When swapping debt makes sense in retirement

Managing debt is challenging at any stage of life, but it becomes particularly burdensome for older adults who are no longer working. The pressure of making debt payments in retirement can significantly impact their quality of life. Understanding the types of debt older Americans carry can shed light on potential solutions to ease their financial strain.

Types of Debt Among Seniors

A recent analysis by MarketWatch, using the Federal Reserve’s 2022 data, highlights the debt landscape for Americans aged 65 and older. It shows that nearly 65% of those aged 65-74 have some form of housing or non-housing debt. This figure drops to about 50% for individuals aged 75 and above.

Mortgage Debt

For those aged 65-74, the average mortgage balance in 2022 was $175,670. Meanwhile, those aged 75 and older carried an average mortgage balance of $138,700. These balances have only seen slight reductions over time. This trend is often due to older homeowners refinancing their homes or opting for cash-out refinances during periods of favorable interest rates.

Credit card debt is less prevalent among older Americans. According to MarketWatch, 34% of individuals aged 65-74 maintain a credit card balance. This percentage slightly decreases to 29.8% for those aged 75 and older, indicating a reduced reliance on credit cards in their retirement years.

Medical Debt

As people age, medical expenses inevitably rise, leading to an increase in unpaid medical bills. The Consumer Financial Protection Bureau (CFPB) reported that in 2020, nearly 4 million Americans aged 65 and older, or 7% of this age group, had outstanding medical bills. Many seniors questioned the accuracy of these bills, with 44% disputing charges and 68% delaying payment in anticipation of insurance covering the costs.

Considering Debt Swaps

The combined burden of mortgage, auto, medical, and credit card debt can significantly impact the finances of older Americans living on fixed incomes. This raises important questions: How long should they continue to manage these debt payments in retirement? Is it worth the continued financial stress of required monthly payments for possibly another decade or more? How much could their quality of life improve without this debt burden?

One potential solution is to consider a reverse mortgage, which allows older homeowners to eliminate required monthly payments by converting their existing debt into a reverse mortgage. For instance, shifting a monthly debt payment of $1,500 into a reverse mortgage could free up $18,000 annually in cash flow. While a reverse mortgage does not eliminate the debt, it restructures it into a loan with flexible repayment terms.

Evaluating Debt Structure

Ultimately, the focus should not solely be on how much debt older Americans carry but on how their debt is managed and structured. If monthly payments become unmanageable, exploring options like a reverse mortgage could provide significant financial relief. By restructuring debt, older adults may enhance their quality of life, reducing stress and increasing their financial flexibility in retirement.