August 21, 2019 • Retirement 101 / Articles and Insights

Paying Off Debt in Retirement

Today, being in debt is a normal part of life. We buy a house or a new car, while still paying off our credit card and student loan bills, and we continue to pay them off little by little each month. And this can last even into retirement. In previous generations, many retirees were able to pay off all of their debt before they retired, but that’s mostly a thing of the past today. 

According to an American Financing survey, 44% of 60- to 70-year-old homeowners have a mortgage when they retire. And 32% of them say it’ll take more than eight years to pay the rest of it off.1

Plus, research from Fannie Mae revealed that Baby Boomers nearing retirement are more likely to have mortgage debt than the generations before them.2

That’s consistent with new research from the Transamerica Center for Retirement studies, which found that 86% of working American households have some form of debt.3

So, the odds are that you may still have some debt left to pay off. And that’s okay. Some kinds of debt are better than others, and can be manageable in retirement. To help you determine whether or not to focus on paying off your debt, let’s take a look at what’s considered good debt and bad debt. We’ll also touch on whether or not you should use your retirement accounts to help lessen your debt, and how to handle your debt effectively.  

Good Debt

Believe it or not, there is such thing as good debt in retirement. Good debt is considered anything that’s budget-able, which means it’s a fixed payment. In order to be classified as good debt, it must also have the potential to increase your net worth. If the debt is tax deductible, that’s another plus.

The main two examples of good debt are mortgages and student loans (either your own student loans or your children’s), because the monthly payment amounts don’t change, and they normally don’t have high interest rates. And home-related debt is usually tax deductible, which also helps. So, even if your house isn’t paid off yet, that’s not a deal-breaker. 

Bad Debt

Unfortunately, there’s also bad debt to have in retirement. Here are some of the key characteristics: assets or payments that are high interest, have changing or revolving balances, or depreciate over time. 

Examples of bad debt include credit cards, car payments, and personal loans. This kind of debt can be more of a burden than good debt, since it can have a larger impact on your retirement income and your flexible cash flow. 

Where to Start

40% of retirees said paying off their debt was currently their top financial priority and 66% of workers said the same thing.3,4 What’s yours? 

If you’re trying to prioritize what loans to pay off first, start with the bad debt, and go from there. Tackle the debt that has the highest rates and variable balances, and then move on to the loans with fixed rates and payments. Your goal should be to knock off as much debt as you can before retirement. That way, when retirement comes, more of your income can be put in your pocket, instead of being put towards your loans. As you consider this, you should check with a financial professional to determine what would work best for your situation. 

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Should You Use Your Retirement Accounts to Pay Off Your Debt? 

It may be tempting to borrow from your retirement accounts and use it to pay off some (or all) of your debt. You’ll pay it back eventually, right? And this is a fairly common method: 35% of working Americans that have taken a loan from their retirement plan did it to pay off their debt.3

But, before you do that, consider the consequences. When you take out a loan from your retirement accounts, you may do more harm than good. If you go this route, you’ll want to make sure that you won’t incur any penalties or tax implications. 

Another possible option is to withdraw funds from your retirement accounts. This should also be treated carefully, because withdrawing too early on some of your accounts, usually before age 59 ½, could incur penalties. Here’s possibly the biggest consequence: the loss of future earnings. By withdrawing money from your retirement accounts, you’re hurting your retirement income and your compound interest. The funds you take out could be taxed immediately, or they could show up on your tax return at the end of the year, so know the rules before you make a decision.

Let’s pause here and look at a hypothetical example: Say you want to withdraw all of the money in your 401(k) account so you can pay off your debts. But it may not be that simple. There’s a 10% early withdrawal fee and, without an exemption available, you’ll also have to pay federal and state taxes on it, and it would show up on your annual tax return. But, if you leave the money in the account and wait to withdraw it until the right age and time, not only will your 401(k) funds have grown, there will be less penalties. 

Here’s another hypothetical example: Say you take out a loan of $15,000 from your retirement account. In most instances, the interest rate on your loan could be higher than your rate of return. Not only do you miss out on any gains, but you’re paying a higher interest rate on your own money. In other words, it may be worth it to wait and not withdraw or take out a loan. Before you make a decision, check with a tax professional to ensure you’re doing the right thing. 

Your goal should be to knock off as much debt as you can before retirement.

4 Ways to Handle Your Debt

Instead of dipping into your retirement accounts early, you might want to try these four ways to handle your debt: 

  1. Factor debt into your retirement budget. If you’re close to retirement, it can be helpful to work your monthly payments into your retirement budget. To do this, calculate your retirement expenses and include any debt you have. This way, you’re prepared for the payments and you’re not surprised when you have less cash flow than you thought. 
  2. Stick to your budget. It can be easy to overspend and let your eyes do the purchasing. But make sure you’re being disciplined when it comes to your budget, so you can work to pay off those debt payments. 
  3. Boost your income. Perhaps the most obvious way to help handle your debt is to find ways to make additional money. That may mean working a part-time job, but it also means paying off your debt faster.  
  4. Limit new debt. Watch your credit card spending and manage how much new debt you take on. Keep in mind, at some point you’ll probably need a new car, and maybe a new roof. Once you hit your 50s, try to limit new debt that hinges on you working.

Don’t let debt get you down. Focus on getting rid of your bad debt, budget for the rest, and the retirement you want can still happen. To make sure it does, consider meeting with one of our Retirement Well Spent affiliates by scheduling your no-cost retirement review today. 


This information is being provided only as a general source of information and is not intended to be the primary basis for financial decisions. It should not be construed as advice designed to meet the particular needs of an individual situation. Please seek the guidance of a professional regarding your particular financial needs. Consult with your tax advisor or attorney regarding specific tax or legal advice.

1. American Financing. “Does Your Mortgage Retire With You?” 2018.
2. Fannie Mae. “Baby Boomers Accelerate Their Advance into Free-and-Clear Homeownership.” 2017.
3. Transamerica Center for Retirement Studies. “18th Annual Transamerica Retirement Survey.” Pages 13, 14, and 18. Jun. 2018.
4. Transamerica Center for Retirement Studies. “A Precarious Existence: How Today’s Retirees Are Financially Faring in Retirement.” Page 17. Dec. 2018.

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