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NEW YORK ( MainStreet) -- Bora Paloka, a 65-year-old former hairstylist in New York City, is not living the type of retirement her husband and she had always imagined. For the past five years, the couple has been using welfare money to cover basic monthly expenses, and to make matters worse, the credit card debt she entered retirement with has ballooned.

Saving enough money to retire comfortably has long been the goal of the American worker as pension plans have disappeared. But now an added wrinkle complicates the scenario for those like Paloka: retirees are increasingly entering their golden years with crippling debt.

Households headed by those 75 or older saw debt double to $27,409 in 2010 compared to $13,665 in 2007, according to the Employee Benefit Research Institute (EBRI). And it's not just mortgage debt that poses the problem: credit card and student loan debt are stifling retirees' plans for leisurely days on the golf course followed by 5 o'clock margaritas.

Coping with this sort of debt does not leave Americans in a solid position to exit the workforce: 82% of workers aged 60 and older expect to or are already working past age 65, according to the May 2015 survey of the Trans American Center for Retirement Studies. Among them, 56% believe they will not be able to afford to retire because of their income or health benefit requirements.

Of course, for those forced into an early retirement, the obstacles increase: life expectancy has lengthened, and the typical consumer needs to be able to cover costs incurred during 30 plus years of retirement.

The best way for Americans to tackle debt in retirement is to develop a strategy and time line so they can attack the most troublesome debt first. It's also important for them to consider taxes, retirement portfolio withdrawals and income streams so that they don't outlive your money or leave heirs with outstanding loans.

Prioritize Your Debt

If you have multiple debt burdens, choosing which obligation to attack first is important.

Tackling high interest credit card debt, whether the charges were for a necessity or indulgence, is a must, according to Michael Conway, CEO of Conway Wealth at Summit Financial Resources in Parisppany, N.Y. If a retiree has multiple credit cards with debt owed, he should first pay off the one with the highest interest rate and then work his way down. This is what personal finance experts call "the avalanche method."

Next up, take care of student loan debt, a pesky phenomenon that's increasingly rearing its ugly head into retirement for many Americans. With education costs only increasing each year, student loans now make up a large portion of retirees' total non-mortgage debt, according to the study by Limra Secure Retirement Institute: individuals aged 65 to 75 have six times the student debt compared to 25 years ago.

Financing a college education for yourself or your children is a priority to most looking to increase earning potential over a lifetime, but luckily, this debt can move down your list of priorities because of the low interest rates on education loans -- typically from 1.5% to 8.8% for private loans and currently 3.86% for federal loans.

Student loan consolidation can simplify your bill to one streamlined payment and give you more time to pay off the loan. When choosing whether to consolidate a loan or not, retirees should compare their current monthly payments with the monthly loan payment for the consolidated bundle and ask whether they can afford to pay loans for the next couple of decades.

Mortgages are the big X-factor when considering entering retirement with debt. Generally speaking, it's safe to pay the monthly amount owed on your mortgage while you tackle paying off your credit card and student loan obligations; once you're squared away on those debts, you can work toward paying your house off in full. That's because with a fixed mortgage, prices remain the same and don't increase with inflation. That decreased urgency to pay off the debt, coupled with the fact that homeowners get a tax a break on their mortgage interest payments, makes this debt more palatable and less destructive to a retiree's bottom line. To boot, the mortgage you took out will appreciate in value and is considered good debt, as opposed to bad debt, the money you charged to take that weeklong trip to Cancun. (That exception for mortgage debt is an adjustable rate mortgage, an ARM, which should be paid off sooner rather than later, because of the increasing interest rate over time).

The option of refinancing your home in retirement can cut down your monthly costs and help in your quest to paying off your mortgage. Lower rates come through from changes in market conditions or an improved credit score. But caveat refinancer: refi does have costs and fees like a 3% to 6% refinancing fee on your principal balance.

A reverse mortgage can bring in some steady cash flow and access home equity slowly over the years. This route comes with costs, depending on the size of your loan, like upfront mortgage insurance and real estate closing costs. Mortgage insurance adds an additional 1.25% on top of an adjusted interest rate.

