Retiring with debt is something financial planners advise us to avoid – yet a large percentage of retirees ignore that sage advice. One of the critical steps in preparing for retirement usually involves taking a hard look at your debts, and strategizing about how to get those pesky encumbrances paid off so you can retire with less pressure on your cash flow. Yet the problem of retiring with debt remains very real.

Back in 2021, Forbes magazine quoted a Congressional study which reported that the number of senior households (those headed people 65 and older) with any type of debt increased from 38 percent in 1989 to 61 percent in 2016. “The amount owed jumped from about $7,500 to more than $31,000 (2016 dollars),” said Forbes. Moreover, said the magazine, “People who carry debt into retirement, especially credit card debt, confront more stress and report a lower quality of life than those who do not.”

But if eliminating debt is your goal, where do you start? For one perspective, we return to this 2022 article from MoneyWise in which freelance reporter Amy Legate-Wolff argues that there are three types of debt you simply must full pay off “before you even think about retiring.”  Ready for a surprise? In her view, your mortgage isn’t one of them. Let’s see which types if indebtedness made her “big three” list of debts that simply have to go before you retire.

Retiring with Debt: Are You Focusing on the Wrong Bills?

Writing in MoneyWise, Legate-Wolff begins, “Millions of Americans spend their working days dreaming about retirement. Yet millions of Americans also may not take into consideration the crucial financial steps they should take before becoming a retiree.”

What are some of those crucial steps? In the author’s mind, some of the most important involve paying down debts – but critically, the correct debts. Many Americans prioritize their mortgages ahead of any other debts they may have, ignoring other, more expensive debts with higher interest rates. Legate-Wolff advocates a different approach.

According to Legate-Wolff, before you even consider retirement, here are the three debts you must pay off. Take a look and see if you agree. We’ve also asked Rajiv for his view which you’ll see at the end of the article.

Avoid Retiring with Debt by Attacking School Loans

“College and university loans are some of the longest lasting debts Americans deal with,” Legate-Wolff writes. “What’s more, those loans may increase as you near retirement if you’ve borrowed money to help children through college too.”

This is a timely reminder. As the article points out, student loans are relatively inexpensive for the moment, thanks to the payment and interest freeze due to the pandemic – but that’s only until the end of December. After that, Legate-Wolff warns that interest rates on student loans “could surge to 7.54 percent in the new year.” (Remember, this article appeared in 2022. Loan rates today range from 5.5 to over 8 percent.)

Moreover, these loans don’t disappear fast. According to the article, a 2019 study found that it took participants an incredible average of 18.5 years to repay their student loans!

“Unlike a mortgage,” Legate-Wolff explains, “many student loans aren’t tax deductible, and data from StudentAid.gov shows that 2.3 million borrowers were aged 62 and older. So all those payments take away from your retirement income.”

This should put paying off any student loan debt at the very top of your priority list. This can be made even easier through scheduled payment plans and strategies that ensure you’ll pay everything off before you plan to retire.

Avoid Retiring with Debt by Eliminating Personal Loans, Credit Card Balances

Personal loans and credit cards have extremely high interest rates, sometimes the highest of any debt. Credit cards in particular are the main culprits here, with the average interest rate for a credit card in the United States sitting at about 22.40 percent. (We’ve seen some rates much higher than that – as high as a breathtaking 36 percent!)

Those bills can pile up unexpectedly. “Personal expenses can also end up on a credit card, like moving and wedding costs or even medical bills, funeral costs and unexpected expenses,” Legate-Wolff writes. “While these credit card balances should be paid down quickly, you shouldn’t let them delay saving for your retirement. Instead, consider lowering your mortgage payments to use those funds to pay down other high interest loans.”

Legate-Wolff adds, “Mortgages have lower interest, which will allow you to hold onto your savings and pay down debt. From there, start putting cash aside in an emergency fund with about three months of wages. That way, if unexpected expenses come your way, you’ll be ready.”

