Debt in Retirement: How It Happens and What You Can Do About It

When we think about retirement, we often picture leisurely mornings with a cup of coffee, afternoons spent on hobbies, and, perhaps, a well-deserved vacation or two. What we don't usually imagine is debt hanging over our heads like a dark cloud.

Unfortunately, for many retirees, debt becomes an unexpected companion in their golden years. If you’re staring down a growing balance sheet instead of your dream of financial freedom, don’t worry—you’re not alone, and there are ways to turn things around.

Why Debt in Retirement is More Common Than You Think

First off, let’s address the elephant in the room: debt in retirement is far more common than you might expect. We often hear stories of people who manage to retire without a penny of debt, their mortgages paid off, savings brimming, and a little nest egg for traveling to Italy every summer. That’s the dream, right? But let’s be real—life happens, and not everything goes according to plan.

A surprising number of retirees still carry debt into their golden years, whether it’s mortgages, credit card debt, car loans, or even student loans.

Debt happens for all sorts of reasons in retirement, and the causes are rarely one-size-fits-all. So, how does it happen?

1. Medical Expenses Can Wipe You Out

It’s no secret that healthcare costs in the U.S. are sky-high. Even with Medicare, many retirees are faced with unexpected medical bills that can turn into significant debt. Whether it’s a medical emergency, a long-term illness, or simply the rising cost of prescription drugs, medical expenses are one of the top reasons retirees find themselves in debt.

Unfortunately, this is a reality many retirees face, especially if they don’t have long-term care insurance or a health savings account (HSA) to fall back on.

A report from the Employee Benefit Research Institute (EBRI) estimates that a 65-year-old couple would need nearly $351,000 in savings to have a 90% chance of covering health care costs during retirement.

2. Credit Cards and Lifestyle Spending Add Up

Let’s be honest: sometimes, credit card debt sneaks up on you. Maybe you relied on your card a little too much to fund your lifestyle when you retired. Or maybe you helped your kids or grandkids with some financial hiccups, and now you're feeling the pinch. It happens!

Credit card debt tends to accumulate for retirees because, often, retirees live on fixed incomes—like Social Security or pensions—that may not stretch as far as they hoped. Even small splurges, like dinners out, family vacations, or home improvements, can add up over time.

3. Mortgages and Home Equity Loans Stick Around

You might have imagined walking into retirement with a fully paid-off home, but for many, that’s not the case. Whether you downsized, refinanced, or took out a home equity loan to fund home repairs or other expenses, mortgage debt can linger well into retirement. In fact, more retirees are carrying mortgages now than ever before.

And while having a mortgage isn’t necessarily a bad thing (especially with low interest rates), it’s still an extra expense that can eat into your retirement budget. If you’re not careful, your home—a place that’s supposed to bring you peace—can start to feel like a financial burden.

4. Rising Cost of Living

Here’s a harsh reality: inflation doesn’t care that you’re retired. The cost of living continues to rise, even when your income stays the same. Things like groceries, utilities, and gas have all become more expensive, and let’s not even start on property taxes.

For retirees living on fixed incomes, keeping up with these rising costs often means dipping into savings, using credit cards, or taking out loans.

5. Helping Family Members Financially

Parents and grandparents have a way of sacrificing for their kids, even when it stretches their budget thin. Maybe you’ve helped out a child with student loans or given some extra cash to help with a down payment on a house. Maybe you’re caring for a grandchild or covering unexpected medical expenses for a family member.

The Real Impact of Debt in Retirement

Debt in retirement doesn’t just affect your bank account—it affects your entire quality of life. Managing debt can lead to anxiety, stress, and a constant nagging feeling of financial insecurity. The last thing you want is to be worrying about money when you’re supposed to be enjoying this new chapter of life.

Debt can also limit your options. For instance, carrying a mortgage into retirement might mean you’re tied to your home, even if you dream of downsizing or moving closer to family. Credit card debt can make it difficult to take that bucket-list trip you’ve been dreaming of. And medical debt? That can lead to decisions between necessary healthcare and keeping up with your payments.

MarketWatch reveals that adults aged 65-74 have an average debt of $134,950, with seniors 75 and up averaging $94,620 in debt.

Financial stress can impact your relationships, your health, and your overall peace of mind. But the good news? You can do something about it.

What You Can Do About Debt in Retirement

If you’re entering—or already living in—retirement with debt, don’t panic. There are several strategies to help you manage, reduce, or even eliminate that debt so you can breathe a little easier. Here are some actionable steps you can take to get your financial life back on track:

Get a Clear Picture of Your Finances

First thing first: you need to know exactly where you stand. Take a deep breath and write down all your debts. List out your mortgage, credit card balances, car loans, and any other outstanding debts you have. Include the interest rates, monthly payments, and how long it will take to pay them off.

