Debt-Free Retirement

Retirement is when you're supposed to relax, spend time with family, explore new hobbies, or even see the world. It's easier to do those things when you don't have debt to worry about. 

What does a debt-free retirement look like? For some retirees, it means no debt at all—no mortgage, no credit cards, no medical bills or student loans. For others, it means they've ditched the credit cards and loans, but still have a mortgage to pay down. 

The only exact debt-free retirement definition that really matters is the one you want to create for yourself. Let’s take a deep dive into whether you should aim to be debt-free before you retire, and help you make a plan for debt relief.

Estimate Your Retirement Expenses

One mistake many retirees make is underestimating how much money they'll need to cover expenses. Increased medical costs, rising inflation, and the ongoing expenses of home ownership could all deliver a surprise to your budget. You may also spend more on hobbies or leisure activities when you have more free time to fill up. Add debt payments into the mix, and you could find yourself stretched thin. 

Creating a realistic spending plan can help you estimate what you'll need later. It can also help you save and pay down debt now. Here are some common expense categories you may need to include in your projected retirement budget:

• Mortgage payments

• Home maintenance and repairs

• Property taxes and homeowners insurance

• HOA fees

• Assisted living or long-term care

• Prescriptions and co-pays 

• Travel and hobbies

• Vehicle maintenance

• Groceries and dining out

Inflation and taxes are a little harder to plan for. No one can predict exactly how much inflation will affect prices in the long term. Your tax situation in retirement can also depend on your income source, and how much of that income is taxable. Typical sources of income for retirees include:

• Social Security benefits

• 401(k) or other workplace retirement plans

• Traditional or Roth individual retirement accounts (IRAs)

• Pensions

• Annuities

• Other investment income, like dividends or interest

• Earnings from a part-time job

• Income from using your home equity (sometimes from a reverse mortgage)

It's easier to gauge how secure your retirement is likely to be when you know what you have to pay versus what you have coming in. You can also make strategic decisions about how to balance debt repayment with saving for retirement to ensure that you have enough money. 

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What Debt Is Okay in Retirement? 

Carrying some debt in retirement can make sense—if it doesn't cause you financial hardship or stress. Debts can become problematic if the interest rate is so high you don't make a dent in the balance despite consistent payments. You could also run into trouble with a debt if the monthly payments are more than your budget can sustain. Examples of debts that might become problematic in retirement include:

• High-interest credit cards

• Upside-down auto loans (meaning you owe more on your car than it's worth)

• High-balance student loans you took out for yourself or your child

• Extensive medical bills that aren't covered by insurance or Medicare

There's also a category of predatory loans that could spell trouble in retirement or any other time. They include payday loans, pawnshop loans, title loans, and guaranteed approval loans that don't require a credit check. These types of debts are generally best avoided, since they can be expensive and do more harm than good. 

Manageable debts typically have fixed interest rates and predictable monthly payments. Personal loans and home equity loans usually fall under this umbrella. These debts may cause less financial pressure, since you know exactly what you'll pay. 

Here’s another example of a debt you might not need to prioritize. Many people got a mortgage between 2012 and 2022 with an APR of 2% to 3%. Those rates are as close to zero as most of us will ever get on borrowed money. In fact, you might earn a higher interest rate in your high-yield savings account. If you have a mortgage rate that low, it could make sense to focus on other financial priorities first. 

Compare how much you pay in mortgage interest with other money strategies. You may want to think twice before paying off your home if your cash could earn more in:

• High-yield savings 

• Brokerage or retirement account, invested conservatively

Likewise, paying for a car with a low interest rate may be smarter than paying cash that could be working for you elsewhere.

Calculating your debt-to-income (DTI) ratio can help you gauge how much of your money is really going to debt each month. 

To find this number:

• Add up all of your monthly debt payments

• Add up your gross monthly income from all sources

• Divide your debt payments by your gross pay, then multiply by 100

There's no specific DTI retirees should aim for. Generally speaking, a DTI of 35% or less means you're managing your financial situation well. The lower this number is, the better, because it means less of your retirement income goes to debt each month. 

Should I Pay Off My Mortgage Before I Retire?

