Retiring Debt Free – Is This An Impossible G...

You hear and read everywhere that you must be debt-free in retirement, yet you have debt. Have you somehow failed? Is this goal even possible in today’s day and age?

Introduction

What drives the desire to retire debt free in retirement?

Well, number one is probably the fact that everywhere you turn you hear or read that you should be debt-free before retiring or that you need to shed that debt as quickly as possible if you’re already retired.

Talk about some serious pressure…and stress.

Beyond that, the notion of being debt free is something most would desire if given the opportunity. It’s a good bet you feel the same, no matter how little or how much debt you’re carrying currently. You simply want to live happily and without worry in retirement.

Makes sense. Everything you own is yours and you are free to do pretty much what you want if you’re debt-free. You’re not incumbered with paying down principle and interest for something you’ve previously borrowed or purchased on credit.

Truth is most of us take on debt when young and we tend to accept it as a way of financing our lives as we age up. We take on debt to cover expenses for everything from dating, purchasing a vehicle or two\three\four\five, getting married, buying a house, furnishing that house, having kids and their associated costs while growing, college, travel, maybe acquiring some property, keeping up with the Jones, et. cetera.

Way before we get long in the tooth we start to realize that the debt mountain we’ve created feels like a self-imposed prison. Major portions of our paychecks get eaten up and yet the amount owed doesn’t seem to lessen.

No bueno! I want a mulligan and to have all this debt magically wiped away.

Sound familiar?

When you start to approach or have entered retirement carrying a bunch of debt, the psychological burden tends to get even tougher.

Trying to reduce that debt or simply meet minimum payments while living on a fixed budget can become very stressful. This can translate to serious health and mental problems at a time in life when you simply wanted to relax and enjoy your golden years.

Today we look at the notion of retiring debt free as a mandate. Seems sort of misguided given we know that a large majority of people are entering retirement carrying debt in general…and large amounts of what is considered bad debt.

This begs the question of if you should overly focus on retiring debt free, which can skyrocket your anxiety, cannonball your health and happiness, and may not be realistic to boot.

Or if you should instead seek to drive down the debt you carry in your older age in a realistic, proven manner that will help improve your finances, all the while able to live more stress free and happy in retirement.

Debt statistics

If you think you’re alone on the SS IHaveDebtInRetirement sinking boat, think again.

Let’s start by looking at some pretty startling statistics. In a recent MarketWatch article, Senior Citizen Debt Statistics (May 2024), contributing writer Rebecca Henderson reported that according to Federal Reserve data from 2022, nearly 65-percent of Americans aged 65 to 74 held debt. And roughly half of those 75 and up continued to owe on debt they carried.

Wow! The SS IHaveDebtInRetirement is a veeerry big boat, indeed!

Experian Credit Bureau, who knows a thing or two about consumer debt and spending, estimated in 2021 that Boomers were on the hook for an average of more than $6,245 when it came to their credit card balances.

And those balances, when combined with store cards (think Macy’s or the furniture store where you bought your home furnishings), the student debt you still carry for your kids or even grand kids, medical debt (a big problem for seniors), personal loans, et. cetera, amounted to more than $95k on average.

And that’s non-mortgage debt. When it came to debt related to their homes, Experian estimated in that same year that Boomers owed an average of more than $180k on their home mortgage loans.

One other statistic that is frightening is the fact the U.S. Census Bureau reports that nearly 11-percent of Americans aged 65 and over were living under the poverty line in 2022. That’s more than six million seniors who are living on the edge.

Startling…

The unfortunate results

Given those debt numbers, it’s fair to assume many Boomers will have a hard time retiring anytime soon. Many will certainly find themselves working much longer than they expected. And will be looking at the real possibility of major downsizing when it comes to their lifestyles.

Fact is that something has to give when it comes to carrying a bunch of debt into retirement. You’re looking at two likely outcomes.

Either your cash flow for monthly expenses, such as food, healthcare, housing, travel and leisure, et. cetera, has to adjust downward. This equates to a diminished lifestyle.  Ouch!

Or you’ll continue to spend to maintain your lifestyle, which probably means that your monthly spending eats more quicky into the savings you’ve amassed. This puts your entire retirement at risk with each passing year.

The real possibility of outliving your savings is a nightmare scenario that we all want to avoid. That kind of stress is something that will hit your health and probably severely impact your happiness in what should be the second act of your life.

One last important point here is the fact that much of the debt you may be carrying comes with high interest rates that well outpace investment returns you’re likely to experience.

This exacerbates the situation. It becomes very difficult to pay down your debt in that type of scenario. Often the only way to do so is through severe cuts to your lifestyle, working longer, and taking other drastic measures.

