Should You Pay Off Debt Before Retirement? 

You’ve saved for decades to create the retirement you want — there’s just one hitch: You’re nearing retirement and you still have debt. The good news? It’s possible to have debt and still live your dream retirement, says Jennifer Raess, Planning Experience integration lead at Northwestern Mutual.

There are all sorts of reasons you may end up carrying debt as you approach retirement, despite your best intentions. Maybe you have lingering credit card debt, several more years before you pay off a mortgage or medical debt from an unexpected health issue. What’s important, Raess says, is learning how to prioritize your payments and understanding how carrying debt into retirement may shift your plans.

4 steps to prepare for retirement if you have debt

Consider where you are with your retirement savings

Should you try to pay off all your debt before retirement? It depends.

“You have to ask yourself what your goals are,” Raess says. “If you're paying off your debt, how will that impact your long-term retirement savings goals? The years when you're approaching retirement may also be your highest income years, and you might still be trying to put money aside for retirement. So having a debt repayment plan that takes your savings goals into account is important.”

In other words, while the idea of entering retirement debt-free sounds ideal, you don’t necessarily want that to come at the expense of growing your savings. “If the interest rate is low on your debt, you might do better by putting your money into an investment account,” Raess says. “You have to find a balance between the debt you have, the interest rates you’re paying on it and the interest you might be able to earn on any money you invest.”

Working with a financial advisor to get a full picture of your financial situation can help you understand the impact of paying off debt now versus putting money into your retirement savings for later. An advisor can also take into consideration what keeps you up at night — maybe the peace of mind of not having a mortgage in retirement is important to you — so that you can weigh the math and create a plan that helps you stress less about your future.

Look at your interest rates

So, how do you prioritize which debts to pay off more aggressively? It’s important to be efficient with your funds.

Start by prioritizing the debt with the highest interest rate. “High-interest debt, like credit card debt that charges an average of 15 percent interest or more, has the potential to derail your retirement and budget when you’re on a fixed income, making it extremely hard to fully pay off in retirement,” Raess says. “Significant credit card debt could be a reason to delay retirement a few more years. That way, you won’t have to tap into your retirement assets to pay it off, and you’ll have extra time to accumulate investment income while you’re paying down your debt.”

On the flip side, you don’t have as much incentive to pay down debts quickly if they charge interest rates that are lower than what you could earn on that money if you had invested it, or if the debt offers other benefits. “Mortgage rates are typically lower than other types of credit and, with a mortgage, you typically get an itemized tax deduction for some of the interest that you’re paying,” Raess says.

Consider your future retirement budget

If you haven’t already, it’s a good time to get a sense of what your retirement budget may look like, including your necessary expenses and the discretionary stuff that you enjoy doing, like traveling or devoting time to hobbies. This can help you get a grasp of what kind of debt payments you can afford in retirement.

If you expect to be on a fixed income, also ask yourself: Is the income enough to cover things like a mortgage or a car payment? “If you find yourself unable to make those payments due to an unexpected financial issue, that could end with your house going into foreclosure or your car getting taken away,” Raess says. If it’s unlikely you’ll miss a payment or you’ve already accounted for the costs in your budget, then you don’t need to prioritize paying down those expenses prior to retirement.

Anyone who has significant debt going into retirement should work with a financial advisor to understand how it will impact their retirement income and lifestyle, Raess says. “Having a retirement debt repayment plan will help you feel a lot more financially secure,” she adds. “When you have a plan and you follow it, you know you're on track. You might not be able to pay off your debt in a few months, but you’ll know when it will be paid off. You can then relax knowing that you’ll be in a great place in retirement.”