How to Be Debt-Free by Retirement

Each season of life comes with unique joys and challenges. For you, it may be a time to pursue hobbies, spend more time with the people you love, and travel whenever the mood strikes. However, carrying debt into retirement may not be ideal, especially if it prevents you from doing what you want. 

On the other hand, paying debt off before you say goodbye to the job for good can offer peace of mind and a greater sense of financial security. Here, we're taking a deeper dive into the kinds of debt you should tackle first, and why not all debt is created equal.

What Does Debt-Free Retirement Mean?

On the simplest level, a debt-free retirement means you don’t owe money to anybody by the time you stop working. However, that might not be a realistic goal for many people.

For one thing, just because you retire doesn’t mean you should stop using credit. Credit cards make retail transactions safer and more convenient. And a car loan with a low interest rate can be smarter than paying cash. 

Also, it may not be possible for everyone to pay off all their debt before they retire. If you bought a house with a 30-year mortgage at age 40, you could easily have a few years left on the mortgage when you retire.

So, as a practical matter, consider the goal of a debt-free retirement to mean at least the following:

• That you are steadily reducing debt rather than continuing to accumulate it

• That you have a plan and the financial means to pay off your debt in your retirement years

If you can accomplish both of these things, you can at least retire free of worry about how you'll pay your debts.

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Do I Need to Be Debt-Free to Retire?

You may wonder how you can comfortably retire if you still have debts. The answer comes down to how confident you are in your ability to pay them. 

Frankly, that’s a question you should be asking long before you retire. No matter how young or old you are, you should always ask yourself, “How am I going to repay this?”

In other words, budget before you borrow. Budgeting prevents overspending and should allow you to worry less about your finances. 

The same principles apply when you retire. If you retire with some existing debt, or even if you’re thinking of taking out a new loan, it’s not a big problem as long as you know what your income will be and have a realistic budget to pay down that debt.

What’s more of a problem is retiring without a clear financial plan—and that’s true whether or not you have debt. 

Also, a clear warning sign is if you often borrow to support your lifestyle. If you can’t live within your means while still working, how will you do it once you’re living on a retirement income, which for most people is lower? Not to mention, how will you support your lifestyle and pay off the debt you’re accumulating?

In short, you don’t need to be entirely debt-free to retire comfortably. However, you shouldn’t depend on new debt to meet routine expenses, and you should be able to afford payments on the debt you have. 

Should I Pay Off My Mortgage Before I Retire?

Think of paying off your mortgage by retirement as a luxury but not a necessity.

It’s a luxury because that monthly mortgage bill is probably your largest expense. Get rid of that before you retire, and suddenly, your retirement budget goes a lot further towards things you enjoy.

If paying off your mortgage by the time you retire isn’t possible, you can manage the payments by planning correctly. 

Part of financial planning involves estimating how much you’ll have saved by the time you retire and how much you can afford to spend throughout your retirement. The amount you arrive at for annual spending should be the basis of your retirement budget. 

If you can still pay your mortgage and meet your other expenses within your expected retirement budget, you should be okay.

After all, mortgage debt has two advantages over other forms of debt:

• It has relatively low interest rates. According to mortgage finance company Freddie Mac, as of the end of 2024, 30-year mortgage rates were under 7%%. While that's higher than it was a few years ago, it's still a much lower interest rate than most other forms of borrowing. In other words, focus on getting rid of higher-interest debts first.

Assuming it fits into your retirement budget, having a mortgage when you retire could be manageable, with one other important caveat. If you have an adjustable-rate mortgage, your payment amount could go up if the interest rate goes up. That could make budgeting unpredictable in retirement. If that’s the case, it may be wise to refinance to a fixed-rate loan. Fixed payments make budgeting easier. 

Why Is Some Debt Better Than Others?

As noted above, mortgage debt has some characteristics that make it reasonably manageable in retirement. That’s not true of many other forms of debt. 

So what’s the difference? What makes some kinds of debt better than others?

Here are three characteristics of relatively good kinds of debt:

1. It finances something that will last longer than the debt. A mortgage may take a long time to pay off, but a home usually lasts longer. Debts offset by assets do not reduce your net worth. But debt without an asset depletes your net worth.

2. It carries a relatively low interest rate. For some loans, you end up paying more in interest than the amount you initially borrowed, so the interest rate is critical.

3. It doesn’t have to be repeated frequently. This is important for two reasons. First, if you keep borrowing, it’s a sign you may be accumulating debt rather than paying it down. Second, if you’re dependent on continuing to borrow, it may get more expensive if interest rates rise, or you may get cut off altogether if your credit score drops.

If fixed-rate mortgages are the best example of this kind of relatively good debt, credit card debt is the other end of the spectrum. 

As noted previously, at the end of 2024, 30-year mortgage rates averaged under 7%. In contrast, the average credit card carries a rate of more than 20%. Those rates will change over time, but the difference between mortgage rates and credit card rates doesn’t change much. 

Somewhere between the extremes of fixed-rate mortgages and credit card debt are other types of borrowing, including car loans and personal loans. How good or bad these loans are depends on their interest rate, loan term, and the useful life of what you finance. 

