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3 Things to Do If You’re Facing Retirement With Debt

Rita Williams, The Motley Fool

An enjoyable retirement can seem like a pipe dream if you're still in debt during your later years, but you aren't alone.

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How much debt do Americans have by generation?

Americans collectively owe more than $1 trillion on credit cards, according to the U.S. Federal Reserve . The average American owes $6,354 on credit cards , according to Experian, but many retirees and soon-to-be retirees owe even more, on average.

The oldest retirees, members of the Silent Generation who were born in 1946 or before, owe an average of $4,613. While lower than the national debt average, that's still a significant amount of debt for a cohort whose youngest members are approaching their mid-70s.

Baby boomers, the generation currently entering retirement who were born between 1947 and 1966, owe an average of $7,550 on credit cards, nearly $1,200 above the national average. And the soon-to-be retirees in Generation X, people born between 1967 and 1981, carry the highest amounts on their plastic, with an average of $7,750.

Plus, that's just credit card debt. Roughly 30% of folks 65 and older are still paying off their mortgages.

Senior citizens have also begun owing significant amounts in student loan debt. People between 65 and 74 owed $18.2 billion in student loans in 2013, a startling increase from the $2.8 billion people of that age group owed in 2005, according to the U.S. Government Accountability Office. While just 4% of households headed by people between 65 and 74 owe student loan debt, the percentage quadruped between 2004 and 2010.

If you have mountains of debt, and you're facing retirement or you are retired already, there could be in trouble. Many retirees live on a fixed income, meaning they receive a set amount of money on a regular basis from stable investments like bonds, T-bills, annuities and pensions. Social Security benefits average just $1,461.31 a month, which makes up about one-third of the income older Americans need , according to the Social Security Administration.

Debt service on a fixed income has the potential to cripple you financially. If you encounter a sudden healthcare emergency or you require long-term care, which isn't covered by Medicare, you might be forced to turn to high-interest credit cards or short-term loans. The current interest rates on credit card debt are 17.72%, which has been climbing steadily, according to Bankrate,

So what should you do if retirement is looming (or already here) and you're shouldering a hefty debt load? Here are three ways to strategize for your debt repayment mission.

1. Prioritize paying off your debt

What does strategic debt repayment look like? It's paying down your debt in the most effective order to save you the most money in interest payments. Don't just start shoveling all available cash to random outstanding debts. Choose the debt to start repaying based on its terms.

Some debt provides you with financial benefits. Mortgage debt is used to build an asset: your home. Over time, paying down mortgage debt helps you build a substantial amount of equity in real estate. Mortgage debt interest also provides you with a tax deduction. While student loan debt won't give you a tangible asset like a house, the interest on it is also tax deductible, and you're investing in your financial future by becoming educated.

Bad debt is high-interest debt with no specific financial benefit, like credit card debt. While you may have needed and enjoyed what it purchased, the debt service is a drain on your income and there are no tax advantages. So if you're looking at your aggregate debt and it includes credit cards, mortgage, and student loans, prioritize the payment of credit cards.

If your debt is on more than one card, choose one of two repayment strategies to aggressively whittle it down: Debt snowball or debt avalanche.

Debt snowball is where you pay off the card with the lowest overall balance. Once it's paid off, you move to the card with the next-highest balance.

Debt avalanche is where you pay off the card with the highest interest rate, determined by its annual percentage rate (APR). You pay it down by consistently putting extra cash toward its balance, then moving on to repay the next-highest interest debt.

2. Use a job to pay down debt

People concerned about debt in retirement can also use earnings and paychecks to fuel their repayment efforts.

The strategies depend on where you are in your career. If you're in your 30s, 40s, or 50s, it might be better to focus on securing a higher-paying job or snagging a promotion, which would allow you to pay down debt before you even reach retirement. If you're in your 50s or 60s, it could be beneficial to move your retirement age beyond what you may have initially planned. This allows you to keep working and earning, specifically focusing on debt repayment.

Once you near your mid 60s, working as long as possible before retirement has an additional financial advantage. You can maximize your Social Security benefits, because the longer you wait to take them, the higher the amount will be.

Although Americans become eligible for Social Security benefits at 62, the benefit amount is less than it would be if you wait to claim it until your full retirement age (FRA), which varies; (The FRA for folks who were born between 1943 and 1954 is 66, and it rises incrementally until it hits 67 for the cohort born in 1960 and after.) If your FRA is 66, for example, and you start claiming benefits early at 62 because you've left the workforce and you need the money, you'll get just 75% of the benefit amount you would receive if you waited until your FRA .

Social Security benefits go up if you delay taking your benefits after your FRA, rising about 8% per year until it's capped at age 70. So if you delay retirement by waiting to claim your Social Security benefits until your FRA or later, the benefit amount you'll receive will steadily climb.

Additionally, if you earn more work credits or boost your average indexed monthly earnings (AIME) by working into your later years, your eventual Social Security benefits will grow.

If you're already retired and you're not working at all, getting a part-time job can help lower your debt effectively. Allocate all your paychecks from your newfound side hustle to paying down your debt.

3. Lower your living costs

You can also take steps to lower your fixed costs. If you have a lot of debt and a large real estate footprint, consider downsizing or relocating. Reducing square footage can cut your mortgage payments, sometimes drastically.

For instance: Paying a 5% interest rate for a house worth $400,000 may have you shelling out $2,147.29 per month in payments, assuming a 30-year mortgage. But a smaller house worth $250,000? The payments fall to $1,342.05, a savings of approximately $800 per month. That's a lot of potential debt repayment.

This solution may be an especially good one for current retirees, who don't need as much space and may find that downsizing makes upkeep and budgeting more manageable. But even if you're aiming for retirement 20 years down the road, it's worth thinking about how your housing payments in retirement may hamper your ability to reduce your debt load.

It's also a good strategy to consider moving to an area with a lower cost of living (COL), especially if you live in an expensive area now. Many places both overseas and within the U.S. boast lower expenses for necessities such as real estate and food, which can boost your living standard robustly without breaking the bank.

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