Retiring with debt is often considered a cardinal financial sin: Every dollar you owe reduces your income in retirement, after all. But on the other hand, blindly prioritizing debt reduction before retirement savings, particularly for low-interest debt, could shortchange your nest egg.
That’s why people nearing retirement need to weigh the costs and benefits of paying off debt vs. saving for retirement, says Brenton Harrison, a Nashville area financial advisor. “If I wiped away all your debts tomorrow, you’d probably feel a huge sense of relief. But if you have $0 in the bank, you’re still not ready to retire,” says Harrison.
The challenge is calibrating your debt repayment to ensure it’s doing the most for your retirement plan, says certified financial planner (CFP) Brandon Renfro. First pay down high-interest rate debt, and then move to a mix of debt repayment and investing when your debt interest rates are less than potential stock market returns.
For most people, that means liquidating credit card debt and private student loans, before moving on to balance retirement investing against paying off federal student loans, car loans and your mortgage. Let’s take a closer look at how you can manage those four main types of debt as you sketch out your retirement plan.
Pay Off Credit Card Debt Before Retirement
Howard Dvorkin, CPA and chairman of Debt.com, has a dire warning about carrying credit card debt into retirement. “Right now, [credit card] interest rates are hovering around 20%,” Dvorkin says. “That means you’re paying a dollar for every five you borrowed.”
Paying interest rates this high would hamstring your finances at any stage of life, let alone when you’re living on a fixed income in retirement. That means you need to prioritize paying down as much high-interest debt as possible before you stop working—and then keep from accruing any new credit card debt.
For most people, the first step is to simply stop using credit cards. Yes, it’s possible to use credit responsibly and pay off new balances each month while also attacking your old debt. But be honest with yourself about your spending habits. If you can’t pay for new spending out of pocket and also cover your existing minimum, you’ll never make progress on your existing balance.
Once you have a plan to avoid future credit card debt, determine which of your cards has the highest interest rate. You’ll want to keep making at least the minimum payment on all of your cards, of course, but by targeting extra payments toward your most expensive (a.k.a. highest-interest) credit card debt, you’ll save more money in the long run. Once that’s covered, turn your focus to your next highest interest card.
Eliminating your credit card debt prior to retirement is your most important job. As Dvorkin puts it, “credit cards and retirement don’t mix. Or they do mix—like gasoline and an open flame.”
Eliminate Student Loans Before Retirement
Student loans might seem like a concern for people who are far from being in the trenches with retirement planning. But education debt is increasingly a problem for those nearing retirement.
In 2017, the Consumer Financial Protection Bureau (CFPB) found that “consumers age 60 and older are the fastest growing age-segment of the student loan market,” with approximately 2.8 million adults over age 60 carrying student loan debt, at an average balance of $23,500.
Many older student loan holders aren’t primary borrowers—they’re co-signers on loans for their children or grandchildren. And in many cases, these older borrowers didn’t fully understand the financial liability they were signing up for, should the primary signer default on payments, according to the CFPB. They also often have trouble accessing information about the loans for which they are responsible because the primary borrower has the account information, says the CFPB.
Staying on top of student loan repayments is particularly dire for retirees. Defaulting on federal student loan debt, for example, could mean having Social Security benefits garnished by up to 15% per benefit check until the debt is repaid.
To clear your own or your co-signed family member’s student debt prior to retiring, the first hurdle is determining exactly what you owe and what your loan terms are. To find what federal student loans you may be responsible for, you’ll want to check out the National Student Loan Data System (NSLDS) at studentaid.gov.
You’ll need a Federal Student Aid ID to log in, which you can create at this government website if you don’t already have one. Once you’ve logged in, you can see all of your federal student loans on your dashboard.
Private student loans may be more difficult to find, especially because these loans may sometimes be sold to another private loan servicer. If you are unable to identify who holds your student loan, you can find that information on your credit report, which shows all of your current debts, including any student loans you carry.
Strategies for Paying Off Student Loans
Once you know your student loan balance and terms, start planning the debt payoff. Calculating how much you can afford to send to your lender above the minimum payment can help you speed up the process.
