How Much Debt is Too Much Heading into Retirement?

It may not surprise you that debt is increasingly common among pre-retirees. CNBC reports that between 1999 and 2019, debt levels for people in their 60's rose by 471%, and the total debt burden for those over 70 surged by 543%. And debt can hinder people’s retirement dreams. Last year, a MagnifyMoney survey found that an astounding 46% of Americans think they'll still have debt by the time they retire. If you are facing debt, you’re not alone, and there are steps you can take to improve your financial standing as you near retirement.

Primary Debt Sources for Retirees

Retirees carry several forms of debt into their golden years:

• Credit Cards. One of the most prolific is credit card debt. It peaked during the 2008-2009 recession, but it has begun to uptick since 2021, which experts attribute to inflation and the increased cost of living.

• Homes. Mortgages, HELOCs, and repairs can be a huge source of debt for those hitting retirement. AARP reports that 44% of retirees are still paying off their homes, with 32% predicting they will make mortgage payments for at least eight years beyond retirement.

• Education. Skyrocketing tuition has created a student debt crisis. The recent $10,000 in federal student loan forgiveness scratches the surface for many, especially since the average borrower owes $37,787. With student loans so high, it’s difficult for many to pay them off before retiring.

• Medical Bills. Even with excellent insurance, medical costs can ramp up, especially if you or a loved one faces unexpected medical issues requiring continued treatment or medication. Many retirees struggle with rising healthcare costs, expenses Medicare doesn’t cover, long-term care, etc.

• Auto Loans. Chances are you will have to replace one (or more) cars in the years leading up to retirement, which can leave you saddled with auto loans and monthly payments that you must factor into your budget.

Whatever your primary source of debt, it can sometimes feel insurmountable if you are nearing or already in retirement.

Why is Debt So Difficult in Retirement?

It’s even more complex to pay off outstanding debt payments while on a fixed income because you have less wiggle room in your cash flow. By carrying debt into retirement, you may have to sacrifice some funds you planned to allocate to your general living expenses, further impacting your quality of life and desired retirement lifestyle. Too much debt could also negatively impact your credit score, affecting future applications for mortgages, apartments, assisted living or independent living facilities, etc. Despite the challenges of eliminating debt later in life, there are several debt-repayment strategies to consider implementing.

Tips for Managing Debt

Let’s review how you can start making a dent in your debt before retiring. 

Start With the Big Picture 

Before you make payments, take a step back to evaluate your debt picture. Be sure you know the following:

• Debt classification (mortgage, personal loan, credit cards, medical bills, etc.)

• Outstanding balance (how much you still owe)

• Interest rate (what is the interest rate, and is it fixed or variable?)

• Lender (who you’re paying)

• Payment terms (when payments are due, how long you make them, etc.)

Write this information down for every balance you carry, so you know what you’re working with. Now, it’s time to build an action plan. 

Zero-In on High-Interest Debt

One of the best things you can do to pay off your debt efficiently is to prioritize paying off your highest-interest debt first. Why? This debt carries the highest interest rates, meaning you’d have to pay more over the life of the debt by letting interest accumulate and compound. For example, if you have credit card debt, it may be beneficial to pay it off first. After all, the average credit card interest rate is now an astounding 18.43%, according to Federal Reserve Data. Aim to pay off the entire statement balance instead of the minimum payments to keep those high interest rates from compounding. See where you can redirect existing cash flow to support those expenses. Auditing your cash flow may reveal recurring costs you don’t need, like multiple streaming services you forgot about, a clothing subscription box that goes unused, or one too many online shopping orders. Eliminating those simple costs from your budget may help you chip away at your debt. If it doesn’t make as big of a dent, you may need to take a more careful look at your spending. Where can you intentionally cut back? Perhaps you won’t cover all the bills for your adult child or go out to eat five days per week. Refocus on what matters most and make the necessary tradeoffs to help you retire with as little debt as possible.  

Consider Working A Little Longer

If you’re not confident you can retire with your current debt levels, another option is working longer. Working even a couple of extra years can relieve the financial strain and allow you to pay off debt without tapping into your savings. You can also opt for a part-time position if you want to ease your way into retirement while still tackling your debt head-on. Even if you work longer, your monthly payments may make it hard to get ahead. If your payments are too high for your budget, you can ask for a repayment plan. For instance, federal student loans have several repayment plan options that can lower your monthly payments. Or, if you’re having trouble keeping up with your mortgage payments, many financial institutions will work with you to create a repayment plan to catch up (or get ahead) on your payments. Repayment plans are just one proactive step you can take– another is starting an emergency fund.

Create A Cash Cushion 

CNBC reports that thanks to inflation, 64% of Americans live paycheck to paycheck. That means most U.S. adults couldn’t cover an unexpected $1,000 expense. To be proactive, start an emergency fund to protect yourself from accruing more debt due to unforeseen expenses you may face in retirement. Setting up an emergency fund and other debt-reducing steps may require you to make sacrifices and say “no” to certain expenses. While this may be challenging at the moment, your future self will thank you when you aren’t struggling to pay off a costly medical bill or fix your car’s engine. 

Reach Out for Help Creating a Debt Repayment Plan

It can be intimidating to tackle debt later in life, but having professional guidance can help you bring clarity to your finances and create a “game plan” tailored to your needs. If you want to speak with one of our financial advisors about eliminating debt as you near retirement, reach out today.