Don’t Let Debt Derail Your Retirement Plan

A very nice couple from Sandwich, let’s call them John and Sandy, came into see me about a week or so ago. They are a hard working family: she is a teacher in Pembroke, and he is in sales out of a company in Cambridge. They are 61 and 59 respectively, have a couple of kids out of college, and are trying to set themselves up for a comfortable retirement. They have a bit of debt and are trying to set themselves up for a debt-free retirement. So this week, let’s spend some time together to review what John, Sandy and I discussed that helped them put steps together to help them manage debt.

I explained to them that debt, for most of us, is a fact of life. Sometimes it’s constructive debt, such as a home mortgage. Sometimes it’s destructive debt, such as credit cards, or loans used to buy depreciating assets such as a vehicle. Debt isn’t good or bad, but for many of us, it just is. For many of us, rolling into retirement with debt is pretty common. However, how you manage that debt as you transition from wealth accumulation phase to distribution phase of your financial lifecycle may have a profound impact on your retirement. It is for this reason why it’s crucial to incorporate debt reduction and debt management strategies into your retirement system.

I find that if you are approaching retirement age with debt, you have lots of company. In fact, about 70 percent of U.S. households headed by those aged 65 to 74 had some debt, according to the most recent statistics provided by the Federal Reserve . Unfortunately, the data shows that number doesn’t go down very much with age, either. About half of U.S. households headed by those aged 75 or older carry debt as well.

With so much owed by people in retirement, it’s little wonder that the average retiree sees the need to pay off debt about at the same priority as paying for food and utilities, according to a recent report from Transamerica.

You see, retirees or soon to be retirees can find themselves easily overwhelmed if they’re confronted with any financial setback. Without an appropriate debt management strategy, retirees can be forced to make substantial withdrawals from savings and retirement funds. This may inhibit the long-term growth of the accounts retirees rely on to provide security for them throughout retirement. That income can also potentially create unanticipated – and therefore unbudgeted – tax liability issues.

The first step in creating a debt management strategy is to take stock of your debt. Add up all loans, mortgages, and credit card bills. Examine interest rates attached to each balance. Understand what money you’ve borrowed is costing you the most to borrow. Consider the potential benefits of paying down the most expensive debt first – contributing more towards higher-interest debt will enable you to pay such debt off faster, reducing the amount of interest you will pay – money you can use to retire other debt before you retire.

Also, examine fixed-rate and low-rate debt such as your mortgage. Understand when it’s smarter to pay such expenses down gradually and take a look at how your money can work for you. In many situations, the emotional benefit of paying off your mortgage notwithstanding may not be the most prudent financial move.

For example, if you will earn a higher rate of return on IRA contributions than the interest rate you’re paying on your mortgage, it may make more sense to put the money away towards your retirement and continue to pay the mortgage bills on time rather than trying pay it off early – especially if you’re still getting a mortgage tax deduction.

Next, formulate a financial plan that enables you to pay off debt while also saving for your future. Prioritize the repayment of destructive debt. Specifically, focus first on reducing credit card debt, other revolving debt, and high-interest loans. You should try to “retire” this debt before you retire, as it eats into your savings and offers you no tax benefit for the long-term.

There are a few different debt reduction strategies for prioritizing repayment. The Avalanche method, for example, emphasizes paying the loan with the highest interest rate faster, then focusing on the balance with the next highest rate, and so on. The Snowball method takes the opposite approach, working away the smallest debt first, then the next smallest, and so on.

You’ll see faster results with the Snowball method. But which method of debt reduction is most appropriate may depend on factors like balances and interest rates rather your behavioral preference.

The goal is to make any debt you must carry more affordable for you. Call creditors to negotiate lower rates or to have fees waived. Consider refinancing options that offer favorable loan rates, including debt consolidation. Use balance-transfer offers with more favorable terms. But be very cautious of ballooning interest rates over time.

John and Sandy must also consider that many people retire before they expect to. Transamerica’s study shows that more than half of those surveyed left the workforce sooner than they anticipated. In many cases, they lost their job. But some developed health issues that prevented them from working. Others needed to become a caregiver for a spouse or loved one. Only 12 percent of those who retired early did so because they had the means to do so ahead of when they expected to.

As a result, John and Sandy must be prudent and be wary of taking on new debt late in their wealth accumulation phase of financial lifecycle. If they lose their income before they expect to, they may find themselves in retirement with a reduction in anticipated income from sources such as Social Security, a cornerstone of the average American’s retirement income. I explained that burdening themselves with more debt can make a potentially bad situation worse. At the very least, the must have a plan to repay any debt they were to absorb late in their careers.

While taking control of your debt and doing what you must to reduce it is essential, the numbers don’t lie. Most Americans will approach retirement carrying debt. The median owed by retirees polled by Transamerica was $52,000 in mortgage debt and $4,000 in non-mortgage debt.

I explained to them it is important to work debt reduction and elimination strategies into John and Sandy’s retirement system to ensure it’s manageable and an expense they have accounted for. More importantly, make the payoff of those debts a certainty within the structure of your budget.

It may also be appropriate to incorporate access to cash or liquid assets as part of your retirement plan. These assets can then be used to help pay for expenses or large purchases you will make in retirement: Home renovation or maintenance projects, new vehicles and so on – predictable but significant expenses that you might otherwise need to finance through revolving credit — the sort of debt you don’t want to accrue in retirement.

Debt is a fact of life for most of us, and preparing for retirement doesn’t have to mean a mad rush to clear all debt to maintain a stable and secure future. Just as John and Sandy have now done, understand what sort of debt you have, your options for repayment, and have a strategy in place to make sure that you manage that debt as part of your overall retirement system.

It’s all part of being vigilant and staying alert because you deserve more.

Have a great week!

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at

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