How to be debt-free before you retire

Many Americans struggle with debt even as retirement nears.¹ If you’re one of them, the burden of debt can threaten your financial stability, making the journey to retirement stressful.

But it doesn’t have to be this way, even if your current finances include significant debt. You can learn how to be debt-free, especially before you retire and your financial options become more limited. 

Here’s a look at how debt can sneak up on you, how it can affect your retirement and what you can do about it. 
 

How people get into debt unintentionally 

Some would argue that not all debt is bad. For example, taking out a low-interest loan rather than paying cash for a large purchase can make sense if your money, when invested, can earn a higher rate of return than you’re paying to a lender.  

But a lot of people aren’t that disciplined about debt. Accumulating credit card debt is easy—and, with its high interest rates, painful. The same goes for debt from a personal or home equity line of credit. Few, if any, people deliberately get in over their heads when it comes to debt. Yet many people do.

There are common reasons why debt can creep up unintentionally. Sometimes it’s poor money management, which can lead you into a thicket of high interest rates, fees and penalties that grow into unplanned debt. Overwhelming debt can also have simple explanations, such as impulsive or excessive spending.

Another reason Americans go into debt: the lack of an emergency fund. Almost half (47%) of surveyed Americans who carry credit card debt from month to month say the primary cause was an emergency or unexpected expense.² Emergencies are unexpected by definition, but that’s no excuse for not planning for a flat tire, broken HVAC or health insurance deductible. Other such expenses can come from divorce, the death of a spouse, or job loss, with even greater impacts on one’s finances.

Student loans are another major factor. With students taking on more debt than ever, and taking longer to pay it back, what used to be a common and manageable obligation has snowballed into a potentially life-changing liability.
 

The impact of debt on retirement 

It’s astonishing but true: Nearly all (97.1%) of retirement-age Americans ages 66 to 71 have non-mortgage debt.³ Unfortunately, debt can wreak havoc on your retirement income planning. You need to know how to be debt-free as soon as possible because the alternative can be grim.

In retirement, you’ll likely have a fixed income—maybe even reduced income—making debt payments a greater burden than they were during your working life. You can’t easily enjoy your retirement if you feel greater levels of stress from the weight of debt. Worse, that stress can affect both your physical and mental health. 

Debt repayments during retirement can reduce your options when the economy—or your investment income—experiences downturns, or when you’re hit with unexpected expenses. But paying off your debt before retirement can also be a problem, by limiting the amount of money you have to put into retirement savings. 

So, what’s the right course of action? The advice we would give is that paying off your debts before you retire generally brings more pros than cons. You gain more financial flexibility to enjoy the retirement you envision and handle any investment losses or unexpected expenses along the way. By eliminating debt repayments, you have less need to tap into your savings and can allow those savings to continue to grow.

With less financial pressure comes less stress and greater physical and mental health. One study even found that people who paid off their debts before retirement were more likely to say they were “much happier” now as retirees.⁴
 

How to be debt-free before you retire 

There are several ways to attack your debt burden so you can enter retirement debt-free. Here are a few for you to consider. As always, it’s smart to check in with your financial professional for guidance. 

• Create or expand an emergency fund. When unexpected expenses occur, it’s important to be able to pay for them with your own savings. This helps you avoid getting caught up in a debt spiral and putting more on credit cards.  

• Pay off debt as fast as you can. Usually, you’re not restricted to single monthly debt repayments, or to the minimum amounts required for repayment. Consider making more frequent and larger payments. You might wonder how you’ll find the money; take a closer look at your spending to see what you can shift or eliminate to free up funding and pay off your debt faster. You might even consider getting a second job or side hustle. Remember, this is just for a season. Your future self will thank you!  

• Consider debt consolidation. When done right, this can help reduce the amount you pay in interest on your debts. It can also make it easier to understand your total debt situation and your progress toward getting out of debt.  

• Prioritize repayment of high-interest debt. It’s a law of financial physics: Debt with higher interest rates grows faster than debt with lower interest rates. So, focus on paying off high-interest debts, such as credit cards, before paying off lower-interest debts, such as a home mortgage. 

• Avoid taking on additional debt. Another good rule of thumb: When you’re in a hole, stop digging. As applied to debt, it means you shouldn’t take on new loans when you’re having trouble paying off the loans you already have. Yes, sadly, this does need to be said. 

• Don’t ignore saving for retirement. While it’s important to reduce debt before you retire, it’s also important to maximize your retirement savings, so you don’t outlive your money. If your employer offers a 401(k) match, make sure you’re taking advantage of that because it’s almost like free money available to you. Your financial professional can help you strike a balance that’s right for you. 

• Think about downsizing. Moving to a smaller home can do more for you than just reducing your expenses. If you’ve built up sufficient equity in your home, selling it can free the funds you need to help pay off your debt and increase your savings. 
   

The biggest benefit of becoming debt-free

Paying off debt, especially with retirement in your future, can be a challenge. But it’s well worth it to help you achieve financial stability and peace of mind!

Take some time to envision exactly what you want your retirement to be like. What do you see? Are you traveling the country, or the world? Do you own a lake house where the kids and grandkids come each summer? Will you spend your days socializing, or focusing on your hobbies? Will you have pets?

Getting what you really want out of retirement might just begin with becoming debt-free. And remember, you don’t need to do this alone. Your financial professional can be an invaluable advisor along your financial journey.