Investing for a comfortable retirement might be challenging if you’re also trying to pay down debt. Dedicating more of your budget to debt means you might have less to invest. You might consider paying off certain debts after retirement so that you can save more now, but that can have disadvantages as well.
If you expect to have debt in retirement, it’s important to know how to manage it.
Key Points
• Professional financial advice can aid in creating a debt repayment plan and optimizing retirement savings strategies.
• Using debt management methods like the debt snowball or avalanche can help individuals effectively repay debts.
• Debt consolidation options, such as loans or 0% APR balance transfers, can reduce interest costs and simplify payments.
• Using retirement funds to pay off debt is generally discouraged, as it can hinder financial growth and create tax liabilities.
• Planning for a debt-free retirement may lower living expenses and increase financial security.
Retiring With Debt
One of the first steps in retirement planning is determining how much money you’ll need to meet your expenses once you stop working. The numbers might be inflated if you’re paying off retirement debt on top of funding basic living expenses. Working out a realistic budget that includes debt repayment is critical for determining how much you’ll need to save and invest.
How Much Debt Is Common to Have in Retirement?
Having debt in retirement is fairly common among older Americans. In fact, roughly two-thirds of seniors between the ages of 65 and 74 carry some level of debt, and half of those over 75 do.
In terms of how much debt retirees have by age, here’s how the numbers break down.
| Age Range | Median Debt | Mean Debt |
|---|---|---|
| 55 to 64 years old | $71,290 | $168,940 |
| 65 to 74 years old | $46,370 | $122,010 |
| 75 and older | $33,620 | $101,200 |
Source: Survey of Consumer Finances, 2019-2022.
The types of debt you might have at retirement may include:
• Mortgage loans
• Home equity loans or lines of credit
• Student loans, either for yourself or loans you’ve cosigned for your child
• Vehicle loans
• Credit card balances
• Medical bills
• Personal loans
• Business loans
A reverse mortgage is another form of debt, though it typically doesn’t have any repayment obligation. Reverse mortgages allow eligible seniors to tap into their home equity as a secondary income stream. The mortgage is typically repaid when the homeowner passes away and the home is sold.
Tips for Managing Debt in Retirement
If you have debt, retirement might feel a little more stressful, financially speaking. You might be torn between trying to manage retirement expenses while also making a dent in your debt balances.
Here are a some simple tips for managing debt in retirement:
• List out each debt you have, including the remaining balance owed, monthly minimum payment due, and the interest rate.
• Consider whether it makes sense to use the debt snowball or debt avalanche method to repay what’s owed.
• Consider contacting your credit card issuers to ask for an interest rate reduction.
• If no rate reduction is offered, look into 0% APR credit card balance transfers to save money on interest.
• Automate payments if possible to avoid late payments, which can trigger fees and potentially damage your credit score.
• Research debt consolidation loan options to see if you might be able to save money by combining multiple debts.
• Prioritize repaying debts that are secured by collateral, such as your mortgage or a car loan.
• Weigh the pros and cons of using a home equity loan or line of credit to consolidate unsecured debts.
• If you owe private student loans, consider shopping around for refinancing options which might help you to lower your interest rate.
• Avoid taking on new debt unnecessarily if possible.
If you’re truly struggling with debt in retirement, there are other things you might consider including a debt management plan, credit counseling, debt settlement, or even bankruptcy. Talking to a credit counselor or financial advisor can help you decide if any of those possibilities might be right for you.
And if you need to get started saving for retirement, you can look at your options to open an online IRA.
Using Retirement to Pay Off Debt
If you have retirement savings in a 401(k) or similar workplace plan, you might be tempted to withdraw some of the money to pay off debt. For example, you might decide to take a 401(k) loan to pay off credit cards or other debts. You’d then pay back the loan paying interest to yourself.
It sounds good on the surface, but using retirement savings to pay off debt can be problematic in more ways than one. For one thing, money you take out of your 401(k) or another retirement account doesn’t have the chance to continue growing through the power of compound interest. That could leave you with a sizable savings gap once you’re ready to retire.
You might be paying interest back to yourself with a 401(k) loan but the rate you’re earning might be much less than you could have gotten if you’d left the money in place. Additionally, your employer might not allow you to make new contributions to the plan until the loan is repaid in full.
More importantly, you could end up with a tax liability for a 401(k) loan. If you leave your employer with a loan balance in place, you’ll have to pay it all back at once. If you can’t do that, the IRS can treat the entire loan amount as a taxable distribution. For that reason, using a 401(k) loan to pay off debt is one of the most common retirement mistakes you’re usually better off avoiding.
Getting Out of Debt Before Retirement
If you’d like to retire debt-free or as close to it as possible, it’s better to start working on repaying what you owe sooner rather than later. How you approach paying off debt before you retire can depend on how much you owe, what types of debt you have, and how much money you have to work with in your budget.
