bankruptcy, nearly two-thirds say medical expenses were a catalyst, according to data from the Consumer Bankruptcy Project. Medicare falls far short of covering seniors’ health care costs. More than one-third of traditional Medicare beneficiaries spent at least 20% of their total per capita income on out-of-pocket health care costs in 2013, and that figure is expected to rise to 42% by 2030, according to the Kaiser Family Foundation.

While medical debt can be overwhelming, it generally should not be prioritized over other types of debt, credit experts say. Medical debt typically carries low or zero interest, and it won’t show up on your credit report for at least six months—whereas delinquent credit card debt affects your credit score right away, according to the National Consumer Law Center.

Use the National Council on Aging’s Benefits Checkup tool to find out whether you qualify for a Medicare savings program or other health care cost assistance that may be offered in your area.

If you’re seeking treatment at a nonprofit hospital, ask the hospital for a copy of its financial assistance policy. The Affordable Care Act required nonprofit hospitals to develop these policies, which may include free or discounted care for low-income patients. Each hospital can set its own eligibility guidelines.

If your insurer has denied a claim, you may have the right to appeal. For help filing an appeal, contact your state health insurance assistance program. Find your local program at shiptacenter.org.

Negotiating payment plans with health care providers may be easier than you think. When Bell, the retired patent attorney, was in the depths of his financial difficulties, his partner had to have an MRI that cost $1,500. “We didn’t have any cash laying around,” Bell says. “I called and said, ‘Can I pay you $150 a month for 10 months?’ They were like, ‘Sure.’ They were happy as a clam,” he says.

Deal with debt collectors. For older consumers, interactions with verbally aggressive debt collectors can be harrowing. Debt collection is a chief source of complaints that older consumers file with the Consumer Financial Protection Bureau.

But a recent CFPB rule proposal governing third-party debt collectors may only make matters worse, consumer advocates say. One issue: The rule authorizes debt collectors to call an individual seven times per week per debt. “We’re very concerned that will particularly affect people with medical bills,” says April Kuehnhoff, staff attorney at the National Consumer Law Center. If a single medical issue leaves you owing money to a health care facility, a physician, a lab and a medical-device company, for example, that could mean 28 debt-collection calls per week.

When dealing with debt collectors, understand your rights. Debt collectors sometimes threaten to garnish retirees’ Social Security or veterans’ benefits, for example—but these federal benefits are typically protected from garnishment if they are direct-deposited in your bank account. You also have the right to tell a debt collector to stop contacting you. To see a sample “stop contact” letter, search “debt collector sample letter” at consumerfinance.gov. This won’t cancel the debt, but it should stop the harassing phone calls.

Get help. If debt has been a persistent problem and you’re unable to make headway on your own, it may be time to contact a nonprofit credit counseling agency. A credit counselor will conduct a comprehensive financial review, analyzing all sources of income and expenses, and look for additional benefits or other resources that may help you bridge the gap, says Barry Coleman, vice president of counseling and education programs at the National Foundation for Credit Counseling.

If necessary, a credit counselor can set up a debt management plan—a voluntary agreement between you and your creditors that typically pays off debts within three to five years and may help reduce your finance charges and fees. Typically, the first counseling session is free, but a debt management plan comes with monthly fees of roughly $20 to $75 a month, depending on the state, Coleman says. Search for nonprofit credit counselors at nfcc.org.