Retiring with debt is a reality many Americans face, whether it’s lingering student loans, mortgage debt, credit card balances or otherwise. While it’s ideal to be debt-free when leaving the workforce, sometimes circumstances require taking the retirement plunge even if you’re not.
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For Therese R., a former administrative assistant from Phoenix, Arizona, she made the decision to retire at age 67 despite still carrying over $35,000 in credit card debt from helping family members in need over the years. Here are five things she wishes she understood before entering retirement in debt.
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You Need a Solid Debt Paydown Plan
“My biggest regret is not having a really solid plan for how I would pay down my debt once I retired,” said Therese. “Without the steady paycheck, I had to be really intentional about where my limited retirement income was going each month.”
She recommends retirees with debt make a strict budget and payment schedule. “Looking back, if I mapped out exactly how much I could put towards my debt principal each month, it would have made the payoff much more attainable.”
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Debt’s Impact on Income Sources
For Therese, carrying debt impacted her ability to claim certain retirement income streams. “What I didn’t fully anticipate was how my debt load would affect getting approved for things like a reverse mortgage on my paid-off home,” she said. “The bank looks at all of your debts and income, so my credit card balances really hampered taking advantage of that option.”
She added that for retirees planning to utilize income sources like rental property or annuity payments, lenders often examine debt levels closely before approving.
Prepare for High Interest Rates
“By the time I retired, my credit card debt was stuck at really high interest rates after years of compounding,” said Therese. “This made putting a dent in the principal balance extremely difficult on a fixed income.”
Her advice? “If you have revolving debt going into retirement, look into consolidating it through a fixed-rate loan while interest rates are relatively low. Those high variable APRs will become harder to outrun.”
Factor In Debt Obligations for Cashflow
Even with Social Security and a small pension, Therese sometimes found herself cash-strapped due to mandatory debt payments. “Some months were really tight after putting a few hundred dollars towards my credit cards,” she said. “I hadn’t properly accounted for how debt repayment could eat into my monthly cashflow.”
To avoid similar issues, retirees should map out expected income sources and make minimum debt payments a fixed monthly “expense” baked into their budgets.
Don’t Sacrifice Retirement Accounts To Be Debt-Free
Retiring debt-free is obviously the goal, but don’t sacrifice every other aspect of your finances to make it happen. “I was so determined to pay off my cards before retiring that I overcontributed to them at the expense of my 401(k),” she said. “That meant major taxes and penalties, and also missing out on the compound growth which is honestly a bummer.”
If she had to do it all again, she said she’d stick to 401(k) contributions with the expectation of some remaining debt in retirement. “You’ll need that nest egg more than you realize,” Therese emphasized.
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This article originally appeared on GOBankingRates.com: I Retired While I Was in Debt — 5 Things I Wish I Knew First
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