If you're nearing retirement with debt, you're in good company. The Center for Retirement Research found last year that the share of U.S. households over age 65 carrying some type of debt has risen from 38% in the late 1980s to 63% as of late 2023.
Of course, retiring without debt hanging over your head could make your senior years less stressful. So you may be inclined to do what you can to shed that debt before your career comes to a close.
But some of the strategies you might employ to pay off lingering debt have the potential to backfire on you. Here are three you should probably steer clear of.
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1. Tapping a small nest egg
Let's say you owe $40,000 on your credit cards. You might assume that if you're old enough to tap a 401(k) or IRA without a penalty, you should do so. That way, you can pay off your balance and stop accruing interest on it.
It's a smart move if you have, say, $500,000 to your name. But if your 401(k) or IRA balance is closer to $100,000, then emptying out 40% of it isn't your best bet.
Sure, you'll shed your debt. But you might then end up not having enough supplemental income to last throughout your senior years.
Furthermore, if you're not yet 59 1/2, it's definitely wise to leave your 401(k) or IRA untouched. Withdrawals taken prior to that age are generally penalized 10%, so removing $40,000 (as per this example) would cause you to lose $4,000 off the bat.
2. Claiming Social Security early
Once you turn 62, you're allowed to start collecting Social Security. You may be inclined to do so and use those benefits to pay off your debt.
But if you file for Social Security before reaching full retirement age -- which is 66, 67, or somewhere in the middle, depending on your year of birth -- then you'll reduce your monthly benefits on what's generally a permanent basis. That could result in a world of financial struggle throughout your senior years, so it's not really a good approach to shedding debt.
3. Signing a reverse mortgage
If you own your home outright or have a lot of equity in it, you may be inclined to drum up the cash to pay off your debt with a reverse mortgage. But this could be a bad idea for a few reasons.
First, a reverse mortgage is actually debt. Granted, you're not making a payment every month so much as you're receiving a payment based on the equity you have in your home. But you're still responsible for repaying that reverse mortgage at the end of the day.
And what may happen is that if you don't repay your reverse mortgage in your lifetime, your home will be sold upon your passing to satisfy your lender. That could be a problem if you're eager to pass your home onto your children.
Also, putting a reverse mortgage in place could be costly. And you're required to commit to staying in your home while that loan is in place. If your home ends up being more expensive to maintain than you've bargained for, you could get stuck living there regardless due to your reverse mortgage.
A better way to approach your debt
If you're eager to shed your debt before you make your retirement official, don't raid your nest egg, claim Social Security early, or resort to a reverse mortgage. Instead, try these approaches:
- Extend your career a few extra years and use your income to pay down your debt.
- Pick up a second job by joining the gig economy and use the proceeds to chip away at your loan or credit card balances.
- Rent out a portion of your home and use your rental income to tackle your debt.
- Look at consolidating your debt to make it more affordable, such as using a personal loan to pay off a handful of credit cards.
It's easy to see why retiring debt-free is something that appeals to you. And it's definitely a good idea to try to eliminate your debt or whittle it down ahead of retirement. But don't make the mistake of resorting to the moves above.
