Debt and retirement planning: a guide for gaining peace of mind

Retirement marks a significant life transition many of us spend years planning for.  An increasing number of Americans are entering this phase of life with debt such as student loans, mortgage and credit card debt. According to the Center for Retirement Research at Boston College, “the share of U.S. households over age 65 that carry some debt has risen sharply since the late 1980s, from 38 percent to 63 percent currently.”

It’s important to consider how you can incorporate debt management into your long-term financial planning. This guide will:

• Offer practical insights into managing debt alongside retirement planning
• Highlight the importance of informed decision-making
• Show the value of a working with a financial professional to provide individualized support and guidance 

Challenges of debt in retirement planning

The ongoing process of paying off things like a mortgage, student loans and other forms debt can make saving for retirement challenging. However, the challenges are compounded once you enter retirement for numerous reasons. Retirees typically rely on fixed incomes from:

• Pensions
• Social Security
• Investments

This can make it tough to manage debt payments without cutting back on other expenses. It could also leave retirees more exposed to economic shifts, making it harder to bounce back from unexpected expenses or market downturns. Moreover, the stress of carrying debt into retirement can impact your mental and even physical well-being, eroding your sense of financial security and peace of mind. To help ensure a more stable and fulfilling retirement, it’s important to understand your debts and develop repayment strategies that are resilient through every stage of life.

Top 3 types of debt commonly carried into retirement

1. Credit Cards: High-interest rates and easy accessibility can easily lead to high balances and debt. According to TransUnion, Americans between the ages of 50-64 carry an average of $7,200 in credit card debt. Those aged 65 and over have $4,700. 
2. Student Loans: The rising cost of college tuition and relatively easy access to student loans mean more  borrower carry balances later in life. Since 2017, student loan debt held by people between the ages of 50-61 increased by 33.5%— the average debt held in that age group is $45,754. For borrowers over 62, average debt $41,778.
3. Mortgage: Owning a home is a significant achievement, but carrying a mortgage into retirement can strain finances, particularly if the mortgage term extends beyond retirement age. This is increasingly common with one study showing Baby Boomers aged 57-75 holding mortgages averaging $198,203.

Overall in the US, members of Gen X owe a total average of $157,556, Baby Boomers owe an average of $94,880, with folks aged 78 and over owing $38,600.

Planning for retirement with debt

It’s clear that debt is a widespread issue but it shouldn’t stop you from getting serious about your retirement plans. With a comprehensive plan, you can manage and reduce debt.  Your path and progress may look different, but these are the steps to help you get started:

• Assess your current financial situation: Take stock of your debts, savings, and income sources to understand where you stand financially.
• Calculate total debt obligation: Determine the total amount owed across all debts, including interest.
• Evaluate retirement savings and income sources: Assess your retirement accounts, pension, social security, and other sources of income.
• Set realistic retirement goals: Consider your debt obligations when setting retirement goals to ensure they are achievable.
• Identify desired lifestyle in retirement: Understand how debt may impact your desired retirement lifestyle and adjust expectations accordingly.
• Identify desired lifestyle in retirement: Understand how debt may impact your desired retirement lifestyle and adjust expectations accordingly.

Strategies to reduce debt before retirement

A proactive approach is to do everything you can to reduce your debts before retirement. Here are some strategies you can implement to support your long-term plan:

• Prioritize debt repayment: Decide which debts to tackle first, whether using the avalanche or snowball methods. With the avalanche method you pay down balances with the highest APR first. With the snowball method you pay down balances from smallest to largest, regardless of interest rates. 
• Negotiate with creditors: Contact creditors (mortgage holder, student loan lender, etc.) to inquire whether lower interest rates, settlements, or payment plans are an option for you. 
• Cut unnecessary expenses: Create a budget, track spending habits, and eliminate non-essential expenses.
• Increase income: Explore opportunities for additional income through side hustles or skills development.

Saving for retirement despite debt

With a clearer picture of your overall finances and strategies for reducing debt, remember these key retirement saving guidelines:

• Consistent retirement savings: Regular contributions to retirement accounts— even small ones— can benefit from compound interest over time.
• Explore retirement savings options: Make sure you’re taking advantage of employer-sponsored plans like 401(k)s or look into individual retirement accounts (IRAs) to maximize your savings. 
• Allocate funds for retirement alongside debt payments: Find a balance between debt repayment and retirement savings, automating contributions for consistency.

Seeking professional advice and assistance

To take the most informed and proactive approach to paying down your debts and planning for your future retirement, there’s no substitute for experienced professional help. Financial professionals can provide tailored guidance based on your individual needs and goals. There are also options for further support. You might find it helpful to explore government programs, non-profits, student loan forgiveness programs and online communities focused on debt where you can find advice and assistance.   

Your debt doesn’t have to hold you back from enjoying your retirement— as long as you’re willing to take proactive steps and commit to long-term financial goals. By working with a financial professional to assess your situation, prioritizing debt repayment, and saving consistently for retirement, you can achieve financial security and enjoy your golden years with peace of mind.

Take action today. Seek professional advice and stay committed to your financial well-being through every phase of life.