None of that sounds fun!

Oh, and there is the added downside of having less to invest to help sustain longer lifespans.

Recognize not all debt is the same

Before getting ahead of yourself in terms of wanting to get debt-free, it’s best to break things down a bit and recognize that not all debt is the same.

Obviously you know the difference between credit card/store card debt, which often come with the highest interest rates, and a home mortgage or a home equity line of credit (HELOC), which are secured and come with much lower interest rates.

But when you feel like you are saddled with debt and going under, it all tends to be overwhelming and seems the same.

Like most things though, when we start to peel back the layers of the onion, a different picture tends to emerge and our perspective can change.

Credit card debt is something we all know is bad, yet young and old alike we succumb to the desire to buy something today and worry about paying for it tomorrow. So we whip out the card without any real consideration of the harm this might do to our finances in the moment. Or in the future.

As someone in or nearing retirement, that temptation is nothing new, but the damage bears being reiterated when it comes to the impact of carrying credit card debt.

According to Lending Tree, when it comes to new card offers in the U.S. in 2024, the average annual percentage rate (APR) is 24.80-percent. That’s the average. Many cards come with rates well above 30-percent.

Store only cards actually now average 30.24-percent interest, with some charging well over that amount. This type of debt is now at a record high, according to Bankrate.

Comparatively, current new mortgage rates average 7.52-percent for a 30-year fixed loan and 6.83-percent for a 15-year fixed loan, according to Lending Tree. Granted, that’s waaaay high compared to a handful of years ago, but much lower than the trust credit or store card.

You get the picture…all debt may seem oppressive when you are nearing or in retirement, but not all debt is the same.

Why is that important to keep in mind? Before setting off on a draconian austerity program to rid yourself of all debt, you need to categorize your debt burden in order to create a comprehensive debt reduction plan that is properly focused and capable of making a big a dent as quickly as possible.

As part of that effort, you should categorize what is potentially good debt, versus that which is decidedly bad debt.

Good versus bad

In a nutshell, there are many types of debt, with some that can be beneficial or considered good debt, and most other types that are considered harmful to your financial future.

According to Experian, good debt is associated with purchasing assets that can appreciate in value or provide leverage that can help you get ahead in life.

Examples of good debt can include mortgages and HELOCs, student loans, car loans, and even business loans:

• Mortgages – without them most couldn’t afford to own a home. When used properly a mortgage can provide you with the ability to buy an asset that has a good chance of substantially appreciating over time. There’s also added benefits, such as tax advantages (e.g. mortgage interest deduction), building wealth, improving credit and increasing borrowing power.
• HELOCs – home improvement loans can help improve the market value of your house.
• Education loans – are considered by many as good debt because they can help you or your children obtain a college education or advanced degrees and certificates, which historically has increased the ability of the individual to increase their marketability and earning power.
• Car loans – can be considered good debt in that they allow you to purchase the vehicle necessary to get to work and earn your salary. That said, if not used responsibly, they can end up costing a purchaser much more for the vehicle over time, turning the loan into bad debt.
• Business loans – have the potential to help you establish and grow your business, so this type of debt can prove very beneficial to your financial well-being over the long run.

Back to the bad debt. There’s credit card and store cards, which we’ve already covered. If used properly, which means paying off the balance each month, they can be helpful, offering travel and other perks, cash-back rewards, and other benefits.

The problems come when you don’t pay down the balance and start to take on the issue of paying interest. Over time it starts to hit the budget and can become a big problem for people. Even more so for seniors on fixed budgets.

There’s also medical debt (soaring for today’s seniors), payday loans (the worst), upside down loans (assets whose value has diminished so that you actually owe more than when purchased – example: a home in a market that has experienced severe price decline), car-title loans, et. cetera.

That kind of debt can wreak havoc on your budget and become impossible to handle. For example, payday or short-term personal loans often come in small amounts ($100s to a couple thousand dollars), and they must be repaid quickly (often within weeks), often charging hundreds to even thousands of percent in interest. Yikes!

Needless to say you want to avoid taking on bad debt of any type. But life happens. The Center for Retirement Research at Boston College estimated in 2022 that households of those 65 and up with high-risk debt jumped above 43-percent in 2019. That figure is approximately 25-percent higher than just 30 years earlier.

Life happens!

Debt reduction plan

So, how do you begin to deal with the issue of carrying debt when approaching or in retirement?

Just like you do with anything else important in life, when it comes to tackling your debt you should get a little educated (read some on the issue) and understand you will need a plan.

