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, as a result of the divorce, I now have $100,000 in unsecured consumer debt and another $30,000 in student loans, and about $170,000 in my 401(k).
It takes every cent I earn to get by and pay debt service. My payment history is considered “exceptional” on all accounts (in Experian-speak) but due to being overextended my FICO score is only about 650. If I were to retire today, I would draw $1,200 a month in Social Security, or $1,400 a month if drawing against my ex-husband’s account (we were married 23 years). If I wait until my FRA those figures will increase to $1,500 and $1,800.
Do you have any advice for me?
I’m sorry to hear you’re in this stressful situation. A divorce can wreak havoc on a person’s retirement security, let alone his or her finances in general.
Debt management should be the priority right now, financial advisers said. “Her first step would be to try to get her debt under control,” said Michael Resnick, a certified financial planner and senior wealth management adviser at GCG Financial. “She may want to look at attempting to refinance her debt or, if it is credit card debt, she could try to find a card that will take her balance with a lower interest rate.”
There are a few ways to tackle your debt. One strategy is to pay down the debts with the highest interest rates, so that you’re paying as little interest as necessary. Another choice is to pay minimums on any and all accounts except the card or account with the smallest debt — that’s where you’d put extra cash. When that account is paid off, move that extra cash flow to the next smallest debt load, and so on. This is known as the “snowball” effect.
Balance transfer credit cards, like the one Resnick suggested, could have an introductory rate of 0%, which would be a great way to eliminate interest payments altogether and make the most 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 crucial to have a repayment plan in place and a back-up plan should you not be able to pay it off before the 0% promotion is up.
Another option is a personal bankruptcy, Resnick said. This route requires serious consideration, however, as there are consequences with claiming bankruptcy. Bankruptcies remain on your credit report for up to 10 years, and many lenders may need individuals who file to wait four years before trying for a home loan. The most common type of bankruptcy, known as Chapter 7, allows individuals to keep certain possessions, such as wedding rings, some home and auto equity and professional tools (but the rules will vary by state). The good news: credit scores do start to recover shortly after filing for bankruptcy, and this route will keep the retirement assets in your qualified plan protected.
If the bankruptcy option does not sound appealing to you, don’t worry. Matthew Benson, a certified financial planner and owner of Sonmore Financial, suggests making it a goal to pay off the debt in two to three years, which might require finding extra income through overtime, taking on a side job temporarily or pushing your expected retirement date back a little (which would also “bolster up retirement savings as well,” he said).
It sounds exhausting, maybe even a little overwhelming, I’m sure, but Benson said he’s seen clients sacrifice this sort of time and energy to pay off massive amounts of debt. “It takes a goal to get started chipping away on it,” Benson said.
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