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Retirement is supposed to be the golden age of kicking back with a lemonade (or something stronger) on the porch, not dodging calls from debt collectors, or crying into your monthly budget . But adults between the ages of 65 and 74 have an average debt of $134,950.
So, here's a not-so-top-secret list of debts to knock out before you hang up your work boots to truly enjoy your hard-earned freedom without financial worries crashing the party.
Essential debts to eliminate
Focus on these debts first and foremost.
1. Credit card debt
Credit card debt is notoriously sneaky, piling up with high interest rates (according to the Federal Reserve, the average rate is at a whopping 21.59% APR) that can quickly become overwhelming. This type of debt can devour your savings faster than you can say "retirement," making it a top priority to pay off. Without the burden of these high rates, you'll not only save money but also significantly reduce financial stress.
2. Car loans
Car loans are another strain on your retirement budget. As you move into a phase of life where you might not need a car as much or you're looking to cut down on expenses, having a car payment can be more of a burden than a benefit. Paying off your car loan frees up cash in your monthly budget and removes a fixed expense, allowing more flexibility in your retirement spending.
3. Personal loans
Types of personal loans can vary widely, from loans for emergency expenses to funds for big life events. Regardless of the reason you borrowed, personal loans often come with higher interest rates and are not tied to any asset that appreciates in value, making them a smart debt to clear out before retirement. Without these payments, your financial picture in retirement becomes much clearer and easier to manage.
Other debts: To pay or not to pay?
These debts might be a toss-up.
1. Mortgage
The decision to pay off your mortgage before retirement isn't cut and dried. While being mortgage free can significantly reduce your monthly expenses and provide peace of mind, it might not always be the best financial move, depending on your situation.
If your mortgage has a low interest rate (rates have ranged from 3.98% to 6.80% from 2013-2023) and your investments are yielding higher returns, it might make sense to keep the mortgage and let your money work harder elsewhere. If you've been investing in the S&P 500 alone for a decade already, you could expect to gain about 10% back on your investment.
2. Medical
Medical debts can be tricky because they directly relate to your health. Entering retirement with outstanding medical bills can increase stress and financial strain, especially as healthcare needs typically increase with age. If possible, prioritize settling these debts so you can focus on enjoying retirement without looming past healthcare costs.
How to evaluate debts
Deciding which debts to pay off before you retire requires a thoughtful approach. Here are key factors to consider when evaluating your debts.
1. Interest rate analysis
Start with the interest rates. High-interest debts, like those on credit cards or certain payday loans, continuously drain your finances. Evaluating the interest costs over time reveals these debts are often more expensive than they're worth. Prioritize high-interest debts for repayment to minimize financial bleed.
2. Tax implications
Some debts offer tax breaks that can influence your decision. For example, mortgage interest is deductible on your federal tax returns, which may make it financially sensible to maintain this debt if the tax benefits outweigh the costs of early repayment. Analyze these benefits carefully against the savings from paying off the debt.
3. Emotional and psychological impact
Consider the emotional weight of your debts. Some debts may cause significant stress or anxiety, which their repayment could alleviate. This factor varies from person to person, but is crucial in determining how to manage your debts.
4. Impact on retirement cash flows
Assess how each debt affects your cash flow during retirement. Monthly debt payments can significantly impact your fixed retirement income. Evaluate if eliminating certain debts could free up funds for a more comfortable lifestyle.
5. Longevity of the debt
Consider the remaining term of the debt. If only a few years are left on a mortgage with a manageable and low interest rate, continuing the payments might be more sensible. Conversely, long-term loans with high interest rates or substantial monthly payments might be better to pay off.
6. Opportunity cost
What could you do with the money if it wasn't used to pay off debt? If the money used for early debt repayment could yield a higher return if invested, it might be worth keeping the debt, especially if its interest rate is lower than the expected return on your investments.
By analyzing these factors, you can better decide which debts to clear before retirement, balancing economic efficiency with personal satisfaction and strategic financial planning. This approach helps ensure a financially optimized and stress-free retirement.
Navigating which debts to pay off before retiring can feel overwhelming, but the principle is straightforward: eliminate high-interest and non-asset-backed debts first. For other debts, weigh the financial against the psychological benefits.
The ultimate goal is to transition into retirement with minimal financial obligations, giving you the freedom to enjoy your golden years without the weight of debt. Remember, retirement should be about relaxation and enjoyment, not about financial burdens.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy .
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