To Avoid Retiring with Debt, Attack Those Burdensome Auto Loans

Got a car? Pay it off! Legate-Wolff explains that the average car loan for a buyer with good credit sits at about 7.88 percent, but warns that if your credit is less than ideal it can skyrocket up to as much as 19.87 percent. “That’s about as much as the interest rate on a credit card,” she writes.

We would urge our readers, especially those approaching retirement or those who have retired recently, to be very cautious about taking out a car loan. With an average term of 69 months and a high interest rate, the loan on that new car you bought to celebrate retirement can quickly become an unsustainable burden.

Legate-Wolff adds, “What’s more, you’ll have to take into consideration these payments for your retirement. If $400 goes into a car payment, and $300 to a credit card and more for student loans, suddenly you have far less cash on hand for your retirement. If you hold off on retirement to pay off these loans, putting aside wages to pay them down, you could be saving yourself thousands in interest and creating a cushion to retire on.”

Retiring with Debt: What About Your Mortgage?

This begs the question: if you’re focusing on bringing down your debt, why not pay off your mortgage, too?

Legate-Wolff explains, “It’s not just lower interest rates, although with the average national mortgage rate for a 30-year fixed rate at 6.49 percent, that is an advantage. There are tax benefits available to you for your mortgage as well. Homeowners can claim a federal and state tax deduction on mortgage and home equity loans that you don’t get with most personal loans and credit cards. So, while you may be inclined to clear your home loan, paying off high interest loans or putting extra cash into your retirement fund and letting it grow, is the strategy more likely to bring you closer to retirement and your dream of truly reaching financial freedom.”

Rajiv’s Input: A Financial Dashboard is Essential

We asked Rajiv Nagaich of AgingOptions for his view on this article, and his response was generally favorable – with a few caveats. “Generally, this article makes a good point,” he states. Some people get fixated on paying off their mortgage but they completely overlook the heavy burden of loans with much higher interest rates and balances they’ll be paying on for years. The more you can clear the decks of the types of loans this article talks about, the less stressed you’ll be.”

But, Rajiv goes on, mortgage debt can be a problem as well. “I’ve seen data from the Federal Reserve that shows that about a third of households headed by seniors still owe money on their home,” he says. “The average balance is about $100,000. That’s not a great situation to be in when you’re leaving the workforce and making the transition to living on a fixed income.”

The best solution, Rajiv recommends, is a familiar one: the financial dashboard. “Making financial decisions in a vacuum is a really bad idea,” Rajiv warns. “Before you start shooting in the dark, whether it’s paying down debt or any other financial decision, take the time to sit down with a professional planner who will prepare a financial dashboard for you. It’s a powerful tool that will not only show you how to achieve your goals but also give you a great incentive – because you’ll be able to visualize the road ahead without all that debt!”

Breaking News: Rajiv’s New Book is Here!

We have big news! The long-awaited book by Rajiv Nagaich, called Your Retirement: Dream or Disaster, has been released and is now available to the public.  As a friend of AgingOptions, we know you’ll want to get your copy and spread the word.

You’ve heard Rajiv say it repeatedly: 70 percent of retirement plans will fail. If you know someone whose retirement turned into a nightmare when they were forced into a nursing home, went broke paying for care, or became a burden to their families – and you want to make sure it doesn’t happen to you – then this book is must-read.

Through stories, examples, and personal insights, Rajiv takes us along on his journey of expanding awareness about a problem that few are willing to talk about, yet it’s one that results in millions of Americans sleepwalking their way into their worst nightmares about aging. Rajiv lays bare the shortcomings of traditional retirement planning advice, exposes the biases many professionals have about what is best for older adults, and much more.

Rajiv then offers a solution: LifePlanning, his groundbreaking approach to retirement planning. Rajiv explains the essential planning steps and, most importantly, how to develop the framework for these elements to work in concert toward your most deeply held retirement goals.

Your retirement can be the exciting and fulfilling life you’ve always wanted it to be. Start by reading and sharing Rajiv’s important new book. And remember, Age On, everyone!

(originally reported at www.moneywise.com)