Think of paying off your mortgage before retirement as a luxury. Whether it’s a necessity depends on your retirement income. 

The monthly mortgage bill is probably your largest expense. Getting rid of that debt could free up significant room in your retirement budget. But it isn’t always necessary. It’s generally best to get rid of other debts before you pay off your mortgage. Mortgage debt tends to have far lower interest rates than other forms of debt, so you get more bang for the buck by paying off high-interest debts first. 

In 2025 and 2026, the interest rate for a 30-year fixed rate mortgage hovered between 6% and 7%—among the highest we’ve seen in the past two decades. However, the Federal Reserve reports that the average credit card APR was about 22% in 2025. It’s more important to pay off the higher interest credit card debt.

If you have an adjustable-rate mortgage (ARM), your payment amount could go up if interest rates rise. In that case, focusing on the debt could be a good idea. You could accelerate payoff, or refinance to a fixed-rate loan. Fixed payments could make budgeting easier in retirement.

Should I Pay off my Car Loan Before I Retire?

Assuming you’ll still need a vehicle and you’re paying off an auto loan, compare the cost of the loan against your other debts.

Though car loans have higher interest rates than mortgages, rates are still typically lower than those of most other debt types. If your car payment is among your higher-interest debts, you may want to pay it off before you retire. But prioritizing costlier debts, like credit cards, is often a smart move.

Should I Pay Off My Student Loans Before I Retire?

If you’re nearing retirement and have student loan debt, you’re certainly not alone. AARP found that about 22% of the $1.6 trillion in student loan debt Americans owed at the end of 2020 was held by people 50 and older. 

Many took out Parent PLUS loans or co-signed private loans for their child’s education. But it’s also common for retirement-age people to have debt because they went back to school to boost their career opportunities.

If you’re trying to decide whether to pay off your student debt before retirement, there are a few factors to consider: 

• Your interest rate

• Your monthly payments

• How long you have left on the loan

• Whether you owe federal student loans or private loans

Private student loan repayment strategies depend on what your lender offers—private lenders seldom offer loan forgiveness. In a few scenarios, you might qualify for forgiveness; for instance, if your school defrauded you.

Low Payments on Federal Student Loans in Retirement

If you’re on a fixed income and have federal student loans, you might be eligible to lower your payment by enrolling in an income-driven repayment (IDR) plan. IDR plans cap your monthly payment at a percentage of your discretionary income (based on your income and family size). 

IDR plans are often a good choice for people retiring with limited income. Since your payments are based on discretionary income, you could conceivably pay $0 per month.

Usually, your loan is forgiven after you make 20 or 25 years’ worth of qualifying payments, depending on the plan. There’s some uncertainty around how the current administration will handle forgiveness programs. A federal court in February 2025 put the SAVE plan—which included a forgiveness option—on hold. Other IDR plans are still accepting new applications.

Paying off your student loan debt can bring some certainty to your retirement years. If you have student loans and don’t expect to be debt-free by retirement, ask your servicer about ways to keep your monthly payment as low as possible, or explore other paths for student loan debt relief.

Should I Pay Off My Credit Card Debt Before Retirement?

Short answer, yes.

Because credit card debt tends to have a higher APR than most other types of debt, it’s usually smart to pay down credit card balances before retirement. The debt snowball and debt avalanche methods are two great DIY strategies for getting rid of credit card debt by retirement.

• Debt snowball: This method is good for staying motivated. Start with paying extra toward your debt with the smallest balance (this often can give you a quick win). Make minimum payments on the other debts, then funnel extra money toward the next smallest balance once the first card is paid off. Work your way up to the largest debt until it’s paid off, too. 

• Debt avalanche: The avalanche is good for paying less in total interest, but doesn’t always give you the quick success you may get with the snowball. You pay off your cards according to their interest rates. Start by sending extra cash to the card that has the highest APR (while continuing minimum payments on the others), then work your way down, sending money to the next debt on your list, and so on.

Not sure if these approaches will work for you? You still have options. 

A debt consolidation loan can lump your existing unsecured debts into a single payment, and can save you money on interest if you get good-enough loan terms.

