6 Smart Ways to Deal With Debt in Retirement

A “rapidly growing” number of households have debt in retirement, raising concerns about the financial well-being of older adults, according to researchers at the Center for Retirement Research at Boston College.

Managing debt can be especially challenging in retirement, given that your income typically drops and your medical expenses increase. On the other hand, many older Americans have assets that can come in handy for dealing with debt and often a wider range of lifestyle options to leverage.

To be clear, debt in retirement isn’t always bad: For example, many Americans currently have low-interest-rate mortgages, including those who bought a home or refinanced before the Federal Reserve began hiking rates in 2022, and there's no need for retirees to rush to pay these off. Plus, when you can earn 5% or more on bank CDs, you’re probably better off investing money you might otherwise use to pay off your mortgage, says Alexander Davis, financial advisor at Carroll Advisory Group.

But what can be problematic is high-interest-rate debt, like payday loans, credit card balances and personal loans. Inflation is also forcing many lower-income individuals to rely on debt to keep up with expenses like food, housing and medical bills, says Josh Hodges, chief customer officer at the National Council on Aging.

Fortunately, there are resources, strategies and people out there to help you deal with this.

"It often feels like this is a problem that is very personal, that you are facing it by yourself, but the reality is you are not alone," Hodges says.

Here are six tips for dealing with debt in retirement.

Tackle high-interest-rate debt first

It can be tempting to use any available funds to clear your balances, but the smartest approach to paying off debt is usually starting with the highest-interest-rate balance and working your way down until it’s all paid off.

With the “debt avalanche” method, you may want to make minimum payments on your other debts while you focus on a high-APR credit card. You’ll save money on interest with this strategy, helping you get out of debt sooner.

Increase your income

Yes, this is easier said than done, but boosting your earnings should be a serious consideration if you don’t have enough money to pay off your debts (let alone pay for your retirement).

“If you're already living on fixed income, and you need every dime of that fixed income, most of the time it does come down to a returning-to-the-workforce conversation, even if that's just 10 to 20 hours a week,” Davis says.

Downsize — or relocate

According to the Center for Retirement Research, there's a high-risk group of senior borrowers who have "too much house" and may need to consider moving. If you're downsizing or relocating to a more affordable market and you have enough equity to pay cash, you may be able to get out of mortgage debt entirely and perhaps have money left over to pay off other debts, Davis says.

For some of their clients, he says, relocating can be a win-win: They move somewhere where homes are more affordable (and the cost of everything else is lower), and they get to move somewhere they would prefer to live anyway.

Tap your home equity

If you have high-interest-rate debt like credit card balances, you may want to stop that interest from accruing by tapping into your home equity with a reverse mortgage, a cash-out refinance or a home equity line of credit (HELOC) loan.

These options are less appealing when interest rates are high, but if you have a high APR on a credit card, you'll want to tackle that debt at all costs.

Wait to take Social Security

If you haven't already taken Social Security, you can potentially improve your financial picture in retirement by waiting past age 62 to claim benefits. You can expect to increase your lifetime Social Security payout by $180,000 if you wait until 70.

It's not possible for everyone, but Hodges says working a bit longer and waiting to claim Social Security could go a long way toward dealing with debt.

Look at federal benefits

Lower-income seniors may qualify for federal benefits, including programs that help pay for food, transportation or even housing, Hodges says. The National Council on Aging's benefitscheckup.org website can help you understand what benefits you may be eligible to receive.

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