Should You Retire Your Debt Before You Retire?

Americans are carrying more debt into retirement than ever before. Since 2008, the share of household debt held by people over 60 has grown from 15.9 percent to 22.5 percent in 2016, according to The Federal Reserve Bank of New York. Making monthly debt payments during retirement can leave you with less money for necessary living expenses, especially if you’re living on a fixed income. Should you retire your debt before retiring?

Well, the simple answer is yes — you should retire your debts before you retire. Many experts would advise that it’s best to enter your retirement debt-free to ensure you’ll have enough to pay your bills once your income tails off. The ideal scenario, however, isn’t always possible for everyone. What you can do, in a range of financial situations, is take a programmatic, measured approach to paying down your debts in the cheapest, fastest, most tax-effective way.

Prioritize Your Payments

If you’re carrying auto loans, a mortgage, credit card debt and a hefty student loan tab from month-to-month, as many soon-to-be retirees are (the average student loan debt owed by borrowers age 60 and older almost doubled from 2005 to 2015 increasing from $12,100 to $23,500, according to the Consumer Financial Protection Bureau), you need to prioritize your payments. Why? Because not all of these debts are created equally.

Certified Financial Planner Bill Losey of Retirement Solutions in Greenwich, NY suggests tackling credit card debt first since it’s often saddled with the highest interest rate and is non-deductible. After that, work from the highest rates down to the lowest, putting all of your extra money against the loan with the highest rate while making minimum or standard monthly payments on the rest. You may also want to consider refinancing your student or auto loans (or transferring credit card balances) to make repayments cheaper and faster.

Don’t Rush The Mortgage

Mortgages are typically the biggest debts we carry. But that doesn’t mean you need to hustle to get them out of the way. A decade of low interest rates combined with the (pared back but not eliminated) deduction on mortgage interest means it’s okay to hold this debt the longest, says Steve Vernon, research scholar at The Stanford Center on Longevity. You also don’t want to let pressure to pay off the mortgage get in the way of fully fleshing out your retirement portfolio, Vernon notes. The return on your money is equal to the return you get paying off a debt (after the tax deduction). By that calculation, it makes more sense to heavy up contributions to a retirement account where you might earn 8 percent (or 6 percent after taxes) than to a mortgage that might cost 4 percent (3 percent after taxes).

Downsize

What if you’re heading into retirement with more debt than you’re comfortable with? Adjusting your lifestyle sooner rather than later can allow you to live more comfortably in the future. Downsizing and moving into a smaller house doesn’t just mean smaller mortgage payments, it means paying less for things like electricity and water — therefore freeing up some money to put towards your debts. And look into other money-saving moves like swapping the SUV for a small sedan, for example. People who simplify and downsize will have more money for the people, things and experiences that are important to them, Losey says.

Work longer

Finally, it pays to consider how much hay you can make by working even a little longer – a move both Vernon and Losey suggest. For every year between age 62 and 70 that you put off taking Social Security, you increase your monthly payout by around 8 percent. You also give the money in your 401(k)s and other retirement accounts additional time to grow.

If going into work five days a week becomes too much, consider phased retirement. Talk to your employer or human resource department about formal programs that will allow you to work part-time, or even just take one or two days off during the week. Another benefit of working longer? “It helps you live longer,” Vernon says. And there’s nothing bad about that.

With Hattie Burgher