Managing debt in retirement

Managing debt—before and during retirement

In a perfect world, we would all graduate from our working years debt free. But this isn’t a perfect world. In fact, nearly six in ten current retirees are carrying some form of debt in retirement.¹ As our golden years get closer, our focus inevitably changes from building wealth to figuring out how to make the money last. Taking a fresh look at your debt should also be part of any transition plan. And it’s worth saying—you don’t have to be debt free. It’s not a requirement, and in some cases, a little bit of debt can be used to your advantage. However, having a debt plan should absolutely be part of your retirement picture.

In this article, we'll walk through:

• Common types of debt
• Planning for debt mitigation before retirement
• Steps to reduce debt during retirement
• Budgeting debt payments before and during retirement

What are some of the most common forms of retirement debt?

Credit card debt

We know this one all too well. From young adults to retirees, consumers of all ages hold credit card debt in the U.S. But as you approach retirement, you can still improve your situation. As a general rule of thumb, the more you put toward paying off your credit card debt, the better off you will be. And if traditional straightforward payments prove to be a challenge, consider transferring your balance to a card with a lower interest rate—better yet a zero percent rate for a given timeframe.

Mortgage debt

Paying off your mortgage could be a good choice, as monthly payments eat up cash for anyone with fixed income. But if your interest rate is low, paying off your mortgage early may not be the right move. This is particularly true if your portfolio has the potential for higher gains through market investments.

But if you want to pay your house off before retirement, create a plan to make it happen. Whether that’s accelerating your payments, refinancing for a shorter term or simply making a one-time payment, make the choice before you retire so that you don’t have to settle for the outcome after you retire.  

Student loans

Student loan debt, whether yours or funds used for a child, can linger and take a toll on your nest egg. Take time to review the loans as part of your retirement debt plan.

Have an understanding of your debt before your retirement years begin

While we touched upon this earlier, let’s spell it out—debt isn’t necessarily a negative. In fact, there’s a commonly held distinction made between what might be considered “good debt,” or debt that works in your favor, and “bad debt.” But understanding the difference is key.

If your debt is low cost and has tax advantages, then by all means give thought to holding on to it. This may include mortgages or home equity lines of credit where tax deductions come into play. And with a low interest rate, you’re actually borrowing to own an asset.

On the other hand, credit card debt is just plain bad. There’s no way to sugarcoat it. The interest rates are high and there’s no tax advantage. Plus, compounding that works in your favor in a retirement fund does exactly the opposite with credit card debt. Debt accumulates in the opposite direction. Without question, your best option is to eliminate as much credit card debt as possible before you retire.

Consolidate debt and obtain low-cost loans before your working years end

As you approach retirement, most people have both significant income and assets, so borrowing is often much easier before rather than after you enter retirement. And remember, it’s income, not wealth, that ultimately determines a lender’s willingness to offer a loan.

If you own a home, another option is to open a home equity line of credit (HELOC) in case of an emergency. Without regular income, you’re much less likely to qualify. So if debt consolidation is on your radar, now is the time to take advantage of financing opportunities before your income drops dramatically and lending availability diminishes. 

Prioritizing high-interest debt during retirement—two schools of thought

There are two dominant schools of thought when it comes to prioritizing paying down debt in retirement. The first is simply to pay off the lowest balance first, and then work your way up the chain.  The second is to pay down debt with the highest interest rate first, with the idea being to have the most expensive debts reduced up front.

Regardless of which strategy you choose, taxable funds, rather than retirement funds, should be used to pay down debt. The reason being, using your retirement savings not only may increase your tax liability, but also deprives you of potential tax-free compounding on the money withdrawn.

A few options to remember both before and during retirement

You had a plan in the years leading up to retirement. The finish line is getting close. More than likely, your plan has surrounded investing and accumulating. But to make the most of your savings, it’s time to create a budget that regularly revisits concepts from both your before- and after-debt planning options:

• Prioritize paying off high-interest debt first, whenever possible
• Make the most of available low-interest debt
• Create a financial plan that accounts for becoming debt free, how long your money might last, and today’s longevity realities
• Seek professional retirement-planning guidance 

Consult with a financial professional

There’s a lot to consider when it comes to planning for debt in retirement. A financial professional can help. So be sure to consult a professional throughout your retirement planning process. A financial professional can walk you through the ins and outs of managing your nest egg and creating a retirement strategy in line with today’s retirement debt realities. They can suggest a variety of approaches and products suited to your journey toward and during retirement.

Discover how a Jackson annuity may support your retirement goals, and speak with your financial professional today. They can help you explore a range of strategies and products designed to support you as you plan for and transition into retirement.