The goal is to retire without student debt. But what if you can’t comfortably pay off student loan debt and save for retirement?
If you have federal student loans, you’ve got a few options: You may be able to alter your repayment plan or put your loans on deferment or forbearance. These repayment options may give you some breathing room for reaching your debt payoff goal as well as allow you to prioritize saving for retirement for a period of time.
[Note: As part of Covid-19-related economic relief, automatic forbearance for federal student loans has been extended through at least September 2021, meaning borrowers will accrue no new interest on their principals until then.]
In addition, if you’re disabled, you may be able to discharge your loan entirely if your disability is not expected to improve. Finally, some lenders allow for a co-signer to be released after the primary borrower makes a certain number of on-time payments.
Private student loan relief may prove trickier as there are no standard relief options. Check with your lender to see if you can negotiate repayment options.
Regardless of your student loan provider, though, remember one thing: For optimal returns, you’ll probably want to prioritize saving for retirement alongside paying off student loans, provided you can make at least minimum payments. For most people, then, it may make the most financial sense to prioritize saving for retirement over all but higher-interest private student loans.
Get Rid of Car Loans Before Retirement
Some people aren’t too worried about outstanding car loans in retirement. Car loans have relatively low interest rates, and, unlike many loans, generally use simple compounding, meaning they cost less over time than other debts.
That said, “unnecessary car loans could be dangerous because they have the tendency to creep up,” says Renfro. Not only is it possible to go under water with an auto loan, but they can let you purchase more car than you need.
There are several easy fixes to take care of your car loan before retirement. First, determine if you need to remain a two-car household after retirement. Since many retirees drive less than they did while working, you may be able to sell one car, thereby getting rid of at least one loan. Use the savings on car insurance and upkeep, as well as any sales proceeds, to pay off your remaining vehicle’s loan.
If you’re tied to the number of cars you currently have, you might consider trading in at least one for a less expensive model that you could afford to own outright. If you intend to keep your current cars and loans, work to pay off the loans and keep the cars for several years after you own them outright.
Regardless of what method you choose to pay off your car, start setting aside the amount of your monthly loan payment once you’re in the black. It is likely that you will need to replace your car during retirement, and saving up money now means you’ll be better positioned to purchase a replacement car with cash when the time comes.
Pay Off Your Mortgage Before Retirement
Paying off your mortgage before you retire could be more of an emotional move than a strategic decision. Mortgage rates tend to be low, and most people heading into retirement can expect to get more value by investing than speeding up their mortgage payoff.
An early mortgage payoff can also have tax implications. “Mortgage loans offer homeowners the potential to deduct the interest they pay on their loan and their property taxes as well,” says Harrison. “If you’re not debt-averse and want to spend your extra dollars where they have the most impact, it can be more beneficial to pursue investments that offer larger dividends than paying off low-interest, tax-advantaged debt.”
Renfro agrees but emphasizes the importance of feeling good about your decision: “If paying off a mortgage relaxes you to the point of improving your quality of life then that should be given proper weight in your decision,” he says.
If retiring mortgage-free is important to you, consider these options: Perhaps the most obvious is sending extra payments to your lender. You could also downsize by selling your house and using the proceeds to purchase a less expensive home in full. If you want to stay in your current home, you may be able to save by refinancing your mortgage to have a shorter loan term.
And if you choose to wait until retirement to pay off your mortgage, make sure you’ve budgeted for mortgage payments in your retirement savings until you’ve paid your house off in full.
Is It Ever Okay to Retire with Debt?
Carrying your debts into retirement is obviously not ideal. Research has shown that seniors who retire without mortgages, for instance, face less financial insecurity than their peers who don’t.
But being unable to pay off all of your debt before you retire will not doom you to an impoverished second act. The important thing is to prioritize your finances in the years leading up to retirement to help you make the most of the money you have. That means paying off your highest cost debt and the debts that have the potential to derail your golden years while also continuing to set money aside in your retirement account.
As long as you have a plan for conquering your debt, carrying some into retirement doesn’t have to derail your plans.
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