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The Golden Years: Navigating Debt in Retirement

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If you find yourself on the brink of retirement while still shouldering debt, you’re not alone. A recent study by the Center for Retirement Research unveiled a troubling trend, indicating that the percentage of U.S. households aged 65 and above grappling with some form of debt has surged from 38% in the late 1980s to a notable 63% by late 2023.

It goes without saying that entering your senior years unburdened by debt could significantly alleviate stress as you transition into retirement. Naturally, the impulse to rid yourself of lingering debt before bidding farewell to your working years is strong.

Proceed with Caution: Pitfalls to Avoid

As tempting as it might be to employ drastic measures to eliminate debt swiftly, certain strategies have the potential to boomerang back on you, leaving you in a less-than-ideal financial position. Here are three actions you should sidestep.

A person at a laptop with a serious expression.

Image source: Getty Images.

1. Resist Raiding Your Retirement Nest Egg

Imagine grappling with a $40,000 credit card debt. The notion of tapping into your 401(k) or IRA might seem like a quick fix. While using a portion of your retirement savings to pay off debt is a sound strategy if you have ample savings, it could spell disaster if your nest egg is more modest.

Depleting 40% of a $100,000 401(k) or IRA balance might obliterate a crucial source of supplemental income, leaving you financially vulnerable during your golden years.

2. Delay Social Security Benefits

Opting to begin collecting Social Security as early as 62 to tackle debt could set you up for long-term financial strain. By filing before hitting full retirement age β€” typically 66 or 67 β€” you risk permanently reducing your monthly benefits, potentially leading to significant financial challenges in the future.

3. Beware of Reverse Mortgages

Considering a reverse mortgage to eliminate debt by leveraging your home equity? Proceed with caution. While reverse mortgages offer a temporary cash infusion, they come with hidden costs and risks.

Repaying a reverse mortgage upon your passing could jeopardize your plans of leaving your home to your children. Moreover, the financial implications and restrictions tied to reverse mortgages could shrink your financial flexibility in the long run.

A Smarter Debt-Reduction Strategy

If you’re eager to shed debt as retirement looms, opt for sustainable tactics instead of risky quick fixes:

  • Distinguish your retirement by extending your work tenure to chip away at debt.
  • Embrace the gig economy with a side job to make extra payments toward your debt.
  • Generate rental income by leasing a part of your home to accelerate debt repayment.
  • Explore debt consolidation options, such as personal loans, to streamline your repayment process.

Retiring debt-free is a commendable aspiration, and reducing your outstanding debt before retiring is undoubtedly a prudent move. However, it’s imperative to steer clear of the ill-advised strategies outlined above.

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The author’s views and opinions expressed herein do not necessarily reflect those of Nasdaq, Inc.

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