How to deal with debt in preparation for retirement

By Benjamin Salisbury

In theory, as we enter our 50s, we leave our heavy debt years behind and begin saving more aggressively in preparation for leaving the workforce in 15 or so years. Now, however, many over-50s Brits are saddled with high debts outside of or in addition to their mortgages, making aggressive saving a bit more difficult.

According to September 2016 research from Saga, which serves the needs of those aged 50 and older, almost a third of over-50s have an average debt of about £12,000. Most of that debt is from credit cards.

"It is worrying to see how many people are getting to retirement age with outstanding debt," Melanie Taylor, debt expert at the Debt Advisory Centre, said in an emailed response to questions. "For most people, retirement will mean a drop in income.  It is vital to plan for this reduction." downsize-debt-for-retirement

Why are older Brits in debt?
"Often, it is a lifestyle choice," Joanna Fowler, head of product at Saga Money, said in an emailed response to questions. "People want a new car or kitchen or simply to buy something they could not afford."

However, 21% of those Saga surveyed said they borrowed because they were struggling to pay bills. Another 14% borrowed to pay for home repairs, and 10% got into debt after a job loss.

Many over-50's borrow through 0% finance deals on credit cards to pay for items such as insurance and home renovations or extensions. These offers can be beneficial, but only if you repay the balance before the no-interest period is over and as long as you don't miss any payments. But often, these deals are over as soon as you slip up, leaving borrowers with high interest loans that are difficult to repay.

What's more worrying is that only 21% of those questioned said they think they will pay off their debt in a year. Most said it would take at least two and a half years to repay what they owe, and 10% don't think they'll ever repay their debt. The majority of those questioned - 60% - said they did not think they would have debt at their age.

More aggressive with debt or savings?
Ideally, you would have started saving for retirement at a young age, giving the funds time to grow.

"Those who start saving early for retirement will benefit from compounded returns - and are likely to have significantly higher retirement provision than those that start saving closer to retirement," said Fowler.

So, if you are still on the younger side, it's wise to put as much as you can toward savings, financial planners say, while still paying more than the minimum on your debts. As long as you have a plan for your debt, when you are in your 30s and 40s, being a little more aggressive with retirement savings than debt repayment can pay off more in the long run.

At a later stage in life, however, it is better to repay debts, starting with the ones that generate the most interest.

"We'd always recommend repaying your debts first," Taylor said. "In most cases, the cost of borrowing will be higher than the returns that you can make from saving." 

How to get more aggressive with debt repayment
Your first step is to work out a realistic budget that covers your essentials, some entertainment and special occasions, your debt and savings.

You can tackle debt one of two ways: pay down the highest-interest debt most aggressively, while paying the minimum or slightly over on the other debts. Or, you can tackle your debt from smallest to largest balance. Knocking out a few small balances can give you a sense of accomplishment and make it easier to stay on goal.

"If it looks like you are going to have a shortfall, there are a number of options," said Taylor.  "Firstly, you may be able to increase your income - perhaps by working part time."

You can also rework your budget and pare down items such as eating out or travel while you work on paying down your debt, he said. Be sure to revisit and rebalance your budget about twice a year to make sure you aren't slipping.

You may be able to secure a 0% interest balance transfer credit card to help you actually pay down your principal, rather than paying interest. Or, try consolidating your debts so you have only one payment and one interest rate.

"But if none of these look possible and it looks like you aren't going to have enough money to live and keep up with debt repayments when you retire, then you should seek debt advice as soon as possible," Taylor said. There are several free debt charities that you can turn to if you need advice.

See related: Money and credit tips for your 50s, retirement and beyond, Child-rearing costs are putting parents over 60 in debt

Published: 26 October 2016