Next, compare this to your income. How much are you bringing in from Social Security, pensions, investments, or part-time work? Getting a clear picture of your financial situation is the first step toward regaining control.

Prioritize Paying Off High-Interest Debt

Not all debt is created equal, and some types of debt are more harmful than others. High-interest debt, like credit cards, should be your priority. The longer you carry this type of debt, the more it will grow, and it can quickly spiral out of control.

Start by paying down your highest-interest debts first (this is known as the “avalanche method”). Alternatively, you can pay off the smallest debts first to build momentum and motivation (the “snowball method”). Either way, the goal is to eliminate the debt that’s costing you the most first.

Consider Refinancing Your Mortgage or Consolidating Debt

If you’re still carrying a mortgage or a home equity loan, now might be a good time to look into refinancing. If interest rates have dropped since you originally took out your loan, refinancing could lower your monthly payment and free up some cash for other expenses or debt payments.

Similarly, consolidating debt can simplify your payments and potentially reduce the interest you’re paying. You can roll several high-interest debts into one lower-interest loan or credit card. Be careful, though—this strategy works best if you can commit to paying off the debt without racking up new balances.

Create a Budget That Works for Retirement

Budgeting is important at any age, but it’s crucial in retirement. The trick is to create a budget that reflects your new reality—fixed income, potentially higher medical costs, and a desire to enjoy life without going into more debt.

Take a hard look at your expenses and figure out where you can cut back. Are there subscription services or memberships you no longer use? Could you downsize your home or car? Even small adjustments can make a big difference over time.

Think About Downsizing or Relocating

If your home is eating up a large chunk of your income, downsizing might be the solution. Selling your home and moving into something smaller or more affordable could free up a significant amount of money that can be used to pay off debt, boost your savings, or simply give you more financial breathing room.

Additionally, relocating to an area with a lower cost of living could stretch your retirement dollars further. Consider states with lower property taxes or no state income tax to make the most of your income in retirement.

Tap Into Your Home’s Equity—Cautiously

If selling your home isn’t an option or you’d prefer to stay put, you can consider tapping into your home’s equity through a reverse mortgage. This allows you to convert part of your home’s value into cash, which you can then use to pay off debts or cover living expenses.

But a word of caution: reverse mortgages are not for everyone. They come with fees and interest, and if you’re not careful, they can deplete the value of your home. Make sure you understand the long-term impact before going down this road.

Explore Part-Time Work or Side Gigs

If you’re able and willing, part-time work can be a great way to boost your income in retirement. Whether it’s a flexible job at a local shop, freelancing, or turning a hobby into a side business, bringing in extra income can make a big difference in your ability to manage debt.

Not to mention, working part-time can keep you active and engaged. Many retirees find that a few hours of work a week gives them a sense of purpose and structure—plus a nice little boost to the budget!

Avoiding New Debt in Retirement

It’s one thing to tackle existing debt, but how do you avoid falling into new debt traps while you’re in retirement? Here are a few tips to help you stay debt-free once you’ve got a handle on things:

1. Be Cautious with Credit Cards

Credit cards can be convenient, but they’re also one of the easiest ways to rack up debt without realizing it. If you can, try to pay off your credit card balances in full each month. If that’s not feasible, limit how often you use them and stick to cash or debit for everyday expenses. This way, you’re less likely to spend money you don’t have.

2. Say No to Co-Signing Loans

This is a tough one. It’s natural to want to help your kids or grandkids with loans, but co-signing can be risky. If they default, you’re on the hook for the payments. At this stage of life, the last thing you need is someone else’s debt adding to your own. It’s okay to say no—it’s about protecting your financial future.

3. Stay on Top of Medical Expenses

Healthcare costs can sneak up on you, especially if you have unexpected surgeries or long-term care needs. If you’re eligible, maximize your Medicare benefits and consider supplemental insurance to cover the gaps. Also, ask your healthcare providers about payment plans for large bills—it’s often possible to spread out payments without going into debt.

Taking Control of Debt in Retirement

Debt in retirement is a reality for many, but it doesn’t have to derail your plans or keep you from enjoying life. The key is to take control of your financial situation and create a plan for managing and eliminating your debt. It may take time, but every step you take brings you closer to financial peace and more freedom to enjoy your golden years.

Remember, debt doesn’t define you, and you have the power to change your financial future. With the right strategies, a clear plan, and a bit of determination, you can break free from debt and make the most of your retirement. Here’s to living the retirement you’ve always dreamed of—debt-free and stress-free!