Another possibility is a debt settlement plan for credit card debt. Debt settlement means making an agreement with your creditors to accept less than the amount you owe, but consider it payment in full. You can negotiate with your creditors directly, or work with a professional debt relief company to negotiate on your behalf. Note that debt settlement can have tax implications in some cases.

How to Balance Debt Payoff and Retirement Strategies

Typically, it makes sense to pay off debt before you save. Interest, especially credit card interest, could cost you more in the long run than what you could earn saving or investing instead. And the longer you wait to start saving for retirement, the less time your money has to grow. 

When should you focus on saving ahead of debt repayment? You might make that choice if you:

• Have a shorter window to retirement and need to make up for lost time

• Mostly owe debts with low interest rates

• Could earn more interest on savings or investments than you pay toward debt

Ultimately, choose what makes you feel most comfortable. And consider how you could potentially make it easier to pay down debt and save or invest. 

For example, say your job offers a 401(k) plan and your company matches contributions. Instead of putting in 15% of your income like many experts recommend, you could put in just enough to get any matching contributions. So, you might save 6% of your pay instead, then use the rest to pay off debt. 

If you don't have a retirement plan at work, you could use an IRA to save. These accounts can offer some tax benefits when you retire. Even $100 a month can add up over time if you earn a decent return on your investments. 

As to how you find the money to save or pay down debt, it starts with your budget. Any expenses you cut mean extra money to put toward your goals. You could split the extra equally between saving and debt, or choose a different split. If a windfall comes your way, you might use some of the money to take out a chunk of debt and fatten up your savings account with the rest.

Create a Debt Payoff Strategy

Everyone's debt payoff strategy looks different, but there are some common steps you can take to get your plan started. First, decide which debts to tackle first. Ask these questions to help you narrow it down:

• Which debts cost the most money in interest?

• Which debts could I potentially pay off right away?

• What do I value more, a quick win or saving on interest?

The third question on the list can help you pinpoint which debts to target first. As a general rule, it usually makes sense to start with high-interest credit cards or loans, then move down the list to your least expensive debts. However, if you want to knock out some debt quickly to stay motivated, you might focus on the smallest balances first. 

A debt payoff calculator can help you develop a realistic timeline for becoming debt-free. You can enter your total balance, interest rate, and monthly payment to see how long it will take to clear a debt. You can also test out how increasing your payment or lowering your rate might speed up your payoff. 

Once you pay off a debt, think about how to put to work the money you were paying toward it. You could add some of it to another debt's minimum payment, and route the rest to your retirement account. That way, you can work on both goals at the same time without feeling like you're neglecting either one. 

4 Steps to Be Debt-Free by Retirement

Whether you want to be 100% debt-free by retirement or get your debt to a manageable level before you retire, here’s an action plan to follow.

1. Take inventory of all your debts

The first step toward a debt-free retirement is to know what you owe. Round up copies of your most recent statements for credit cards, loans, and other debts, including:

• Mortgage payments

• Car loans

• Student loans

• Credit cards

• Personal loans

• Home equity loans and home equity lines of credit (HELOCs)

• Medical bills

• Buy now, pay later plans

Include the outstanding balance, minimum monthly payment, and the APR. You may also want to note whether each is secured or unsecured. Secured debts are attached to collateral, or something of value that you own. Mortgages and car loans are secured debts; credit cards and personal loans are usually unsecured. This difference matters particularly if financial hardship makes it hard to keep up with debt payments. Secured debts take priority since you risk losing your home or car if you can't pay. 

2. Avoid new debt

If you want to be debt-free by retirement, you naturally want to avoid new debt as much as possible. When you add debt to the pile, you work against your goals.

How do you avoid debt? It becomes easier when you:

• Budget and plan your expenses each month

• Track where your money goes

• Leave credit cards at home and only use cash or your debit card

Will you never need a loan or line of credit again? That's unlikely. Just one financial hardship could mean you have to get an emergency loan to get through. And if you don't own a home now but would like to, you'll probably need a mortgage. 

The key here is being conscious about how you spend and pay for purchases. It's easier to avoid debt when you're tuned in to how you use your money. 

3. Make a budget

A budget is a plan for spending your income. You can make a budget on paper, using a budgeting app, or with a spreadsheet. The method you use isn't important; what matters is that your budget is realistic so you can stick to the plan each month. 

