The Risks of Retiring With Debt and How To Avoid It

/ BY / Personal Finance

Most people understand the importance of having a healthy savings account by the time they retire. However, a growing number of people are spending their golden years in debt. One study by a non-profit finance firm, CESI, found that 56 percent of all retirees begin their retirement with some form of debt.

Why People Retire With Debt

So why so much debt? There are a number of reasons retirees are finding themselves in debt, including:

  • Medical and funeral expenses. The CESI study reported that 75 percent of their survey respondents cited medical or funeral expenses as the main reason behind their debt. With health problems increasing as we age, many seniors are putting their debts on credit. However, those who retire already in debt are often saddled with credit card debt or home and auto loans as well.
  • Insufficient retirement funds. Some opt to put their extra money towards retirement savings instead of paying down their debt. This gives them a larger bank account, but more of their fixed income is going towards debt payments and interest.
  • Instant gratification. Many people have debt when they retire because of an inability to delay gratification. Instead of putting off a large purchase altogether or waiting until they have cash, they charge vacations, furniture, remodels, and so forth.

The Risks of Retiring With Debt

Retiring with debt can take both a financial and emotional toll on seniors in a number of ways, including:

  • Increased stress. Financial problems are some of the major stresses people deal with. This stress often directly affects physical health as well.
  • Limited income. When you retire, your income is usually limited to your retirement accounts and pension. With no money coming in, high debt and interest payments can quickly deplete these accounts.
  • Less financial freedom. Many find that their fixed income limits their ability to enjoy their retirement. Instead of traveling, visiting family, and enjoying themselves, retirees with debt often find themselves cutting back on things they enjoy in order to meet their financial obligations.
  • Financial distress. In extreme cases, seniors with high loads of debt are forced into bankruptcy. In fact, more than 20 percent of all bankruptcies filed in the United States are by those over the age of 55.

Avoiding Debt in Retirement

If you are nearing retirement age and are carrying a high debt load, don't panic-there are plenty of ways you can take control of your finances and still retire debt-free (or close to debt-free).

  • Make a plan. The first thing you should do is make a plan for paying down your debt. Sit down with your statements and list your creditors, how much you owe, and interest rates. From there, you can develop a workable plan that allows you to pay off debt quickly.
  • Don't incur more debt. You will never get out of debt if you continue to make purchases on credit. Avoid incurring more debt at all costs.
  • Downsize. You can save money on your mortgage or get rid of it altogether by downsizing. For example, if you have a large two-story home, you may be better off selling and using the equity to purchase or put a substantial down payment on a smaller home that's one story and will be easier to manage as you age.
  • Reassess your needs. Think about your needs during retirement and plan accordingly. If you have two cars, for example, chances are you won't need two vehicles. Sell the car with the higher balance and focus on paying off your less-expensive car.

Going into retirement without debt isn't easy, but it's well worth it. Start paying off debt now so you can enjoy your golden years without being saddled with debt.

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.