Here’s what you need to know about managing your debt in retirement – CNBC | Vette Leader

Most Americans have debt, whether it’s from student loans, a mortgage, a credit card, or a car loan.

But what happens to debt management once you’re retired or about to?

While many Americans were able to pay off some of their debt in the early days of the pandemic, when activity restrictions and aids like stimulus checks boosted household budgets, they are now seeing many types of debt rising again.

Total household debt increased by $333 billion to $15.58 trillion in the fourth quarter of 2021, the largest quarterly increase since 2007, according to a report by the Federal Reserve Bank of New York. Credit card debt grew by a record during the same period of $52 billion, the Fed reported.

Debt has also been rising steadily in households where the head of household is 55 or older, rising from 53.8% in 1992 to 68.4% in 2019, according to a study by the Employee Benefit Research Institute.

“We’re seeing more and more people with a variety of debts retiring,” said Shweta Lawande, board-certified financial planner and analyst at Francis Financial, a New York-based firm.

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Organize your debt

Some people cannot avoid carrying debt into retirement. However, not all debt is created equal.

For example, a fixed-rate mortgage will be less of a problem in retirement than a credit card, student loan, or health insurance debt.

“A mortgage is generally going to be a really stable payment over time,” said Shelly-Ann Eweka, TIAA’s senior director of financial planning strategy, adding that this is also something that people have generally budgeted for.

There are reasons more Americans are retiring with mortgages today — people are buying houses later, and because interest rates are so low, it can make sense to pay them off slowly over time.

Additionally, it’s widely considered “good debt,” said CFP Diahann Lassus, a managing principal at Peapack Private Wealth Management in New Providence, New Jersey.

However, if you have a lot of high-interest credit card debt, you could continue to grow during your retirement and add additional spending to your budget.

Also, more and more Americans are retiring with student loan debt, either from their own education or from loans they took out to help children or grandchildren go to school. Those with debt of their own may want to consider various forgiveness programs that call off their loans after a period of time, such as B. 25 years of on-time payments.

Retirees should also avoid taking on more educational debt or taking money from investments to help family members with school expenses.

“You can take out credit for school, but you can’t take out credit for retirement,” Lawande said.

budget homework

Before reaching retirement, Americans should take a close look at their finances and debt to make sure they are on the right path to leaving the workforce. According to Craig Copeland, director of wealth benefits research at EBRI, this should be the case at least by age 55.

“If you have a substantial credit card balance, you should attack first and then just pay your monthly mortgage,” he said.

It’s important to do this a few years before you plan to retire so you can adjust your schedule accordingly. For example, it may make sense to work an extra year or two to pay off a large credit card balance. Delaying your Social Security benefit will also prepare you for a major test in the future.

“It’s ideal to have those debts paid off before retirement,” Eweka said. It’s also better than using money from a retirement account to pay down your debt, she said. That could result in penalties depending on your age, leave you with a hefty tax bill, and take more money out of the market than necessary, all of which could impact future income in retirement.

Getting your finances in order before you leave work can also help you develop solid habits that will serve you well in retirement.

“I can’t stress this enough – managing spend is really the foundation of financial success,” said Eweka. “Living within your budget is crucial.”

Get professional help

If you’re worried about not making the move to retirement or are struggling to manage your debt, working with a financial professional can help you develop a plan for your future.

“It doesn’t matter if you’re thirty years away from retirement or five years away, working with a financial advisor or financial planner will help ensure your plan is appropriate,” Eweka said.

An advisor can also help you understand your current financial position and use many creative projection and planning tools to help you chart a path for your future, Lawande said.

“The bottom line is that it’s really hard to plan for retirement and make sure you’re doing well if you don’t understand where you are right now,” Lassus said.

It’s also important that you continue to allocate some money for emergency and retirement savings while you’re paying off debt, especially when you find a suitable employer. This is because retirement savings in the market grow over time and with compound interest, starting early means you’ll have more later.

Emergency savings are designed to keep you from taking on more debt if there is a market downturn or you have unexpected expenses such as a home loan. B. a car breakdown.

“Make sure you have a cash cushion that can take you from crisis to crisis,” Lawande said.

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