Retiring When You Still Have Debt

Retiring When You Still Have Debt

Growing your nest egg is important even if you have debts to pay when you retire. Here’s how to manage the debt and still live well.

If you’re nearing retirement, you may be looking forward to traveling, spending time with grandkids, or just playing more pickleball. But your ability to rock your retirement could be kicked to the curb, if you’re carrying a lot of debt.

According to Clever Research, three out of every four people retire with some debt and the number is growing. The statistics are eye-opening:

  • The percentage of households headed by people 65 and older with any type of debt rose from 38% in 1989 to 61% in 2016, according to a 2019 Congressional Research Service report.
  • According to the same report, the average amount of money owed grew from about $7,500 to more than $31,000 in 2016 dollars--that’s the same as $38,900 today! 
  • A 2021 report from Experian found that baby boomers (people born 1946-1964) carried an average of $24,136 in non-mortgage debt and $198,203 in mortgage debt.

Debt happens

There are many valid reasons that people have debt at the end of their working lives. Some have refinanced their home mortgage to take advantage of lower interest rates. Refinancing pushes the payoff date further into the future. Some people took out a new car loan. Others have an outstanding student loan or co-signed on one for a child or grandchild.

Many people lost their jobs in recent recessions or have left the workforce due to illness, disrupting their ability to sock money away and make plans for retirement. Now they are trying to catch up and pay down credit card and other types of debt.

But don’t despair! It’s possible to manage your finances and live well while paying off your debt – either in the run-up to retirement or after you’ve made the jump.

Should you pay it off before retirement?

This is a worthy goal if your debt isn’t too large and you can imagine working a few additional years. Plus your share of Social Security benefits gets larger the longer you wait to take it. If you work to age 70, you receive the biggest benefit – an average of $1,200 a month more than those who apply for it at age 62.

There are no hard and fast rules on the amount of debt that’s feasible to retire with. It all depends on your retirement savings, the type of debt you’re carrying, the amount you owe, your interest rate, and other factors.

Steps to paying off debt

Whether you’re already retired or are still planning for it, be strategic about paying off your debt.

Assess your debt

Take a look at what you owe—from credit cards and college loans to mortgages and car loans. Then record the balances due, interest rates, and minimum monthly payments.

Prioritize your pay-offs

Many experts believe that credit card debt is the worst kind of debt to carry, due to generally higher interest rates. This is debt you should tackle aggressively.

Mortgages, on the other hand, are less urgent in the short term. This type of debt is often referred to as “good debt,” particularly if you have locked in a favorable interest rate (say, 2% to 4%).

Student loans are trickier. If you have private or federal loans with an interest rate of 8% or higher, try paying them down quickly. If the interest rate is lower, keep making regular payments.

Saving versus paying off debt

If you’re still working, you have to balance saving for retirement with paying down debt. Here’s what the experts say.

Keep saving

In general, if your interest rate is less than your expected rate of return on your investments, it’s wise to keep socking dollars away. As Forbes contributor Bob Sullivan and John Schmidt, a Forbes editor, noted, “If you can invest the money and earn a greater return than the cost of the debt you are paying, why not save for retirement first?” They note that the S&P 500 has historically earned an average of about 7% over the long term.

Most experts agree that you should prioritize savings over paying off debt—you don’t want to get to retirement and have no nest egg to live on. However hard it may seem to be to pay off debts, continuing to put money aside is very important.

Take advantage of employer’s matching 401K plans

If you’re not participating in your employer’s matching retirement funds program, you are missing out on free money. After you pay off any high-interest debt, like credit card debt, prioritize getting those contributions into your retirement account.

Getting help from a professional

If you’re juggling a lot of debt and need help making a plan to deal with it, consider seeing a financial adviser. The Financial Counseling Association of America and Advisors Give Back may offer free or discounted guidance. The Consumer Financial Protection Bureau provides targeted advice on planning for retirement and managing student loans and mortgages. 

Make sure you have the right Medicare plan

When you’re on a fixed income, it pays to make sure you choose the right Medicare plan. Is Original Medicare the best option? Sometimes. Other times, you may find savings with a Medicare Advantage plan. If your doctors are in an Advantage plan’s network, your costs could be lower.

You could choose a $0 premium plan, or get money back into your social security check. Benefits like dental and hearing aids can save you money, too.

To compare plans in your area, check out our easy-to-use Find a Plan tool.

Additional Resources

Lynn Cicchelli is a writer with over 20 years' worth of experience creating healthy lifestyle content for both print and digital publications. Originally from New York, Lynn currently lives in Connecticut with her husband, stepson, and dog Indiana.


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