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Managing Debt on a Pension: Plan Your Way to Financial Freedom

Posted By:  |  March 3, 2014  |  0 Comment(s)

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Nobody wants to spend their retirement years struggling with mounting debt. Yet sadly, a rising number of pensioners are finding themselves in the red after retirement. Many retirees are in the position of still owing hundreds of thousands of dollars on credit card bills, interest-only mortgages, and other loans that they can’t seem to shake. Such escalating debt can lead to financial catastrophe, especially for those living on a fixed income. Luckily, there are ways for pensioners to achieve debt relief, and ultimately dig themselves out of a financial hole. Here are just a few strategies for becoming debt-free if you’re living on a pension.

Tap Into Life Insurance to Obtain Debt Relief

Many pensioners have taken out a permanent life insurance policy at some point in their lives, offering them cash value when needed. If you have a number of outstanding loans still yet to be paid off, you might consider taking a cash-surrender loan, which allows you to use the money from your life insurance policy to pay off your other loans without having to pay it back. Not only are such cash-value life insurance policies given a monetary value that the owner is paid when the policy is canceled, they’re also investment accounts that the owner can borrow against. After the owner passes away, the insurance provider will be reimbursed for the balance of the loan.

Reverse Mortgages Can Provide You With a Lump Sum to Pay Off Your Debt

Many people with mounting credit card debt are often advised to use the equity in their homes to gain access to liquid cash needed to get rid of high-interest debt. Although this may be a viable option for younger homeowners that are still employed full-time, such an option might be a bad idea for retirees. Those that are retired and receiving a pension shouldn’t be in a position where they are still obligated to make hefty mortgage payments.

Instead, a reverse mortgage is a practical option to gaining access to cash to help pay off various debts. Reverse mortgages still allow homeowners to tap into their home equity to convert it into cash, but the money received from such an approach does not have to be paid back as long as the homeowner continues to reside in that home. This differs from other home equity loans, which generally require reimbursement from the owner. For those retirees who are strapped for cash, this can provide a source of income that could potentially last the rest of their lives.

Consolidate Your Debt to Lower Interest Rate Payments

Debt consolidation is an option that is available both to those who are retired and those who are still working. Many consumers have a number of outstanding loans that need to be paid every month, several of which come with a sky-high interest rate. Credit card bills in particular are notorious for charging exorbitant interest fees on outstanding balances. In such a case, debt consolidation can help. Debt consolidation eliminates multiple bills at various interest rates by combining them all into one easy-to-manage loan that is charged a much lower interest rate. By combining such loans into one that comes with a lower rate you can save significant amounts of money in monthly fees, which can help you find debt relief sooner rather than later.

Be Wary of Tapping Into Your Life Savings to Seek Debt Relief

Most retirees that are in debt don’t exactly have a large sum of life savings, including cash savings, investment accounts and the value of their pensions combined. Even if a retiree does have some cash stashed away, it’s not necessarily wise to use it all up to pay off mounting debt. It might sound like a good idea at the moment to get rid of debt that is tied to high interest rates with cash that is only earning you a mere 3% annually. However, if all you have to get you through your retirement years is your life savings, it’s a better idea to keep most of it for a rainy day. You should never drain your life savings to eliminate your outstanding loans unless you have exhausted all other options and you have other income streams (such as a 401k, an IRA or valuable stocks) that will provide for you during retirement.

Spending the golden years drowning in debt is not something to look forward to. Many of the debt-management approaches that may help younger working people might not necessarily make sense for retirees. However, that doesn’t mean there are no alternatives. Climbing out of debt is something that pensioners can manage – and one of the four above strategies can help you get there.

Any more advice about managing debt on a pension? Let us know in the comments!

Poll

  • How important is it to you for a debt consolidation company to offer financial education resources?
  • Takes your existing debt and try to settle with your creditors for a lower amount. If you pay off the settled amount, your debt will be considered paid in full.
  • Negotiates with your creditors on your behalf.
  • Fee based on a percentage of your total starting debt or a percentage of the debt they save you.
  • Most settlement companies have you create a separate "escrow" account where you will make monthly contributions over a certain amount of time to contribute to your settlement. Once there is a substantial amount of funds to show your creditors, the settlement company will try to negotiate a lower amount of debt.
  • Combines all your debts and creditors into one monthly payment.
  • Allows you to pay one monthly payment to the consolidation company, instead of multiple payments to different creditors.
  • You no longer owe your original creditors; instead you pay one monthly payment to your consolidation company.
  • Consolidation companies can help negotiate lower interest rates on your debts and help lower your total debt payment in the long run. A lower interest rate will lower the amount you owe in the end.
  • Allows you to consolidate all your different debts into one personal loan that can be paid off over time.
  • Can offer borrowers a lower interest rate with a longer payback term (compared to high-interest credit cards or medical bills). This will lower the amount of money required to pay off the loan over time.
  • Personal loan debt consolidation can be an effective way to raise your credit score quickly (within 3-6 months).
  • Borrowers can receive funds from their loan within only a few days.

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