Actionable steps to become debt-free before retirement

It takes time to eliminate debt, and you may need patience. Still, moving into retirement with less debt is absolutely worth the effort. It all begins with a plan like this: 

• List your debts: Include each creditor's name, the current balance, monthly payment, and interest rate. 

• Create a budget: List monthly expenses, including bills, groceries, and miscellaneous expenses. One of the easiest ways to ensure you don't forget anything is to review your credit card and bank statements for the last few months. Next, subtract the amount you spend each month from your monthly income. This exercise gives you a clear idea of where you stand.

• Carefully comb through your budget: Look for any areas that can be cut back. For example, if you eat out four times a week, cut back to two times. If you have subscriptions you no longer use or need, cancel them. The goal is to find extra money by trimming the fat from your budget.

• Begin to pay down bills: Direct the funds you trimmed from your original budget to debt repayment.

• Choose a repayment strategy: With the Debt Snowball Method, you pay off smaller debts first for a quick sense of accomplishment. With the Debt Avalanche Method, you focus on the debt with the highest interest rate to minimize your long-term costs.  

• Decide if you need to increase your income: If repaying debt stretches your budget uncomfortably, look into a side hustle, like tutoring, dog walking, driving for a rideshare app, or another task that suits your interests. 

• Avoid new debt: Only borrow money (including the money you borrow each time you use your credit card) for emergencies. 

• Don't be afraid to ask for help: If it feels overwhelming, that's okay. Now may be a good time to consult a debt counselor or debt relief program. 

What’s More Important? Saving Money or Paying Off Debt?

As you go through your career, you’ll often wonder what to do with any extra money you have. Should you put it towards retirement savings or towards paying down debt?

In that case, ask yourself if you could earn more on your retirement investments than you’re paying on your debt. 

Historically, the average return for large U.S. stocks is about 10% a year. At the end of 2021, the average savings account was earning just 0.06%, and 30-year Treasury bonds yielded 1.9%. While rates rise and fall, remembering how low they can drop is a good way to create a realistic budget.

Now, consider whether those returns could keep up with the interest you’re paying on your debt. If you have a low-interest mortgage, you may be able to earn more by putting extra money into retirement investments rather than paying off the mortgage faster. 

However, even accounting for the tax advantages of retirement savings, it would be difficult for most investments to keep up with credit card interest rates. So, if you have high-interest debt, pay it off before putting extra money towards retirement.

There’s one key exception to this, and that’s if you participate in a 401(k) or similar retirement plan that has employer-matching contributions.

With those contributions, your employer kicks in some percentage of the amounts you contribute. According to investment company Vanguard, the most common arrangement is for employers to match 50% of the employee’s contribution, up to 6% of the employee’s pay.

That’s like getting an instant 50% return on your retirement savings. So, if you’re eligible for an employer match, putting enough money into your retirement plan to qualify for the full match available might be better than paying down debt faster - just as long as you’re meeting the minimum required payments on that debt. 

How Should Debt Figure Into My Retirement Planning?

Questions like “Should I pay off my mortgage before I retire?” and “How much can I afford to live on?” shouldn’t be left until late in your working career. Answer them early in your retirement planning process -- which should ideally begin decades before you retire. 

After all, the earlier you get a handle on your debt, the sooner you’ll be able to set realistic retirement goals and start saving towards them.

As noted earlier, you do not necessarily have to get rid of all debt before you retire. Some remaining years on a mortgage or the occasional loan for something like a car or home improvements can be reasonable if you have a realistic repayment plan.

On the other hand, ongoing credit card balances could be a heavy drain on your retirement resources. 

Here are three things to address so that debt won’t be a problem in retirement:

1. You shouldn't need continued borrowing to support your retirement lifestyle. If you’re borrowing continuously during your career, it'll slow your ability to save for retirement and increase the amount of money you’ll need in retirement. 

2. You must add any debt payments you’ll still have when you retire into your budget. Regular debt payments will squeeze out some of your lifestyle spending. 

3. Be sure to resolve overspending or debt problems before you retire. If you’re having trouble keeping up with payments or can’t see a realistic path to pay off your debt, you may need to pursue help like credit counseling or debt relief. Doing this before you retire leaves you with more options than waiting until your career is over. 

Managing debt in retirement

If you can't get all your debt paid off before retiring, that doesn't mean retirement's not in your future. It simply means that you need a strategic approach. For example:

• Continue to chip away at debt: As long as you can find a little "extra" in your budget, continue your efforts to pay down debt. Focusing on debt with the highest interest rates first is a good way to preserve your limited resources in the future. 

• Consider downsizing: Whether it makes sense to downsize into a small home or rent to reduce expenses will depend heavily on the housing market. Look at the market to determine whether you can save money by selling your home or if you're in better financial shape staying where you are. 

• Look into debt consolidation: Debt consolidation involves taking out a new lower-interest loan to pay off existing high-interest debt. It simplifies monthly payments and can save money while getting you out of debt quicker.

• Work with creditors: Now may be the time to negotiate lower monthly payments or ask about hardship programs designed to help retirees. 

• Avoid new debt: Unless it's absolutely necessary, resist the urge to use your credit cards (unless you plan to pay them off each month) or take out a loan. 

Ideally, a debt-free retirement would mean having no debt. If this is not possible, you should shoot for a retirement free of debt worries. Having a retirement plan that includes keeping debt under control is one way to make that happen.