Managing Debt in Retirement
Approximately four out of every five Americans carry some form of debt today. The challenge then becomes how to handle that debt wisely, even more so for retirees and near retirees. Debt is created when an individual chooses to buy now but can’t immediately pay cash for the entire purchase. The following basic spending strategies can help you control the amount of debt you create.
Post-Retirement Debt Control Strategies
- Spend less than your retirement income. This saving tactic works well during the working years and will continue to benefit you in your retirement years.
- Take control of how you spend money. Tracking what you actually spend using a pencil and paper, a spreadsheet program on a computer or money management software can help you avoid potential debt traps.
- Build an emergency fund equal to at least three months of living expenses. Using emergency funds for unexpected expenses or infrequent but anticipated expenses (such as repairing a damaged roof, replacing a broken dryer or buying new automobile tires) avoids the use of expensive debt.
The use of debt is becoming more common for people in retirement. If you find yourself in a situation in which you must go into debt, the following guidelines can help you sensibly manage your loan obligations:
- Know the costs of using credit. Read the fine print. Be aware when fees could be assessed (e.g., fees for late payments) and when higher than normal finance charges can be applied (e.g., penalty interest rates for late payments).
- Lower the costs of using credit (e.g., lower interest rates and paying credit card bills in full).
- Pay all your bills on time every month.
- Avoid spending more than 30 percent of a credit limit from any one source.
- Know what you owe.
- Begin to pay down or pay off a mortgage after paying off high-interest debt, such as auto loans, credit cards and payday loans.
- If your spending is under control but your overall debt is too burdensome when you begin retirement, consider downsizing your home, moving to a less-expensive area or taking on a part-time job. Even small cut backs in expenses can add up to big savings over time.
- Do not hesitate to get help in addressing personal debt issues from a non-profit credit counseling agency.