Entering retirement brings the promise of relaxation, freedom and time for personal pursuits. However, lingering debt can tarnish this dream, creating unnecessary stress and financial strain during what should be your golden years.

The good news is that debt doesn't have to derail your retirement. There are time-tested ways to manage and eliminate it, even when you're no longer working. We’ll break down some tips to help make your existing debt more manageable, plus leave you with some tools to keep you debt-free in retirement.

Managing debt in retirement

Managing debt in retirement starts with understanding where it came from to begin with. Start by making a list of all your sources of debt and how much you owe on each, as well as the individual interest rates.

This should include credit cards (don’t forget the ones from department stores), loans, the federal government and even friends and family. If you want help getting started, the Consumer Financial Protection Bureau (CFPB) has a free debt management worksheet to help keep you organized.

Next, determine your monthly gross income. You’ll need it to figure out your debt-to-income ratio (DTI), which is a benchmark to help you understand exactly how much debt you’re in. To calculate it, divide your monthly debt by your monthly income, then multiply the total by 100 to make it a percentage — that’s your DTI.

The CFPB recommends keeping your DTI no higher than 36% if you own your own home or no higher than 20% if you rent. If your DTI is above these levels, it's time to look at ways to reduce or eliminate your debt.

A couple ways to help manage debt in retirement include refinancing and consolidating.

Refinancing

When you refinance, you effectively replace an existing debt with one that has more favorable terms. For example, you could take out a new loan with a lower interest rate and use the funds to pay off an existing loan. This would reduce the overall cost of your debt because your payments will be based on a lower interest rate.

Refinancing can help you lower your monthly payment, but it can also help you change the terms of your loan. If you have a loan with a variable interest rate, for instance, you may want to consider refinancing to a fixed rate so you have more stability.

Consolidation

Debt consolidation is when you combine multiple existing debts into a single loan. There are several different ways you can consolidate your debt:

• Debt consolidation loans allow you to combine multiple existing loans into a single loan, potentially leaving you with one smaller payment each month. However, those benefits may come at a cost, so make sure to read the terms carefully. If you consolidate into a loan that will take you longer to pay back, you may end up paying more in interest in the long run. You’ll also want to make sure any rates you’re offered extend through the life of the loan and aren’t just promotions that will expire after a certain time period.
• Credit card balance transfers let you transfer existing credit card debt to a different card with a low rate, so it can function like a debt consolidation loan. However, beware of fees associated with the transfer. Some companies also offer zero- or low-interest balance transfers if you open a brand new card, but those promotional rates are typically only for a limited time.
• Home equity loans let you borrow against the equity in your home. You can then use the funds to pay off existing debts. Since your home is used as collateral, home equity loans may have lower interest rates than the other options we mentioned. However, this also means your home is at risk of foreclosure if you don't pay it back.

Eliminating debt in retirement

There are two common approaches when it comes to eliminating debt:

• High interest rate method: Each month, you'll make the minimum payment on all of your debts, then use any remaining funds to make extra payments on the debt with the highest interest rate. Once that debt is paid off, you start putting extra funds toward the debt with the next highest rate. Keep working down the list until you're debt free. This is often referred to as the avalanche method.
• Snowball method: Instead of putting extra funds toward the debt with the highest interest rate, you put those funds toward the smallest debt. Once that one is paid off, you start adding all the money that was going to the previous debt toward payments on your next smallest loan. This effectively creates a snowball of debt payments that gradually gets bigger as you eliminate each debt in turn. This method can give you a sense of accomplishment, as you'll likely see progress faster than with the high interest rate method. However, you may end up paying more overall because you won't always be paying off your most expensive debt first.

Avoiding debt in retirement

Once you've done the hard work of eliminating existing debt, the trick becomes avoiding future debt. The best way to do this is by living within your means. But this is easier said than done, especially for retirees, whose income can fluctuate based on market conditions.

Start by creating a budget:

1. List your necessary expenses: These should include items you can’t live without, like your rent or mortgage, utility payments, food and medical expenses.
    
2. List your discretionary expenses: Now create a list of the things you would like to spend money on, but can skip if necessary. For example, travel, hobbies and dining out are often things we enjoy but can live without.

(If you'd prefer a less manual budgeting technique, you can use Vanguard's retirement expenses worksheet to help with these first two steps.)

3. List your retirement income: After you've laid out your expenses, it's time to consider how you’ll pay for them. List all of your retirement income sources, including Social Security, retirement savings and other non-retirement assets.
    
4. Match income to expenses: Finally, match up your income sources with your expenses. Start with your necessary expenses first. Try to cover all of your necessary expenses with fixed sources of income, such as your Social Security benefit or a pension payment. If you still have income left over after your necessary expenses are covered, you can start allocating funds to discretionary expenses.

Now you should have a clear picture of how your income and spending align — or don't. If after step four, you still have expenses that aren't paired to a source of income, it's time to start cutting back. Or, if you can't or don't want to reduce your expenses, you might consider getting  a part-time job (just be aware of how your earnings may impact your Social Security benefits).

The trick to avoiding debt is to ensure you never spend more than you earn each month. It's up to you if you'd rather accomplish that by reducing your expenses or increasing your income — or even a combination of both.

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Matt Schulz is the Chief Credit Analyst at LendingTree and has been covering the personal finance space for more than a decade. He is a nationally recognized expert on credit cards, “buy now, pay later” loans, personal loans, credit scoring and reporting, small business lending and other aspects of personal finance. He’s been quoted in or appeared on Good Morning America, NBC Nightly News, The Wall Street Journal, The New York Times and hundreds of other media outlets around the U.S. and the world. He is a graduate of the University of Texas and lives in Austin with his wife and son.