Financial Literacy Month: What to Do if You or a Loved One is Retiring With Debt

Life happens.  We have children to support.  We lose jobs.  Marriages fall apart.  By the time we near our ‘Golden Years’ the nest-egg we may have envisioned may be a lot smaller than we thought and in many cases, not there at all due to heavy debt loads.

According to the most recent data from Employee Benefit Research Institute,  families with heads ages 55-64 have an average debt level of about $107,000.  This also weighs heavily on our psychological and emotional well-being.  The study also found that nearly half of workers with a major debt problem are not at all confident that they have enough money for a financially secure retirement.

For African Americans, a debt-burdened retirement may feel inevitable.  A study by Demos finds that 42% of our households are relying on credit cards for basic living expenses, making it difficult to even think about things like investing for retirement and financial security.

[Related: 3 Easy Money Management Tips for Millennials]

“Factors like income and employment account for a lot of the difference in investing and the feeling that we can’t afford to invest.  It’s often a question of resources, not desire,” says Valerie Rawlston Wilson, director of the Economic Policy Institute’s Program on Race, Ethnicity, and the Economy.

The most important thing for people facing retirement with a debt burden to remember is to keep perspective.  You’ve come this far in life and survived many financial challenges. spoke with Shelly-Ann Eweka, a Certified Financial Planner, and Financial Planning Manager at TIAA-CREF about this issue.  There is a lot of finger-pointing and judgement out there when it comes to saving enough for retirement and debt.  For some people, however, life’s challenges, and circumstances beyond their control have put them in this less than ideal situation.

Shelly-Ann Eweka, CFP:  That’s very true.  In addition to life’s circumstances, people are having children later.  That means paying for college later in life, and keeping that bigger home and mortgage longer than expected.  These things make it hard to manage your cash flow, which can drive people to take on credit card debt.

What’s the first thing people should do when they realize that debt is going to be a problem in retirement?

Come up with a debt reduction plan.  You can sit down with a financial planner or seek debt reduction counsel, but you need a plan.  It’s important to remember that getting rid of debt is not something that will occur tomorrow.  It took you years to get into it.  It will take you years to get out of it.  If you’re patient and will stick to a plan, it will pay it off.

*TIAA-Creff recommends National Foundation for Credit Counseling, for debt counseling on its website.

Credit card debt is a big problem with all groups, particularly African-Americans.  We scramble to pay down all of our cards, sometimes missing opportunities to finance that debt at a lower interest rate.  What are some of the things people should consider?

You can consolidate your debt to a lower interest rate card.  You may also get a better rate through a personal loan from a bank or a credit union.  People can also use the equity in their homes to pay down debt, but you must think about the consequences.  You don’t want to end up with a higher mortgage payment that may end up sending you into more debt.  Most important, this is about getting rid of debt to be out of debt.  Not about getting rid of debt so you can rack up more.

You say people should also consider working longer?

Putting in another few years can make a big difference.  Also, consider things you can do for part-time income with a goal towards reducing debt, or a phased retirement.

(Phased retirement is a human resources tool that allows full-time employees to work part-time schedules while beginning to draw retirement benefits).  Read our story here.

What else should people remember when they’re looking at a debt-burdened retirement?

A lot of people will take money out of their retirement fund to pay off debt.  But that may not be wise because of the tax consequences to taking money out of the retirement assets.  Again, the most important thing to do is sit down with a financial adviser or counselor and come up with a plan for paying down that debt.  Also, look at all of your assets.  There may be places you can downsize.