The first thing many consider is consolidation of their bad debt. If you have decent to good credit, a debt consolidation loan or balance transfer to a card offering lower rates can be an option. This approach can help you rid yourself of the highest rates you’re paying on those credit and store cards.

But…

A word of caution with balance transfer options from credit cards, as well as debt consolidation loans, is the fact that many go this route and then run their bad-debt balances right back up. Either can leave you saddled with even more debt than when your started.

Shuffling dollars is not the same thing as paying down debt, which takes time and discipline.

For many, it’s best to target your high-cost debts one at a time. This can be the debt that has the highest rate attached (probably credit or store card, or even personal loans), or the one with the highest balance. Remember, this is bad debt – not good debt.

You’ll want to pay as much as is practical without adversely impacting your monthly budget, while at the same time maintaining at least your minimum payments on all other debt. Once one debt is paid, you choose the next to tackle and approach in the same manner, always focused on your bad debt first.

There’s two primary types of strategies recommended by Experian when it comes to bad-debt reduction – the debt avalanche and debt snowball methods. There is merit to both methods.

• The debt avalanche method focuses on targeting/paying the debt with the highest interest rate first, regardless of the balance, which will help reduce the total amount of interest you’ll pay over time
• The debt snowball approach focuses on paying debt with smaller balances, regardless of the interest rate, which helps you gain victories in your debt reduction efforts faster

Whatever approach you decide upon within your plan, keep it focused and eliminate the bad debt balances one-by-one. And absolutely do not take on new bad debt.

After you do eliminate your bad debt, next you can focus on the good debt, with vehicle or education loans a good place to start, and then working from there to paying off a mortgage.

Should you pay off the mortgage?

So, let’s say you have rid yourself of your bad debt (maybe you were one of the few who never took on bad debt – good on you for being that person), and even some of the good debt you’ve carried for some time. But you still have that mortgage.

A common question in that scenario is whether to take some of your retirement savings to eliminate your home mortgage.

While many would advise you to pay off all debt if close to or in retirement if you are able, that is not always the best advice.

President and Co-Founder Jessica Cannella of Oak Harvest Financial Group suggests you need to more closely examine the situation before making such a blanket decision.

In the video Retirement Planning: Paying off Mortgage vs Investing in Retirement, she addresses the issue, using the example of a person with a $175k mortgage balance at an interest rate of 3-, 4-, or even 5-percent.

That person is looking at the possibility of receiving an upcoming lump sum distribution when retiring, or they might have already amassed a sizable amount of retirement income through their years of diligently saving.

Either way, they wonder if it makes sense to take a chunk of that money and pay off their mortgage. Her response is, “What is the potential cost in doing so?”

In other words she is telling them they have to think about the opportunity cost in order to make an informed decision best for their situation.

For yourself, the question is whether you can realistically make more safely investing those dollars while continuing to pay for that good debt at a relatively low interest rate versus simply paying off the mortgage debt.

If the answer is yes, then from a financial planning standpoint it’s worth considering the investment approach versus paying off the mortgage.

You also want to consider some of the benefits (e.g., mortgage tax deduction) of maintaining a mortgage before making a decision to pay using retirement dollars.

Click to see all the latest retirement videos for your Retirement Income Planning research.

Conclusion

One of the hardest things about carrying debt into retirement is that of fear and the psychological burden you shoulder in doing so.

You know this can leave you with very limited options. More so, this is self-inflicted. You know you shouldn’t have such debt in retirement, but you do…

Again, life happens!

Forget the shame and guilt. Time to look forward and not backward.

Frankly, the presumption that you can never get out of debt is not something you should focus on. You’d be better served recognizing there are things you can do to address your debt burden and to improve your financial situation over time.

The key is recognizing what types of debt you have and then creating a plan to reduce them in the best order, starting with a focus on your bad debt.

Ultimately, remaining disciplined in that plan can allow you to make progress in your goal of debt reduction. All the while protecting and not tapping into your retirement savings. Even continuing to invest during that process.

Your debt plan should actually be part of your retirement plan.

Speaking of your retirement plan, if you have one (either your own or one created for you), our team would be happy to review it to determine if it is capable of adequately and securely meeting your goals and those of your family.

Or we can assist you by creating a holistic retirement plan capable of helping you to retire with confidence. We can build a comprehensive retirement plan utilizing strategies and planning techniques that address important issues, such as proper asset allocation, risk, Social Security, taxes, income, spending, healthcare, legacy, and more, customized to your family’s specific needs.

A plan created with the goal of ensuring you can successfully live out the retirement you envision.

If you are ready to take the next step and talk to a team of retirement planners who can advise on all your retirement needs, and who will put your interests first, Schedule a call today!

 

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