3 Ways to Reduce Debt as You Near Retirement

Ryan Derousseau

The various types of debt -- from credit cards, student loans or even a mortgage -- take on a different story in portfolios as people get older. What once was viewed as an achievement can become detrimental.

It turns out, though, that the older you are, the more likely you're taking on more debt than those that came before you. The New York Federal Reserve found that 67-year-olds saw their debt levels increase 169 percent from 2003. At the same time, 39-year-olds had a 12 percent decrease in debt.

This is due to the same cause of the 2008 recession -- the ease in which people could obtain loans. Older people experienced the opportunity to accumulate debt with very little standards, while younger people are living in a time where loan originations have tightened. But that isn't necessarily a good thing or bad thing for an older saver.

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"It's not so much of good debt versus bad debt," says Joe Heider, founder of Cirrus Wealth Management in Cleveland. "It is always a function of, 'Do they have the assets to pay the debt off if things go the other way?'"

With that in mind, we took a look at the different types of common debt, and discuss what is useful and how to get rid of it effectively.

Student loan debt has become an unavoidable reality. While it's always best to keep debt levels to a minimum, the need for student loans has grown with the rising costs of higher education. And with many low-interest rate options, it's completely normal to be paying the loans through your 30s. But if you're still paying into your 40s, then that can be a problem, Heider says, since it could cut into saving for retirement or your child's education.

But how long it takes to repay the loans depends on the interest rate. If it's low, then dragging out the payments isn't nearly as detrimental. "Student loan debt is like any other debt we have," says Kelly Trageser, founder of Sea Clear Financial Planning in Sea Girt, New Jersey. "If you're only paying the minimum, look for ways to cut back in other areas."

Whether or not you can pay down the loans quickly will depend greatly on your income. But if you're adding a high-end rent or a more expensive auto loan to the mix, then ensure you have plenty to also pay back the loans. The more you can set aside, the greater ability you will have to invest in other areas of life, like a home or retirement.

Credit card debt serves as a major concern for older people. Younger people growing up, graduating, trying to find jobs and otherwise getting their adult life started under the backdrop of the Great Recession have learned to live with less debt (aside from student loans). You see this even with credit cards. The Fed study found that credit card debt had dropped 36 percent for a 30-year-old compared to 2003.

But for those at age 65, the amount of credit card debt held steady. It doesn't seem that baby boomers have shied away from the dangerous spending strategy.

No matter the age, though, credit card debt is by far the worst type of debt to fall into. That's because of the interest rates.

It's a situation Heider finds troubling, particularly when a client wants to fund a huge vacation a few years away from retirement using credit cards. The vacation may run $10,000, which could cost more if you don't pay down the whole trip at once. Plus, by not investing the money in the savings plan, it's costing you far more in future money for retirement, he says.

"We don't think they should make sacrifices all their lives," Heider says. But they need to have a balance. Even downgrading the vacation to a $2,500 trip could save on interest payments and future earnings.

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Consider a home-equity loan in some situations. If you do find yourself in large credit card debt, an option that has gained some steam to pay down the cards is by taking out a home equity loan. If you have equity in your home, you can borrow against it to pay back the credit card debt. Since home interest rates remain low, it's almost certainly a better rate than your credit card bills. Plus, you're paying back the loan over many years instead of accumulating further payments.

"It helps them to convert that high-interest debt into low interest," Heider says.

Of course, if you go this route then you will want to make sure you cut up all your credit cards. And, the big downside: you could lose your home if you fail to pay back the loan.

A good reason to cheer is that credit card debt has generally declined.

Mortgage debt can be troublesome for older savers. While younger savers have avoided jumping into home debt, it's something they should consider. But with two-thirds of millennials younger than the average age of first time homebuyers -- 31 years old -- it's not a wild notion that they will soon. Financial advice site Nerdwallet found that 49 percent of millennials wanted their next financial move to be purchasing a home.

However, it's the amount of mortgage debt that those nearing retirement should find concerning. It has increased 47 percent since 2003 for those who are 65. These mortgage payments can hurt retirees.

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"A mortgage payment is like any other expense," Trageser says. "If they do need to reduce expenses, what can they cut?" Often for retirees, what they can cut is where they live, but not a whole lot else.

This means having a high mortgage, or moving into a place with a new mortgage can significantly hurt the amount you have to spend on expenses -- or actual fun -- once you have a fixed income.

And it's not just the mortgage those nearing retirement must worry about. It's the expenses of the home itself. Are the taxes too high? Does it cost a fortune to keep the place cool enough to sleep in? Trageser has had to encourage clients to move to a cheaper location, even though the person had paid off the mortgage, due to all the other expenses associated with the home.

"What's the key number that you can spend based on what you can save?" Trageser says. "You can't control the market, but you can control how much debt you have."

Ryan Derousseau is a journalist with nine years of experience writing about investing and leadership issues. His work has been read in Fortune, Money, CNNMoney and Fast Company, among other publications. You can find more from him on Twitter @ryanderous.