When you retire or plan to retire soon, it might be a good idea to look at your total household debt again. Debt doesnt have to stop your retirement plans, but you might want to consider your overall financial situation and make a plan to get out of debt before you decide to retire.
Depending on your income, credit score, and other aspects of your financial life, there are options to pay off your debt faster, refinance your debt at a lower interest rate, and otherwise manage your balances. Debt management should always be a part of your retirement plan.
Consumers in their 50s have the highest levels of credit card debt, according to a recent study of credit card debt statistics. Fortunately, if you are nearing retirement age with credit card debt, you can still improve your situation. The more money you put toward paying off your credit card debt, the better. You might also try to negotiate a lower interest rate or consider a balance transfer credit card at low interest to help you pay off your debt more quickly and save money on interest.
If you currently hold a mortgage on your home, do you have a plan to pay it off?
Most people think of mortgage debt as “good debt,” but if you want to pay off your house in full before you retire, you’ll need to make a plan. Or, if you are comfortable with carrying a mortgage for a few more years into your retirement, consider refinancing your mortgage at a lower interest rate or with a faster loan payoff.
For example, if your retirement date is approximately 10 years away, and you have 20 years left to pay on your current mortgage, you might be able to refinance and get a similar monthly payment on a 15-year mortgage that will hasten the final payoff.
Many parents have borrowed money to help their children go to college. Unfortunately, sometimes this student loan debt can linger, causing financial difficulties for parents who want to retire.
Student loans are also considered “good debts” because they help people qualify for better-paying jobs and more secure careers. But sometimes these debts can become a long-term problem for families. Student loans generally cannot be discharged in bankruptcy.
If you have taken on debt to help your children go to college, review your loans. If your children are graduated and working, talk to them about helping to pay off the debts or removing your name as co-signer so the debt responsibility is with them.
Retirement is supposed to be a time of relaxation and enjoyment, not stress over debt. Yet many Americans enter their golden years still carrying debt from earlier in life. According to a 2022 study by the Employee Benefit Research Institute, 37% of today’s retirees have debt, with a median amount of $31,300.
Carrying debt into retirement can seriously impact your quality of life if you’re not careful. As your income drops, having fixed monthly debt payments can squeeze the budget for essentials. The higher your debt load, the more you’re at risk of falling behind.
So how much debt is too much when you retire? While there’s no single right answer, there are some general guidelines to follow.
How Much Debt Can You Comfortably Carry in Retirement?
As a general rule, you shouldn’t use more than 36% of your pre-tax income to pay off debts. This includes your home loan, credit cards, car loan, and line of credit. When you retire, your income goes down, which means you have less money to pay off your debts.
You should try to pay off all of your debts other than your mortgage by the time you retire. Credit cards, auto loans, student loans, and personal loans all have high interest rates that can quickly wipe out your cash flow. When you pay them off in full, you no longer have to worry about them, so you can focus on other important things in retirement.
It’s also smart to have your mortgage mostly or completely paid off as well Being mortgage-free reduces your required monthly expenses and provides more financial flexibility If you still owe a significant amount on your home in retirement, consider strategies to pay it down faster or downsize to eliminate the mortgage.
How Different Debts Impact Retirement
Not all debts affect retirement equally Let’s take a look at how specific types of debt can impact your retirement situation
Mortgage Debt
Ideally you should enter retirement with your mortgage completely paid off. But if not, try to at least have it mostly paid down. Financial experts suggest your mortgage payment should be no more than 28% of your monthly gross retirement income.
Credit Card Debt
Credit card debt is bad for retirement because the interest rates are so high. Make paying it off in full a top priority. If you have to keep a balance, move it to a card with a lower interest rate.
Car Loans
Auto loans can be managed in retirement if the payment is low relative to your income. But large car payments will strain your budget. Pay off the loan before retiring or trade the car for a less expensive model.
Personal Loans
You have to pay off these fast, fixed-rate loans before you retire. The monthly payments are too high relative to retirement income.
Student Loans
Federal student loans can be managed through income-driven repayment plans that base your payment on your income. Private loans are more problematic since there are fewer options to reduce payments.
Medical Debt
One major health event can leave you with a mountain of bills in retirement. Avoid this by maintaining sufficient health coverage and emergency savings. Negotiate and settle medical debts quickly.
Tax Debt
Owing back taxes to the IRS is not something you want hanging over your head in retirement. Set up a payment plan as soon as possible to pay back what you owe.
How to Reduce Debt Before Retirement
The best way to handle debt in retirement is to have as little of it as possible when you stop working. Here are some strategies to reduce debt prior to retirement:
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Make a detailed budget to free up as much cash as possible to pay extra toward debt balances each month
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Prioritize paying off high-rate variable debts first like credit cards and auto loans
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Explore debt consolidation or balance transfer options to secure lower interest rates
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Consider adding a part-time job or side gig income to generate extra debt repayment cash
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Downsize your housing to free up equity that can be used to pay off debt
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Review expenses for discretionary cuts that can be reallocated to debt repayment
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Delay retirement a few extra years if needed to improve cash flow for debt elimination
The bottom line is that establishing a clear debt reduction plan well in advance of retirement helps ensure you start your golden years with minimal monthly obligations. This allows your retirement income to be focused on living your best life in retirement!