If all else fails, downsizing your home is an economically efficient way to save some cash for retirement and free yourself of burdensome debt. A realtor can help with costs of selling your home and buying a new cozy condo for two.


During the first year of retirement, couples usually spend the equivalent of 75% to 85% of what their income was, mainly on home, food and health-related expenses -- decreasing that expenditure level as they head deeper into retirement. Retirees should look at income and tax brackets to help determine what strategy to take for monthly spending and withdrawals from retirement accounts, according to Neil Krishnaswamy of Exencial Wealth Advisors in Plano, Texas.

Financial advisors would caution retirees, with credit card debt, of over-splurging in their first retirement years. Non-deductible and with high interest rates, credit card debt will financially stunt you if not paid off early in retirement. More friendly debts, like mortgage debts, can be left to simmer while you pay them off slowly throughout your 70s and 80s.

"Some people are comfortable with having debt during retirement, but it's good to have other means to control tax burden," said Krishnaswamy, specifically referring to the trusty mortgage interest deduction.

Alternative accounts like an emergency fund for back up can soften up the debt burden for the future.

Of course, diversity of investments is key: Krishnaswamy says that if all your investments are in a 401(k), then any distribution you make from investments comes from a 401(k). "If there is no flexibility, then there is a higher tax burden," he says.

That's why multiple streams of retirement planning vehicles are of the essence: retirees older than 59.5 can start making withdrawals from their traditional IRAs with no penalty. Withdrawals are subject to state and federal taxes but can be used toward paying down debt. Those with a Roth IRA are not subject to the same tax burden, as a consumer with such an account has already paid taxes on contributions.

In Brooklyn, N.Y., Sunny and Mary Gianetto use their Social Security earnings and tax free annuities from financial companies they invested in to stay afloat in retirement and pay off their obligations.

Sunny Gianetto retired at age 65 and his wife at 62. Now at 80 years old, Sunny hopes to exceed his monthly budget through additional earnings, because his Social Security check won't do it alone. "The wonderful people in Washington give us a raise every year and the increase comes in January, but it's not enough," he said. 

The Gianettos have monthly expenses of car insurance and home maintenance to pay for. "If we didn't have the tax free investments, we would be in trouble," Mary said. Both husband and wife try to plan smart for the future and have a monthly budget.


For people burdened by excessive debt in retirement, sometimes drastic measures like moving are necessary to find tax advantages. That can make all the difference in chipping away at the debt and moving toward a financially independent lifestyle.

Conway says to consider moving out of a state unfriendly to tax advantages, like New York with a high income tax rate of 8.82%, to a tax friendly state like Arizona, with a 4.54% income tax rate. All the better, retirees can head to states ;ole Nevada and Florida, which have no income tax rate. Retirees may often look to migrate to warmer climates, but they shouldn't make the mistake of moving to one of the top least tax friendly states like California- 13.3% income tax rate.

Moonlighting for More Cash: Real Talk

If you have debt, you should try to hold off on retirement, says Sergey Kuznetsov of AXA Advisors in New York City. That's a strong opinion urging people who exit careers with debt to find a side hustle or alternative income stream.

But it's a realist policy, given that people who retire in their 60s need to have money for the next three to four decades.

"If you want to make sure you have enough money for retirement, you have to stick to a monthly game plan," Conway says. Therefore, individuals who are about to retire with an unpleasant amount of debt should consider working longer or seeking part time work after retirement to keep up with monthly payments.

That's exactly the strategy Paloka has employed when trying to whittle away at her credit card debt.

Fearful that her four children will inherit her credit card debt, she began knitting for Hania Bytloi, a company that sells handmade knitwear. "I sometimes work through nights to finish the products," she said.

With her husband selling a few books here and there, the Palokas are still unable to pay for everything and go to their children for help. "My eldest daughter helps pay for my credit card debt, but she is constantly late on the payments, which puts me back even more," said Paloka.

There's not a one-size-fits-all strategy here, of course.

"It's like a little game of chess or jigsaw puzzle, and you need to ask yourself, 'What's the best thing you can do with your money?'" Kuznetsov says.