As More People Retire In Debt, Here’s How To Reverse The Trend

By Hanna Horvath, Next Avenue

By the time most Americans enter retirement age, they want to be free from many financial burdens. But for a growing number of older adults, debt has become an unwelcome traveling companion.

According to the Survey of Consumer Finances, the number of households headed by adults ages 65 or older with any debt rose from 41.5% in 1992 to 60% in 2016. The median total debt for older adult households with debt was $31,300 in 2016.

By understanding what’s driving this trend and what resources are available, older Americans can take better control of their financial situation.

The Shrinking Safety Net

Several converging factors over the past few decades have made debt especially difficult for today’s retirees.

Take Marie Gillan, a 64-year-old divorcee living alone in Houston. She receives roughly $1,100 per month from Social Security. Her rent is $500 and utilities run her approximately $160 a month. She also spends about $100 out of pocket each month for prescription drugs.

This is just one example of an older American struggling to live on a fixed income. The Census Bureau says 10.9% of Americans ages 65 and older were living under the poverty line in 2022, the most recent year for which there is full data. That is more than 6.3 million people.

Here are some trends that may be causing the recent debt trap.

Over the last 40 years, traditional defined-benefit pensions have become increasingly rare for private sector workers, replaced by defined-contribution plans like the 401(k).

Inadequate Savings

Without the guarantee of monthly pension checks, individuals must depend more upon their personal savings and Social Security. This places the burden and risk entirely upon each person to save enough on their own.

What’s more, retirees are living longer, which means they often need more savings to fund their retirement.

This shift has left a large segment of the population woefully underprepared financially for retirement. According to the Survey of Consumer Finances, nearly half of American households had no retirement savings in 2022.

“This is the first generation that we’re seeing that had to basically self-fund retirement through 401(k)s, whereas the previous generation of older adults was using pensions,” says Genevieve Waterman, director of corporate partnerships and engagement at the National Council on Aging, a private nonprofit. “What happens when you’re the first guinea pig is that you’re not saving enough.”

After 20 years of relatively stable prices, inflation accelerated over the past four years — making everyday costs more expensive for retirees living on fixed incomes.

This includes rising prices for housing, food, transportation and medical care. Fewer and fewer retirees own their homes, which makes them vulnerable to rising rental prices.

Increasing Health Care Debts

Health care costs are a major contributor to senior debt. It’s often hard to predict how much medical care will cost in retirement — and many Americans don’t save enough.

A 65-year-old couple in 2023 may need to save $315,000 for health care expenses alone in retirement, even with Medicare, according to Fidelity.

Medicare doesn’t cover many services commonly needed by older adults, like certain prescription pharmaceuticals, hearing aids and long-term care. Many seniors rack up debt paying for critical medical care as their health declines.

Without wiggle room in their budgets, many older Americans lean on credit cards and carry increasing balances just to afford essential items. “[Retirees] enter a vicious cycle of having to lean on credit cards and making changes to their spending, which is very hard to break, especially going from a salary income to a fixed income,” said Waterman.

Retirees Still Paying Student Loans

About 3.5 million Americans ages 60 and older also still face student loan payments. Together, they owe more than $125 billion in student loans.

“The number of older student loan borrowers is growing as well,” Waterman said. “That’s because they have either taken out their own loans or are covering their adult children or even grandchildren.”

Managing debts while living on a fixed income can be challenging, to say the least. But there are resources to help older Americans tackle debt and create stronger financial habits.

Options For Older Americans

BenefitsCheckUp, for example, is a free tool offered by the National Council on Aging to help people struggling with debt locate financial assistance programs suited to their needs, whether that is paying for medications, health care, food, housing or utilities. Reducing these costs frees up cash to pay down debt. The tool also provides referrals to local assistance services.

There are several community-based services, or workshops, helping retirees with their finances. Some focus on promoting financial literacy, while others work to connect older Americans with government services. The NCOA offers grants to many of these programs.

“Older adults have told us that they prefer to have a class where they can go with their friends,” said Waterman. She praised the community-based organizations that provide the workshops. “They are the heart and soul of their neighborhood — it’s a safe space they enjoy.”

Marie Gillan turned to one of these local organizations for help after learning she had been disenrolled from her state’s Medicare Savings Program, which helps people with limited income pay their Medicare premiums. Without the program, her Medicare Part B premium was suddenly being withheld from her monthly paycheck.

While helping Gillan reapply, the agency shared more information about budgeting. After the initial appointment, she was able to create a budget and establish short-term financial goals.

“It was an eye-opening experience for her,” said Waterman. “She was struggling, and now she has a budget in place and a better sense of how to manage her money. We also got her enrolled in some benefits programs as well, and that alleviated some of that financial stress.”

How To Manage Debt In Retirement

“Debt repayment becomes a distinct challenge for (people on) fixed incomes,” says Garrett Smith, financial advisor and chief commercial officer at Ascend Investment Partners in Logan, Utah. “Stress and anxiety may result from the obligation for retirees to budget for essential expenses while managing debt.”

Smith outlines some tips to help manage and minimize debt in retirement.

Create A Budget

The first step is for retirees to see where their money is going. Creating a retirement budget that accounts for income and expenses can help older Americans align spending with their usually lower, now fixed incomes. If your outlay exceeds your income, a budget helps identify areas to cut expenditures and free up cash to pay debts.

Increase Income Where Possible

Supplementing your income, even on an irregular basis, can enable you to pay off debts ahead of schedule. Options include renting out a spare bedroom, turning a hobby or passion project into a side gig, or taking a low-stress part-time job. For one-time injections of cash, consider wringing equity out of your home by selling the big family house; as a bonus, moving into a smaller, less-expensive place can cut housing costs every month. Every extra dollar directed at paying down debt can help relieve financial pressure.

Lower Interest Rates

Using balance-transfer credit cards to move your unpaid balances to cards with lower interest rates can help you reduce the balance you owe without having to pay more each month. Nonprofit credit counseling services can advise you on the best debt consolidation option.

Enroll In Benefits Programs

Many older adults miss out on benefit programs that free up cash for debt payments. Using BenefitsCheckUp, you can find programs that could help pay for medications, utilities, medical bills and more.

Consider Bankruptcy

While declaring bankruptcy is emotionally difficult, it might be the best path forward for retirees drowning in debt. Discharging debts through bankruptcy protects qualifying assets and creates the opportunity to rebuild financial health. It is prudent to talk to an attorney to determine if bankruptcy makes sense based on your situation.