How Much Debt Should I Have in Retirement?

Planning for retirement also means analyzing your debt obligations and planning on when you will have them paid off, and how much you will take with you (if any) into retirement. But that’s the big question we all have. Should I have all my debts paid off before retiring? We can help with our blog: How Much Debt Should I Have in Retirement?

Every person’s retirement plan is unique, and the answer will depend on each scenario. With that said, there are a few things to consider when determining what is the right answer for you and your retirement plans.

Is It OK to Still Have Debt When I Retire? If So, How Much?

Not having to pay interest on debt obligations in retirement just frees up more money to live the lifestyle you want. In a perfect world, having no debt in retirement is always ideal. However, this just isn’t a realistic scenario for many people planning for retirement. If you have a mortgage, a car loan, time shares, etc. and see no realistic way that you can retire without debt, you’re not alone. With that said, if you have the means to pay it all off, then you would be beneficial to do so.

So, is it OK to still have debt when you retire? Yes. The question becomes, which debts are necessary to pay off before retiring, and which debts are reasonably manageable when you retire?

How to Determine How Much Debt Is OK in Retirement

We base almost all of our retirement plans on what our desired or expected retirement income is each year. From there, you can determine how much of your income will service your debt in your annual retirement budget, and how to prioritize the debts you wish to eliminate before you retire. The following three steps will help you plan for your debt management in retirement.

Step One: Analyze Your Projected Retirement Budget

The goal of this step is to determine whether if your retirement budget is sufficient to manage your current debt obligations and take actions where needed.

For example, if you plan to live on a $75,000 income in retirement, and you still have a mortgage, two car loans and a few thousand in credit card debt, does your retirement budget consider these debt obligations? Your answer to this question will determine your next steps for your plans.

Other considerations to keep in mind when analyzing your debt for retirement are:

• How much is the interest rate on each debt payment?
• Is the debt secured or unsecured?
• How much of your debt is credit card debt?
• Do you plan to use a reverse mortgage in your retirement plans? If so, your home may be a priority debt to pay off before retiring.
• Are there any debts that you can consolidate to get a lower interest rate and lower payment?

Step Two: Prioritize Your Debt Payments

Perhaps you’ve determined that your mortgage, two car loans and credit card debt may be manageable in retirement on a $75,000 income, but it sure tightens things up a bit. Not to mention the fact that you forgot that you had a timeshare and some other residual loans you forgot about that you’ve been paying on.

Which of these debts should you pay off first, and which debts are realistic to take with you into retirement? There are two ways to prioritize your debts. The first is to prioritize them by interest rates, listing the highest interest rate as the highest priority to pay off and the lowest interest rate the least priority to pay off.

The second way to prioritize your debts is to separate your debt between secured debt and unsecured debt. Secured debt is less of a priority to getting rid of, because should you sell the asset that is securing the debt, the proceeds would pay off the debt. Unsecured debt, or debt that has no associated collateral, such as a credit card, medical bills or student loans, should be the priority of paying off first.

Step Three: Plan Accordingly

Only you know how much flexibility you have in your retirement plans, and you’ve prioritized your debts on which ones are most critical to pay off as soon as possible. The question now becomes, how much of your debts and which debts are you OK paying on during retirement, and which ones should you pay off before you retire? The short and easy explanation of the task for this step is to pay off your high interest debt and your unsecured debt.

If you compare your average retirement portfolio returns to the interest rates on your debt, it becomes clear where you should put your money. If your average retirement investments return is say 7%, and you have $5,000 in credit card debt that has an interest rate of 25%, then perhaps it’s obvious that you should temporarily allocate much of your current retirement savings plans for getting rid of that high interest bearing debt.

Which Debts Are OK to Take with You into Retirement?

As previously mentioned, each retirement plan will differ since each individual’s financial outlook will be different. As a general rule of thumb, the best mindset to have is to pay off all debts before you retire, if you can.

Seeing that there are a lot of retirees that just won’t be able to do this, consider paying off the following debt first before retiring:

• Credit Cards
• High Interest-Bearing Personal Loans
• High Interest-Bearing Lines of Credit
• Student Loans
• Medical Bills
• High interest-bearing time share loans

Debts likely for many to take into retirement and are manageable during retirement are:

• Mortgage loans
• Low interest-bearing car loans
• Secondary Vacation Mortgages
• Secured asset loans
• Loans against life insurance or other insurance assets

Final Thoughts

Is it OK to retire with debt? As with anytime during your life regarding debt, yes, as long as it’s properly managed, it isn’t costing you fortune in interest rates, and if the debt is secured by a valuable asset. When all is said and done, be sure you discuss your plans and debt with a professional advisor before making any immediate decisions.

We hope that you’ve found some useful information with our piece; How Much Debt Should I Have in Retirement? As always, if you don’t see something here you want us to cover, feel free to reach out to us directly through our Contact page or leave a comment below. Happy retirement planning! ~ Glen.