Should You Focus on Paying off Debt Prior to Retirement?

Should You Focus on Paying off Debt Prior to Retirement?

Many people wonder if they should pay off their debt prior to retirement. Entering retirement without debt can reduce stress and help to free up money for discretionary expenses. Moreover, avoiding debt can prevent people from feeling that they need to re-enter the workforce to make ends meet. However, retiring without debt is not an easily achievable goal. In 2018, the Employee Benefit Research Institute published research showing that retirees have significantly more debt than previous generations. Nearly 70 percent of households headed by someone 55 or older have debt. The reasons behind this increase range from the growing cost of housing to the increasing need for student loans.

Weigh Total Debt Against Expected Retirement Income


While maintaining control over your debt is important in all stages of life, the decision about whether or not to retire with debt can depend on a number of factors. Some individuals might be more easily able to handle debt during retirement than others. This means that it’s important for people to analyze their personal situation. Financial advisor Carrie Schwab-Pomerantz recommends starting with a net worth statement. Net worth weighs liabilities against assets. When an individual has more debt than assets, the situation can become problematic as retirement approaches because it can mean that the majority of one’s monthly income will go toward repaying debt rather than covering living expenses.

Another good step in figuring out how debt might impact your retirement involves developing a realistic estimate of your monthly income and expenditures. Income can come from a range of sources, such as real estate, savings, pensions, and Social Security. Expenses can include cost-of-living, insurance, and taxes, among other reoccurring ones. When considering these expenditures, it is also critical not to underestimate potential healthcare costs. Schwab-Pomerantz states that retirement income should ideally cover expenses and debt payments without leading to the depletion of assets. Those who possess a reliable retirement income and money left over each month after covering their expenses, including debt repayments, might not have an issue with retiring in debt.

Consider the Types of Debt Potentially Held in Retirement

Beyond examining total debt, it’s also beneficial to consider the type of debt that a person might carry into retirement. Low-cost debt, particularly that which has potential tax benefits, can help during these years. Examples can include a mortgage or student loan. However, debt with higher interest rates, such as credit-card balances, can quickly derail one’s finances during retirement. Car loans can also prove problematic if they carry a high interest rate because they offer no tax benefits. Therefore, it’s best for people to try to pay off high-interest debt as much as possible before they retire.


When paying down debt prior to retirement, it’s important to be strategic. Often, households carry multiple balances, which means it might be best to prioritize one’s debt over the others. Schwab-Pomerantz suggests focusing on the ones with the highest interest rates first and to increase payments on them, if possible, while continuing to meet monthly minimums on other balances. Once the largest debt is paid, a household can move on to the one with the next highest interest rate. Typically, credit cards carry the highest balance, so you should attempt to eliminate the debt before other consumer ones like car loans. Another option involves consolidating balances using a low-interest account. However, loan consolidation offers can come with high hidden fees, so it is important to read the fine print.

The Question of Retiring with a Monthly Mortgage Payment

For homeowners, one of the most difficult questions to answer is whether to pay off a mortgage prior to retirement. A 2018 study found that mortgage debt can make people particularly financially vulnerable in retirement due to budgeting challenges. However, it can prove beneficial to keep this debt into retirement in some cases, such as if someone has a fully deductible, 5 percent loan on a home combined a 30 percent federal and state tax rate. In these circumstances, paying off your mortgage provides a 3.5 percent return, which can be invested elsewhere for a higher potential return.

Schwab-Pomerantz believes that it’s wise for every household to examine their financial situation in order to determine what makes the most sense. If monthly mortgage payments account for a sizeable amount of retirement income, then paying it off in advance might be the best option. Also, it is important to consider the consequences of paying off your debt early. If doing so will deplete your savings, it’s often more beneficial to keep those funds and to continue to make regular monthly payments into retirement.