Inflation 2022: Here’s How To Manage Debt in Retirement

elderly couple working out a budget
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The high rate of inflation is causing many retirees to burn through their savings at a faster pace than they originally anticipated.

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The effects of inflation on retirement budgets can be especially tough for retirees who need to balance paying off debt — which may be getting increasingly expensive due to high interest rates — while trying to cover everyday costs on a fixed income.

While dealing with debt in retirement is no easy task, especially in an inflationary environment, there are some ways for retirees to keep it manageable.

Prioritize the Right Debts

Not all debt is created equal, so retirees should prioritize paying down certain debts over others.

“The first step is to make a list of the debts that you currently owe and place them into categories,” said Scott Heise, wealth management advisor at TIAA. “It is important to understand how much debt you have and the interest rates associated with the debt.”

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Next, determine which of these debts are “good debt” and which are “bad debt.”

“Good debt, such as a mortgage loan, can help you build wealth over time by increasing your assets, while bad debt can do the complete opposite,” Heise said. “A credit card with a high interest rate would fall in the ‘bad debt’ category when compared with a mortgage loan. At least the mortgage loan allows you to build equity into an asset.”

Once you’ve categorized your debts, develop a plan of action that focuses on paying off your bad debts.

“I typically recommend that clients should consider paying off the debt with the highest interest rate first so, over time, more debt payments will be made toward principal than interest payments,” Heise said. “It makes sense to pay off a credit card at 18% as compared to a car loan at 4%.”

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Stick To a Budget

The original budget you created pre-inflation may no longer be working in the current environment, so it may be time to re-evaluate.

“It is important for retirees to establish a budget to better understand where their money is going each month,” Heise said. “Establishing a budget will also help identify necessary expenses versus discretionary spending, which can hamper your debt repayment strategies by reducing the amount of money you have each month.”

You may need to cut down on spending to dedicate more dollars to debt repayment.

“By identifying areas of discretionary spending, such as dining out or other entertainment expenses,” Heise said, “you can decide where you may want to curb your spending so you may use the extra money to help reduce your overall debt faster.”

Seek Professional Guidance

If you’re not sure how to prioritize your debt, where you should be cutting back on spending or how much of your retirement savings you should be dedicated to paying down debt, consider seeking out expert advice.

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“I don’t think there is a one-size-fits-all strategy to managing debt in a volatile economy,” Heise said. “Retirees should work with a trusted financial advisor to look at the total financial picture and develop an appropriate strategy that makes sense, according to their assets and goals.”

There are different avenues retirees can take to pay down debts, so working with an advisor can help you figure out the best option for you.

“For instance, it may be possible to sell investments to pay off high-interest debt,” Heise said. “Also, some retirement plans allow retirees to convert some of their retirement assets into lifetime income. This may allow retirees to create an additional income stream to add more cash flow each month, which can be applied to paying down debt faster and hopefully enjoying a more comfortable retirement.”

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About the Author

Gabrielle joined GOBankingRates in 2017 and brings with her a decade of experience in the journalism industry. Before joining the team, she was a staff writer-reporter for People Magazine and People.com. Her work has also appeared on E! Online, Us Weekly, Patch, Sweety High and Discover Los Angeles, and she has been featured on “Good Morning America” as a celebrity news expert. 
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