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We, present company included, often preach about the importance of retiring our debt before we retire ourselves. We write about how the burden of servicing debt on a fixed retirement income can put a strain on you future plans, about how it can compromise your ability to weather an unforeseen future financial emergency and how it could impact your potential legacy, not to mention the physical and emotional toll of financial stress.

But what happens when a debt-free retirement isn’t your reality?

This is, in fact, the case for a growing number of retirees. According to a study by the Employment Benefit Research Institute, nearly 50% of those aged 75+ have some outstanding debt, much of which is mortgage debt. The Federal Reserve’s Survey of Consumer Finances estimates 70% of US households headed by people ages 65-74 had at least some debt and half those 75 or older. In Canada, a SunLife Financial study reports that 66% of retirees have credit card debt.

So how do you manage if this is closer to your own reality? How do you manage life on a fixed income with debt if you haven’t been able to eliminate it before then?

Assess and Acknowledge

An important first step is to fully assess the ‘what’ of your situation. It’s time to construct your full financial profile with facts, not estimates. Open the bills you have been avoiding, print off those credit card statements you have merely glanced at. How much do you owe and to whom? What is the interest rate and what are the terms and conditions of those debts, including prepayment or late penalties? Having all the facts in front of you will enable you to move forward to constructing a clear plan of action.

It is also an important exercise to assess the ‘why‘ of your debt. How did you get here? Was it a one-time financial setback that caused you to take on the debt or is it an ongoing behavioural issue that you need to address in real time to prevent a worsening situation going forward?

In the case of the latter, tracking your spending will reveal critical information about where those cash flow shortfalls are coming from. You can take that knowledge and use it to create a realistic, achievable budget for retirement, including your debt service payments.

A key point here is to not add to the debt in retirement, but to live within your means. Unsure of how to construct a budget? Online tools like those available at www.mymoneycoach.ca will guide you through creating a personalized plan, allowing you to consider and save different scenarios, to understand what irregular or seasonal expenses you might be missing and so on.

Need more support? Reach out to a trusted advisor or your local not-for-profit credit counselling agency for information, options and resources.

Explore Refinancing

If possible, consider the possibility of refinancing before you retire. You are typically a more attractive candidate to your financial institution while you are still employed and earning. You might even weigh the option of working an extra year or two if it will give you the surplus to make a significant dent in your debt.

The ultimate goal at any time, of course, is to make monthly debt burden more manageable for when you are on a fixed income. So communicate with your creditors early, ask about options for consolidation and reduced rate products.

Craft A Plan

Now that you know what you owe and why, and you have a realistic budget in place for your monthly living expenses, it’s time to decide on a repayment strategy. Options include the ‘Avalanche’ method, where you service the minimum required on all debts, and put any excess resources towards the highest interest debt first. When that is paid off, all monies used for it are then rolled onto the next highest rate debt and so on. The ‘Debt Snowball’ is similar in that minimum payments are being made on all debts, but this time the excess funds are directed towards the lowest balance debt outstanding.

Keep prepayment options and penalties in mind when choosing the appropriate method. As well, depending on where you live, if you might be in a situation where mortgage debt can serve as a tax benefit, in which case you should consult with your financial advisor or accountant for guidance when structuring your plan.

Remember, every extra dollar helps save time and money over the course of a debt. Be vigilant and monitor your progress.

Find Additional Income

One question to ask yourself is where you can find extra income to help you retire your debt faster. Do you have a hobby or a skill you can monetize and turn into a side hustle? Can you take on a few shifts at a local business to pick up extra cash? Can you take on a roommate, tenant or student to bump up your income and pay off some debt? Is it time to downsize and free up some capital to put onto your debts? Or can you declutter, and finally realize the value of that comic book collection that has been gathering dust all these years. Who wants to dust in retirement anyway?

Any extra money you can generate from any activity should go directly onto your debts to accelerate their repayment.

A final thought: Are you a co-signer on anyone else’s debts? If so, what can you do to extricate yourself from that situation before you retire, in order to avoid a nasty surprise down the road as a result of someone else’s financial decisions. It would be a shame – and a stress – to find yourself on the hook for someone else’s debt after you’ve worked so hard to eliminate your own.

While the common wisdom is that it is best to retire your debt before you retire yourself, that is not always possible. By acknowledging and addressing your own situation head on, however, and seeking some outside support if necessary, all is not lost, and a happy retirement is still in your sights.

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About the author

Anne Arbour is the Credit Counselling Society’s Financial Educator for the Greater Toronto Area. Anne has over 25 years combined experience in facilitation and financial services, including operating her own small business financing company. She holds an MBA and is a Certified Educator In Personal Finance.

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