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Cutting Expenses in Retirement? Here’s Why You Should Prioritize Paying Down High-Interest Debt
By Andrew Lisa,
7 hours ago
Iuliia Zavalishina / iStock.com
Good health, a well-stuffed nest egg and a personalized plan are all good things to bring into retirement .
Toxic debt is not.
“Picture this,” said Ant Tumi, debt expert and founder of Loan For Success . “You’ve worked hard your entire life, saving diligently for retirement, only to find yourself shackled by high-interest debt that threatens to unravel your golden years. It’s a nightmare scenario that far too many retirees face, but it doesn’t have to be your reality. Don’t let high-interest debt steal your golden years. Prioritize paying it down, create a plan and stay focused on the goal. With a little discipline and determination, you can enter retirement with the confidence and financial security you deserve.”
Compounding Interest Never Retires, Even When You Do
It is, of course, wise to structure your retirement around your finances, but you’re also supposed to relax and enjoy the ride — and there’s nothing relaxing about debt stress.
“The benefits of a debt-free retirement go beyond just dollars and cents,” Tumi said. “It’s about peace of mind, freedom and the ability to live life on your own terms. When you’re not constantly worrying about making ends meet or juggling multiple debt payments, you can focus on the things that bring you joy, whether that’s traveling the world, spoiling your grandkids or pursuing a passion project you’ve always dreamed of.”
“High-interest debt can drain your savings quickly, leaving less for the fun stuff,” he said. “I once helped a couple tackle their credit card debt, and they were thrilled with how much more they could enjoy their retirement. Debt causes unnecessary stress. It’s hard to relax when you’re worried about money. Clients who’ve paid off their debt often feel more at peace and enjoy their retirement more fully.”
Retirees have to build a financial cushion to cope with unforeseen expenses, just as people who are still working have to do. Without an emergency fund, unexpected expenses will force you into debt — but debt makes it hard to build one in the first place.
“Getting rid of debt makes your finances more stable,” Stubbendeck said. “It’s easier to handle surprises without debt hanging over you. This stability means you can keep your retirement savings intact and enjoy your golden years.”
Debt Chokes Cash Flow and Diminishes Savings, Social Security and Investment Returns
The healthiest retirements draw income from several sources — and high-interest debt can siphon precious funds from all of them simultaneously.
“Carrying high-interest debt can have a long-term negative impact on your retirement picture,” said Charlie Pastor, CFP, contributing expert at The Motley Fool Ascent . “From a cash flow perspective, high rates can drag down your take-home income from Social Security and pension benefits, as well as regular withdrawals from your savings. Letting high-interest debt hang around is a bad idea for consumers of any age, but when your debt costs more than your investments are earning, it might be time to use your savings to pay down debt. Many retirees rely on compounding investment returns to cover expenses down the road, and being shackled with high-interest debt can prevent your dollars from growing.”
According to Forbes , the S&P 500 has delivered an annualized return of 7.58% since 1971, or 10.51% with reinvested dividends. That’s not bad — unless you’re paying 20% interest on expensive loans while your investments struggle to keep up.
“If your funds are invested, you may see a decrease in balances depending on what the market does,” said Ashley Morgan, a debt and bankruptcy attorney whose Northern Virginia practice, Ashley F. Morgan Law , focuses on helping people with debt and financial issues. “Over a 10- to 15-year period, investments tend to trend positive. But, if you need to pull money out during the next two to five years to survive, then you cannot time your withdrawals when the market is hot.”
Bad Borrowing Affects All Aspects of Your Financial Life
Credit cards aren’t the only source of high-interest debt — and its corrosive effects can bleed into every aspect of your financial life and sneak up from obscure hiding places.
“For one client, $500,000 in life insurance policy loans at 8% were costing over $40,000 per year in interest,” said Bill Boersma, a life insurance consultant who helps retirees optimize their insurance portfolios as the founder of OC Consulting Group . “By refinancing the loans at 3%, we saved them $25,000 the first year and $300,000 over 10 years. Now that money stays in their retirement accounts. Another client bought a $5 million policy with premium financing but didn’t understand the risks.”
With Toxic Debt, Things Get Worse as Time Goes On
Both finite and nonrefundable, time is the most valuable asset of all — and it eventually works against retirees and their ability to manage toxic debt.
“Retirees are usually on a fixed income or have limited resources,” Morgan said. “When living on a pension and/or Social Security, your income only increases based on cost-of-living increases. This usually does not keep up with inflation. As a result, when you have high-interest debt, your payments will be more burdensome on your budget as time passes.”
Morgan explained that fixed-rate interest payments stay the same and variable rates increase with time — but in both cases, the threat of debt-based financial trouble grows with time.
“The payments on your debt then usually will take up a larger percentage of your income or you will need more of your income to meet your regular necessities,” Morgan said. “This means your spending power goes down every year.”
While that’s happening, your earning potential also dwindles with age, leaving you with fewer options for coping.
“As you get older, usually getting a part-time job or additional supplemental income gets hard,” Morgan said. “So if you are retired and are healthy, working part-time may be a possibility. But if you get older or start to have health issues, you might not be able to supplement your income. So paying off debt while you still have some options is best.”
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