Here are a few additional tips for paying down debt before retirement.
Paying Off Your School Loans
More than 2 million Americans over the age of 55 have outstanding student debt. So, it’s not out of the realm of possibility that you might be torn between saving for retirement or paying student loans. And it’s helpful to know what debt relief options you might have. If you have federal student loans, you might be able to:
• Enroll in an income-driven repayment plan, which might allow you to eventually have some of your debt forgiven.
• Qualify for Public Service Loan Forgiveness if you’re working or plan to work in a civil service job.
• Apply for other types of federal loan forgiveness, such as Nursing Corps Loan Repayment.
• Consolidate your loans to streamline your monthly payments.
If you have private student loans, you might look into refinancing them. Student loan refinancing allows you to take out a new loan, ideally at a lower interest rate, to pay off your existing loans. Depending on how the new loan is structured, you might save a significant amount of money on interest over the long term.
Paying Off Your House
Should retirees pay off their mortgage? Entering retirement with no mortgage debt could mean much lower living expenses. But if you’re trying to pay off your home before you retire, you might have to commit substantially more of your monthly income to the payments.
If you’re interested in paying off your home faster, there are a few hacks you might try, including:
• Paying biweekly, which allows you to make one additional full mortgage payment per year.
• Applying your extra paycheck during a three-paycheck month to your mortgage’s principal balance.
• Using tax refunds, bonuses, or other windfalls to pay down the principal.
You could also look into refinancing your mortgage to a shorter loan term. Doing so may raise your monthly payment, but you could get out of debt faster, potentially saving money on interest.
Paying Off Your Credit Cards
Credit cards are usually considered to be “bad” debt and you might want to get rid of them as quickly as possible, especially if they’re carrying high APRs. Transferring balances to a card with a lower or 0% rate can cut the amount of interest you pay so more of your monthly payment goes to the principal.
You could also consider a personal loan for debt consolidation, if the interest rate is lower than the combined average rate on your cards. Keep in mind that it pays to shop around to find the best loan option for your needs.
Paying Off Your Car
Car loans can come with sizable monthly payments, which may keep you from investing as much as you’d like for retirement. Refinancing may be an option, though whether you can get a new car loan may depend on the vehicle’s value and what you owe on the old loan.
Paying biweekly or applying tax refunds to your balance can help you get out of car loan debt faster if you’re not able to refinance. You could also try rounding up your card payments to the next $100 each month. So if your regular payment is $347.55, you could round it up to $400. That’s a simple hack for paying off car loan debt in less time.
Saving for Retirement
If you’re trying to save for retirement while paying down debt, it’s important to find the right balance in your budget. It’s also a good idea to know what your options are for saving and investing. That might include:
• 401(k) or 457(b) plans at work
• Traditional and Roth Individual Retirement Accounts
• SEP (Simplified Employee Pension) IRA, if you’re self-employed
• Solo 401(k), if you’re self-employed
You can also invest in a taxable brokerage account, though you won’t get the same tax breaks as qualified retirement plans. If you have a high deductible health plan, you may also have access to a Health Savings Account (HSA). While an HSA is not a retirement account, per se, you could still use it to save money on a tax-advantaged basis for your future health care needs.
If you’re not sure how much you can afford to save or need to save, using a retirement calculator can help. You can revisit your plan each year to see if you have room to increase the amount you’re saving, based on changes to your budget or income.
Seeking a Financial Advisor
Getting professional financial advice can be helpful if you’re not sure how to go about creating a debt repayment plan or preparing for retirement. A financial advisor can help you figure out:
• How much you’ll need to save to reach your target retirement goals.
• Which debts to prioritize and how to make them less expensive so you can pay them off faster.
• Where to focus your savings and investing efforts first (e.g., a 401(k) vs. an IRA).
• How to diversify your portfolio to achieve the rewards you’re looking for with an amount of risk you can tolerate.
The Takeaway
Debt doesn’t have to be an obstacle to your retirement goals. Creating a debt repayment strategy and actively avoiding unnecessary debt can make it easier for you to create a secure financial future.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
Is it wise to use retirement to pay off debt?
Using retirement funds to pay off debt is generally not recommended by financial experts as it may leave you playing catch up later. Better options for paying off debt before or during retirement can include a debt consolidation loan, home equity loan or line of credit, or 0% APR balance transfer offer.
How much debt is common to have at retirement?
Federal Reserve data suggests that the typical retiree between the ages of 55 and 74 has somewhere between $71,000 and $122,000 in debt. That includes mortgage debt, student loans, auto loans, and credit card balances.
What percent of Americans retire with debt?
According to Federal Reserve data, 77% of older Americans aged 55 to 64 have debt. Among Americans aged 65 to 74, 70% have some debt while 51% of those 75 and older have debt obligations.
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