I am 63 years old and recently divorced. I earn $ 68,000 a year and had always planned to retire when I reach my full retirement age in March 2025. However, following the divorce, I now have $ 100,000 in debt. in unsecured consumer and $ 30,000 in student loans, and about $ 170,000 in my 401 (k).
It takes every penny I earn to get by and pay off the debt service. My payment history is considered “outstanding” on all accounts (in Experian parlance), but due to overextension my FICO score is only around 650. If I were to retire today , I would draw $ 1,200 per month in Social Security, or $ 1,400 per month if drawn on my ex-husband’s account (we had been married for 23 years). If I wait for my FRA, those numbers will drop to $ 1,500 and $ 1,800.
Do you have any advice for me?
I am sorry to hear that you are in this stressful situation. A divorce can wreak havoc on a person’s retirement security, not to mention their finances in general.
Debt management should be the top priority right now, financial advisers said. “His first step would be to try to get his debt under control,” said Michael Resnick, chartered financial planner and senior wealth management advisor at GCG Financial. “She might want to try refinancing her debt or, if it’s credit card debt, she might try to find a card that will take her balance at a lower interest rate.”
There is a a few ways to meet your debt. One strategy is to pay off debts with the highest interest rates, so as to pay the least amount of interest required. Another choice is to pay minimums on all accounts except the card or the account with the smallest debt – this is where you would put the extra money. When that account is paid off, move that extra cash flow to the next smallest debt, and so on. This is called the “snowball effect”.
Credit cards with balance transfer, like the one suggested by Resnick, might have an introductory rate of 0%, which would be a great way to eliminate interest payments entirely and get the most out of your repayments. But these cards usually have a specific time frame for that 0% rate, such as 15 or 18 months, until they skyrocket. If you go this route, it’s essential to have a repayment plan in place and a back-up plan if you can’t pay it off before the 0% promotion ends.
Another option is personal bankruptcy, Resnick said. This route requires serious consideration, however, as there are consequences by declaring bankruptcy. Bankruptcies stay on your credit report for up to 10 years, and many lenders may require people who file to wait four years before trying to get a home loan. The most common type of bankruptcy, known as Chapter 7, allows individuals to keep certain assets, such as wedding rings, some home and auto equity, and business tools (but the rules vary depending on the type of bankruptcy). the states). The good news: Credit scores begin to recover soon after filing for bankruptcy, and this route will help protect the retirement assets of your qualifying plan.
If the bankruptcy option doesn’t sound appealing to you, don’t worry. Matthew Benson, chartered financial planner and owner of Sonmore Financial, suggests setting a goal of paying off debt in two to three years, which may require earning extra income through overtime, temporarily taking a side job, or getting out of business. postpone your planned retirement date. pull back a bit (which “would also boost retirement savings,” he said).
It sounds exhausting, maybe even a little overwhelming I’m sure, but Benson said he’s seen clients sacrifice that kind of time and energy to pay off massive debts. “It takes a goal to start snacking on it,” Benson said.
Read the MarketWatch column “Retirement Hacks” for practical advice for your own retirement savings journey
Remember, these are just suggestions: you need to do everything you can to improve your situation and not burn yourself out even more.
Now let’s move on to Social Security. When to apply for Social Security is a very personal decision, but there are a few ways to think about it for you. On the one hand, if you delay until at least your full retirement age, you’ll get more money on your check each month, Benson said.
On the other hand, if you can’t increase your short-term income until you reach full retirement age, claiming early wouldn’t be the worst thing – and it would help you pay off your debt faster, a. said Resnick.
“I guess the interest rate on her consumer debt is higher than the growth factor of her Social Security, so if she can’t eliminate or refinance the debt, the early deposit might make sense,” he said. -he declares.
Try to keep contributing to your 401 (k), but maybe just focus on meeting any employer and spending the rest of the money on debt, Benson said.
“It’s a scenario where it’s very difficult to see your long-term goals through the weight of debt,” he said. “I’m less concerned with the cost of debt and more focused on how she can get out of debt so that she can have a realistic picture of what the future would look like. ”
A financial advisor could help you navigate this new way of life – Resnick said he often recommends that people speak to a financial planner before finalizing a divorce to find strategies to ease the transition.
And remember, don’t be too hard on yourself during this difficult time. Divorce later in life has become much more common, and legal paperwork isn’t the only costly aspect of it. “It’s more expensive to live apart than together, which throws a big wrench into a financial plan,” Benson said. “A lot of times the two people going through a divorce have to make significant changes to their current lifestyle and future goals to be able to make things work. ”
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