Tackle Your Debt Before Retirement

You should aim to leave the workforce with as little debt as possible. Otherwise, money that could be spent enjoying your golden years could end up going to repaying loans.

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The debt just crept up on Kathy Lee, 59, and her husband over time. The couple made some home improvements thinking it would boost Lee's in-home day care business. Then there were the costs of an international adoption that never happened. In all, the Lees racked up about $72,000 in credit card debt and a car loan on top of their $582,000-plus mortgage. "We had so much debt," says Lee, a social worker for seniors in Northern California. "It's so hard to get out of it."

Then one day Lee heard personal finance guru Dave Ramsey on the radio extolling the value of getting and staying out of debt. She became a regular program listener and began reading personal finance blogs. After attending a local Ramsey seminar, the Lees sold possessions they no longer needed and worked part-time jobs for extra cash. They also stopped using credit cards. In more than a year, they paid off roughly $44,000 in consumer debt.

The 2008 financial crisis ended their progress abruptly. Lee's husband, who worked in commercial construction, struggled to find employment. Meanwhile, parents who had lost their jobs withdrew their kids from Lee's day care. She was forced to close the business and find other work. Eventually, the couple filed for bankruptcy.

Today, about a decade after declaring bankruptcy, the couple lives debt-free, and they remain committed to the fundamentals they learned while paying down debt. "Now we have more peace of mind," Lee says. "We don't have to worry about debt collectors."

Adults today are nearing and entering retirement with more debt than previous generations. Americans ages 50 to 59 had $3.39 trillion in debt in 2021's first quarter, twice as much as 20 years ago after adjusting for inflation, according to data from the New York Fed Consumer Credit Panel and Equifax. For people 60 and older, it was $3.58 trillion, more than three times as high after inflation compared to first quarter 2001.

Much of that is mortgage debt. The number of adults carrying a mortgage in retirement has doubled in the last 20 years, says Caezilia Loibl, a professor of consumer sciences at Ohio State University in Columbus. Mortgage debt in retirement is tied to increased food insecurity and trouble paying for medications. "Being able to borrow against the equity in your home can be important later in life," she says, because it "eases other financial burdens for an older couple."

"Debt is kind of evil when you go into retirement," says Mike Riffel, private wealth manager at Lucco Financial Partners in Highland, Ill. "You are stuck with a guaranteed payment you have to make when the focus in retirement should be to minimize your expenses. That is something that will haunt you until it's repaid."

And the strategies for taming that debt don't get any easier late in life.

Senior Retirement Editor, Kiplinger.com

Jackie Stewart is the senior retirement editor for Kiplinger.com and the senior editor for Kiplinger's Retirement Report.