In retirement, managing your debt is crucial.

A majority of Americans have some form of debt, including student loans, mortgages, credit card balances, and car loans.

How does debt management change during retirement?

Despite initial debt reduction due to pandemic restrictions and aid, Americans are now witnessing an increase in various types of debt.

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

The percentage of households with debt has increased among families headed by individuals aged 55 and older, rising from 53.8% in 1992 to 68.4% in 2019, as per a study by the Employee Benefit Research Institute.

As people retire, an increasing number of them are dealing with diverse types of debt, according to Shweta Lawande, a certified financial planner and analyst at Francis Financial in New York.

To achieve financial success, couples should consider joint or separate accounts.

Rank your debt

While some individuals may not be able to eliminate debt before retirement, not all debt is created equal.

In retirement, a fixed-rate mortgage will be less of a burden than credit card, student loan, or medical debt.

Generally, a mortgage is a stable payment that people budget for, according to Shelly-Ann Eweka, senior director of financial planning strategy at TIAA.

The increasing number of Americans retiring with mortgages can be attributed to the trend of buying houses later and the low interest rates that allow for slow payment over time.

CFP Diahann Lassus, managing principal at Peapack Private Wealth Management in New Providence, New Jersey, stated that it is generally considered "good debt."

While in retirement, having a lot of high interest credit card debt could increase and add more expenses to your budget.

An increasing number of Americans are entering retirement with student loan debt, which may be their own or for the education of their children or grandchildren. Those with their own debt may be eligible for loan forgiveness programs that cancel their loans after a specified period of on-time payments, such as 25 years.

It is advisable for retirees to refrain from incurring additional education debt or depleting their investments to assist family members with school expenses.

Lawande stated that while it is possible to obtain loans for educational purposes, it is not permissible to borrow money for retirement.

Budget homework

It is recommended that Americans examine their finances and debt before retiring, with a goal of being financially secure by age 55, according to Craig Copeland, EBRI's director of wealth benefits research.

He advised paying off a substantial credit card balance before making monthly mortgage payments.

To ensure a comfortable retirement, it's crucial to plan ahead and make necessary adjustments a few years before retirement. For instance, working an extra year or two can help pay off a significant credit card balance. Additionally, delaying the taking of Social Security benefits can lead to a larger check in the future.

Eweka advised that paying off debts before retirement is ideal, as using money from a retirement account to pay off debt could lead to penalties, tax bills, and unnecessary market impact on future income.

Organizing your finances before retiring will establish good habits that will benefit you in your golden years.

Eweka emphasized the importance of managing expenses as the foundation of financial success, stating, "Living within your budget is critical."

Get professional help

A financial professional can assist you in creating a plan for your retirement and managing your debt.

Eweka stated that regardless of whether you are thirty years or five years away from retirement, working with a financial advisor or planner will ensure that your plan is suitable.

Lawande stated that an advisor can aid in comprehending your current financial situation and employ numerous imaginative forecasting and strategy tools to guide you in mapping out your financial future.

Planning for retirement can be challenging, especially if you're unsure of your current financial situation, according to Lassus.

While paying off debt, it's crucial to set aside some funds for emergency savings and retirement savings, especially if your employer matches them. This is because investing in retirement savings early will result in more significant growth over time due to compound interest.

Emergency savings can prevent you from accumulating additional debt during a market downturn or an unforeseen expense, such as a car breakdown.

Lawande advised having a financial buffer to weather one crisis to another.

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