For example, a lot of people use the 50/30/20 budget rule to map out their spending. This method has you budget your money like this:

• 50% of your income to needs

• 30% for wants

• 20% to savings and debt

This budget system is simple enough that just about anyone can use it. You just need to categorize your spending so it goes into one of these three buckets. That should be easier if you already track your expenses regularly. 

For example, if you bring home $5,000 a month, you'd spend $2,500 of that on needs and $1,500 on wants, and $1,000 would go to savings and debt. As far as what counts as a need, it's the basics you need to live:

• Housing

• Utilities

• Transportation and gas

• Insurance

• Groceries

• Health care

• Childcare

Wants are anything you spend money on that you don't truly need to live. So new clothes, dining out, hobbies, or entertainment expenses could all go into this bucket. 

This budget rule can help you generate a concrete number to allocate to debt and savings each month. Since all it requires is a simple calculation (20% of your income), it's easy to make adjustments if your paychecks are higher some months than others. 

4. Consider professional help

Sometimes a debt payoff plan and budget just aren't enough. You may have all the numbers down on paper and not be able to make them work. At that point, it could make sense to ask for help. 

A debt expert can evaluate your situation and offer information about solutions that could help you reach your goals. For example, if you need credit card debt relief, the options might include debt consolidation, a debt management plan (DMP), or debt settlement. In some cases, bankruptcy may be the best way to deal with your debts. 

You might be a candidate for any of these options if you mostly owe unsecured debts and have a financial hardship that makes it difficult to manage your payments. A debt expert or credit counselor could help you evaluate which solution makes the most sense. 

Emergency Funds and Retirement Planning

Retirement is an important goal to save for, but it's just one kind of safety net. An emergency fund can help you cover unplanned expenses so you don't have to turn to credit cards or loans. You can set your goals back a step if you have to add to your debt to cover an unexpected situation. 

How much of an emergency fund do you need? If you're focused on debt repayment and retirement, a little can go a long way. You can start with a goal like $500. Once you hit that mark, you could bump it up to $1,000. At that point, you should be able to handle most smaller emergencies, like a minor car repair.

Once you've got at least that beginning emergency fund in place, you can turn your attention back to debt. When the debt is gone, you can beef up your emergency savings and go full throttle on saving for retirement. 

A typical rule of thumb for emergency funds is to have three to six months' of expenses set aside. However, you might tweak this to save nine months of expenses instead, or use a different measure, such as $5,000 for every person in your household. Again, it's all about finding a solution that feels good to you. 

When Debt Settlement Makes Sense for Pre-Retirees

Debt settlement is a way to get out of debt for less than what you owe. Once you pay the agreed amount, the creditor forgives the rest of the debt. Creditors may accept a settlement if you're behind on payments and it seems unlikely they can collect what's owed in full. 

You might think about debt settlement if you:

• Mostly owe unsecured debts, like credit cards, medical bills, or personal loans

• Have a financial hardship that makes it difficult to keep up with payments

• Owe $7,500 or more in debt

Late or missed payments are a clue that debt has become overwhelming. A less-obvious hint is that you can only afford to pay the minimums on your debts. Maxed-out credit cards are also a sign that you need help with your financial situation. 

Looking for debt relief in Missouri or across the country? The first step is the most important one—learn more.

Debt settlement can help you get retirement-ready by getting you out of debt faster. It could take you a decade or more to pay off debts if you only pay the minimums or have high interest rates. When you work with a reputable company, on the other hand, you could be debt-free in four years or less. 

You can lower your overall debt cost and reduce the amount you pay on your debts monthly. That can take some of the pressure off your budget in the short term. Once your debts are paid off, you can fully focus on your retirement goals. 

Professional help is key. You could negotiate debts on your own, but that can be stressful. When you work with a debt relief company, an expert handles negotiations on your behalf. You just have to make one monthly payment while your expert works behind the scenes. The debt settlement company may charge a fee, but it can be a small price to pay to know that you're on the path to debt freedom.

A reputable company like Freedom Debt Relief can help you craft your debt payoff plan. Learn how Freedom Debt Relief works.