Debt in Retirement? What to Consider

Debt when you retire, while not ideal, is a common reality many Americans face. High-interest credit card balances, car loans, or medical bills can add financial stress and prevent you from living your desired lifestyle. While it may feel like an uphill climb, there are strategies you can take to manage post-career debt.

In this article, we’ll outline what to consider if you’re a retiree in debt. This includes when it might be normal to carry certain types of debt, strategies for managing debt if you’re already retired, and how a financial advisor can help you build a payoff plan and keep your goals intact.

How Debt Can Impact Retirement

Debt is a major threat to any person’s financial picture, but it’s particularly damaging to retirees. Instead of relying on income from a job, you’re drawing cash from several sources, including tax-advantaged accounts or Social Security. Owing money, therefore, can limit your cash reserves and prevent you from living the life you want, especially if your income is fixed.

Retirees may carry many kinds of debt into their later years, such as:

• Credit card balances with high interest rates
• Car loans or lease payments
• Mortgage debt, including reverse mortgages or second homes
• Medical debt, especially after a major procedure or uncovered expense
• Personal loans or lines of credit

Paying off debt (particularly with high-interest, like credit cards or car loans) cuts into your monthly cash flow from income sources. You might also feel forced to tap into retirement savings earlier than you planned, potentially triggering tax consequences or even locking in investment losses if you sell during a market downturn.

Beyond the numbers, carrying unpaid debt into retirement also takes an emotional toll. After building wealth for years, you may feel like you’re less on track if you owe too much money at once.

Is All Debt Bad?

While debt generally carries a negative connotation, not all forms are necessarily bad or unnecessary. Low-interest debt, such as a home mortgage, is a strategic choice that allows you to build equity and further your goals.

“If you have a realistic plan to continue paying your mortgage payment into retirement, carrying low-interest debt into your retirement is generally considered low-risk and potentially beneficial for your taxes in the long run,” explains Steve Sexton, CEO of Sexton Advisory Group.

By contrast, high-interest debt, such as from credit cards, can slow your progress and offer no future benefit. If you do decide to take on debt, it should be strategic and in line with your goals. It’s smart to speak with a financial advisor to ensure you’re approaching loans optimally.

How to Approach Debt in Retirement

Clearing debt, especially in retirement, isn’t always a simple task. Your approach should be as strategic and long-term focused as other areas of your finances. Committing a large sum of cash upfront might seem productive, but it can disrupt your monthly cash flow and throw off your long-term retirement plans.

Lamar Brabham, founder and CEO at Noel Taylor Agency, emphasizes that, first and foremost, it’s critical to “create a budget and stick with it” if you’re entering retirement with outstanding debt. “When you get a grip on what’s coming in and what’s going out, you can make a plan to reduce your debt,” he adds. This includes setting up automatic payments, taking guesswork and mental labor out of the equation.

Beyond keeping track of your cash flow, you can begin incrementally paying off your debts. Evan Patzer, retirement strategizing specialist at LifeWealth Solutions, notes the next step is “prioritizing debt types and aligning payoff plans with income sources.” He adds that, if it doesn’t risk long-term retirement goals, “a lump sum (like an IRA or annuity)” may be used to “eliminate burdensome debts.”

“In order to avoid having debt derail retirement, it needs to be managed,” says Patzer. “Prior to retirement, you should sit down with your financial team to determine which debt should be paid down and when. This can help future retirees stay on financial track.”

As Brabham and Patzer explain, it’s wise to tailor your payoff plan to your situation. Before you begin paying off debt, consider these four questions:

1. Will a lump sum payment increase my tax burden or impact my goals?
2. How stable is my retirement income, and what is my cash flow?
3. What are the interest rates on each debt?
4. Have I reviewed my plan with a financial advisor?

How a Financial Advisor Can Help with Debt

While paying off debt may feel insurmountable, it’s not impossible. With help from a financial advisor, you can create a clear, personalized plan that helps you regain control of your finances and stay on track for the future.

A financial professional is a valuable tool to not just pay off debt but manage it within a larger plan. According to Sexton, a professional “can help you bring all the puzzle pieces together in a cohesive and personalized strategy that takes into consideration your income, expenses, assets, and debts in relation to your retirement goals.” He adds that this includes “check-ins and reviews to ensure you’re making progress” and maintaining accountability.

If you’re feeling unsure about how to handle debt in retirement, you don’t have to shoulder all the stress alone. Having an advisor by your side can boost your confidence and give you the additional expertise and perspective you need to correct and stay on course.

To find a qualified financial advisor, we recommend this free matching tool. Once you fill out a brief quiz regarding your goals and current situation, it’ll connect you with a vetted fiduciary who suits your needs.

Frequently Asked Questions

Should I retire if I have debt?

In theory, yes, you should be able to retire despite having debt. This is especially true if you’re carrying a low-interest loan, such as a mortgage. Be aware, however, that debt can significantly weigh down your finances, particularly if it’s high-interest, like from credit cards or car loans.

Before you retire, it’s important to consult a financial advisor to determine if you can pay off your debt without a job. Without a steady paycheck, your savings and other sources will need to be able to cover your payment plans.

Should I use my IRA or 401(k) to pay off debt?

Using your IRA or 401(k) as a tool to pay off debt is an option, with some caveats. First, withdrawing from a traditional IRA or 401(k) creates taxable income. This means that, if you take a lump sum out, you’ll create a notable tax burden for yourself. It could also cause you to sell assets off at a loss if markets are down.

Because of the details above, it’s typically a better option to settle debt incrementally so you don’t harm your long-term goals. Be sure to talk to a financial advisor before you make substantial withdrawals from your retirement accounts to pay off loans.

What happens to debt when you die?

Unpaid debts don’t disappear after you die—which is a common misconception. Rather, your debts will become part of your estate and get paid before your assets can properly disperse to your heirs or beneficiaries. And even though your family members might not be directly liable, creditors can attempt to make claims on the estate.

Is mortgage debt bad to carry over in retirement?

Carrying a mortgage into retirement isn’t always a bad option if it strategically benefits your goals. Keeping the loan may allow you to preserve more liquid assets, which may fit your retirement income strategy.