Nearly two-thirds of Americans expect to retire with debt. A few strategies can help you pay down (or pay off) those bills and enjoy retirement.
Quick takeaways
In an ideal version of retirement, you’d start your post-work years with zero debt, enabling you to spend your hard-earned savings just as you pleased.
In reality? People of or nearing retirement age have mortgages, credit card balances, and other debt. Nearly two-thirds—63%—of retirees have outstanding debt, and of that group, 68% of carry a credit card balance, an increase of 28% in just two years.
The takeaway? If your debt-free retirement dreams haven’t become reality, you’re not alone. “While many people choose to set a goal to go into retirement with no debt, for others that’s unrealistic,” says Heather Winston, head of product strategy for individual solutions at Principal®. “There are real-life obligations and needs that happen, from a mortgage to unexpected expenses. Balancing financial obligations can be difficult.”
Whether you’re in or nearing retirement, it can be helpful to review your debt . Here are a few ways to get started.
To figure out whether your debt is manageable in retirement, you have to start with your budget. Budgeting is probably something you’ve done for decades, but still, budgeting in retirement can be challenging.
For one, your fixed expenses may look different. For another, your retirement income is actually the process of understanding how much of your savings to spend each year. “Many people underestimate their spending as they go into retirement,” Winston says. “Saying you can live off $60,000 a year and doing it are two very different things.”
Start with a practical exercise: After you’ve estimated your expenses and forecasted how much retirement income you’ll need, practice living on that budget for a month or two. Is it doable—and can you keep pace with, or even accelerate, your debt payoff? Or, you can gradually ease into a retirement budget, spending less each month until you reach your budget goal? Both will give you a good view into if you can manage current debt without adding to it, and if it’s possible to pay off some debt sooner.
Much as budgeting is an old-school skill you lean on in retirement, debt payoff strategies are, too. If you want to pay off debt, here’s a method:
- Consider starting with debt that has the highest or variable interest rates—credit cards, medical debt, home equity loans. The sooner you pay it off, the more interest you save. You could pay off smaller balances more quickly, or put extra funds towards the highest interest rates of the bunch.
- Then move on to debt you’ve co-signed, such as student loans. Why? The borrower is responsible for the debt if you die.
- Next, try to pay off debt with low interest rates, such as some car loans.
- Finally, think about paying off debt with fixed interest rates; a mortgage is a good example.
If you’ve not yet decided on an exact retirement date and want to pay off some (or all) debt, one option is to keep working (or phase in your retirement with a slow-down in your work schedule) until you’re able to fulfill some obligations. If you’ve already retired and the debt is enough of a budget burden, a part-time job could help.
One note of caution: Some people may think about taking a bigger-than-normal retirement distribution to help with debt payoff. There are two big considerations before you do this. First, you’ll permanently decrease the retirement income savings you may be able to draw on in future years. And, a bigger distribution may come with big tax implications. For guidance, consult your financial professional or tax advisor.
Your retirement savings aren’t infinite; at some point, your money may run out. Debts that remain after death are generally paid from the estate before any money passes to heirs. That may help you frame how you manage your retirement debt, especially if you don’t want to leave behind high-interest rate debt. "Think about how you can make your money work for you instead of the other way around,” Winston says.
Unsure how to calculate retirement income needs? Use our retirement income calculator (login required). You can adjust factors such as health, savings rate, and current pay. Use the link, or under your Principal 401(k) account, click on “Personalized planning" then "Education hub."
