How to Handle Retiring with Debt
As retirement approaches, the last thing you want is to have financial liabilities — especially ones you didn't account for — preventing you from making the most of your golden years.
Let's take a look at common questions about retiring with debt and review ways to keep debt manageable so that you can enjoy a fulfilling and financially secure retirement.
Why Pay off Debt Before Retirement?
Think about it this way: tackling debt is probably an easier task while you're still earning a salary than it will be once you're on a fixed, or at least more limited, retirement income. Retiring with debt can make it more difficult to keep up with your living expenses. It will also leave you with less cash to spend on hobbies, entertainment, and travel. That's not to mention the impact debt can have on your ability to afford healthcare, long-term care, and home maintenance.
It's a good idea to pay down as much high-interest debt as you can before retiring. Credit card balances or other high-interest balances, could break your retirement budget.
Is Retiring with Debt Ever OK?
Retiring with debt isn't the ideal situation, but sometimes it can't be avoided. And some types of debt are easier to deal with than others.
Let's say you're still paying off your mortgage or student loans. You can take some solace in knowing that interest payments on mortgage loans are tax-deductible, as are a portion of the interest payments on qualified student loans. These tax benefits may help to offset the financial burden of repaying those debts after you retire.
Home loans also tend to carry lower interest than other kinds of debt. If you're considering whether to accelerate payments on your home loan so that you can pay it off before you retire, do an assessment of the impact on your retirement savings. Compare the interest you're paying on the loan to your potential earnings if you were to keep the money for those extra loan payments invested in your retirement account. In some cases, you'll come out ahead by sticking to your regular payment schedule, even if it runs into your retirement.
How Can I Manage Debt While Retired?
If you expect to still have a mortgage or other debt when you retire, work toward having enough retirement savings or post-retirement income to cover your monthly payments. If your combined income from Social Security, retirement accounts, pensions, and other existing sources won't be sufficient, earning new income during retirement might be part of your payback plan. Maybe you can get a part-time job, start a business, or join the gig economy by picking up temporary work assignments in your field.
Downsizing is another way to access more cash to pay off your post-retirement debt. Selling your home and moving to a smaller, more affordable one — or moving to a more compact apartment if you're renting — can free up cash to help you put your debt behind you faster.
You might also consider whether debt refinancing or consolidation could be a good solution for you to lower your interest rates or make monthly payments more manageable.
Retiring with debt may not be ideal, but it shouldn't setback any of your financial goals either. Prioritizing the elimination of the costliest debt will make it easier to handle any remaining debt you carry into retirement. Talk to a financial advisor about how to include debt management in your retirement plan.