How to Handle Existing Debt in Retirement
If you do wind up retiring with debt, it doesn’t have to ruin your plans as long as you handle it properly. Here’s how to manage ongoing debt payments in retirement:
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Use a portion of Social Security income to cover debt obligations
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Withdraw retirement account assets strategically to help cover payments
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Refinance debt when possible to reduce interest rates and required payments
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Set up automatic payments so you never miss a payment due to forgetfulness
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Explore debt management programs for credit counseling and consolidated payments
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Communicate with lenders if you have trouble making payments to avoid defaulting
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Consider downsizing your housing or relocating to reduce living expenses
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Generate supplemental retirement income from part-time work when feasible
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Prioritize essential spending like food, housing, and healthcare over debt repayment
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Contact credit counseling agencies for customized advice on handling your situation
With some planning, discipline, and wise choices, you can successfully navigate retirement, even with some lingering debt payments. The key is being realistic about your cash flow and making debt management a priority in your retirement budget.
Strive to be Debt-Free for a Stress-Free Retirement
Entering retirement with a clean balance sheet is certainly the ideal situation. Being debt-free maximizes your income flexibility, reduces stress, and gives you greater freedom to fully enjoy this time of life.
By following the strategies outlined here to methodically repay debts prior to retiring, you can make this debt-free retirement vision a reality. It may require sacrifice and discipline along the way, but the payoff is huge.
The earlier you get started, the easier it will be to check the “debt freedom” box before you kiss your working days goodbye. Consult a financial advisor if you need help creating a customized debt repayment roadmap tailored to your specific situation.
While being 100% debt-free may not be feasible for everyone, pushing yourself to reduce debts to the absolute minimum sets you up for the flexible, peaceful retirement lifestyle you deserve. With a prudent plan and commitment to debt reduction, you can make it happen.
Managing Debt Payments in Retirement
Being in debt doesnt mean you have to delay your retirement plans. But make sure your debt payments are at a manageable level based on your expected retirement income. Ask yourself key questions:
- Are your payments at a manageable level?
- Can you refinance the loans at a lower interest rate?
- Do you hold any “bad debts” like credit card balances?
And estimate your debt levels in retirement:
1. How much retirement income do you expect to have? Use the Social Security Retirement Estimator to figure out your estimated amount of Social Security Retirement Benefits. Also, add any pensions that you or your spouse may have, and any expected retirement income that you might receive from a 401(k), traditional or Roth IRA, annuity, or other workplace retirement plan.
2. How much debt do you have to pay each month? Add up your monthly debt payments — including mortgage, car payment, credit card payments, and other financial obligations.
3. Calculate your debt-to-income ratio. Divide your monthly debt payments by your monthly gross income (before taxes) that you expect to receive in retirement. What is this ratio? If your debt-to-income ratio is higher than 43%, this can be a sign that you are overextended. The federal government uses the 43% debt-to-income ratio as the cutoff point for the highest amount of debt you can have to still get a Qualified Mortgage.
Many people will have a lower income in retirement than they had while they were working; a general rule of thumb in financial planning is that retirees should plan to live on 80% of their pre-retirement income. Can you still manage your debt payments on that budget? If not, you may need to adjust your retirement plan or delay retirement until more of your debts are paid off.
Did you find this article helpful?
- Its okay if you have some debt in retirement.
- Compare your monthly debt payments to the amount of money you expect to get in retirement each month.
- To make your retirement income last longer, you might want to refinance or consolidate your debt.
How Do I Know When I Have Enough Money to Retire?
FAQ
How much debt should you have when you retire?
The 28/36 Rule. 28%—An industry rule of thumb suggests that no more than 28 percent of your pretax household income should go to servicing home debt (principal, interest, taxes, and insurance). 36%—No more than 36 percent of your pretax income should go to all debt: your home debt plus credit card debt and auto loans.
What is the $1000 a month rule for retirement?
Here’s the skinny on the rule, popularized by certified financial planner Wes Moss, author of “What the Happiest Retirees Know: 10 Habits for a Healthy, Secure, and Joyful Life. ” The savings guideline states that for every $1,000 of monthly income you want to generate in your golden years, you’ll need to have $240,000 .
What is the average debt for retirees?
A new analysis from the personal finance site LendingTree finds that 97% of retirement-age adults have non-mortgage debt. The average balance: $11,349.
Can I retire at 62 with $400,000 in 401k?
It is 100% possible to retire with $400,000, provided you’re not looking to enjoy a particularly expensive retirement lifestyle or hoping to leave the workforce notably early. Here’s an example: You want to retire at age 60, which is just one year younger than the average age (according to Gallup).