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Avoiding debt in retirement: A guide for your 40s, 50s, and 60s

Nobody likes the idea of carrying significant debt in retirement. These tips may help you pare down what you owe, whether you’re just hitting middle age or you’re entering your golden years.

It’s not always practical to retire debt-free. However, the closer you get to retirement, the heavier a burden debt can become. Every dollar you pay to a lender is one you could spend on living expenses, vacations or a legacy for your children. You don’t need to retire debt-free, but downsizing what you owe before you stop working is a good idea. Here’s a plan that can help:

In your 40s: Pay down high-cost debt

  • Shrink credit card debt first. Nothing eats into your retirement savings faster than debt with a high interest rate, and credit card debt may be at the top of this list. If you carry credit card debt, try to pay more than the monthly minimum and, if possible, allocate extra money in your budget to paying off your cards as quickly as possible. If you carry balances on multiple cards, pay down the one with the highest interest rate first, or consider consolidating your balances on the card with the lowest rate.
  • Reduce loans you can’t deduct next. Once you cut down outstanding credit card balances, do the same for other non-tax-deductible debt you may be carrying, such as auto loans. The same strategy applies here: Tackle the loan with the highest interest rate first. Although retirement is still decades away, you may be close to the height of your earning power and thus have more income to put toward eliminating your liabilities.
  • Keep saving for retirement. At the same time, continue paying attention to your other goals, particularly saving for retirement. In fact, it may make more sense to use available funds to maximize contributions to your retirement accounts rather than pay off tax-deductible debt such as mortgage interest.

If possible, work toward the goals of debt reduction and savings in tandem—capturing tax benefits while taking advantage of available savings opportunities.

In your 50s: Do the math on your mortgage

  • Paying off your mortgage may not make sense. Housing is the largest expense for many households, including among the elderly. However, while paying off your mortgage can free up more cash in retirement, it might not always be the best option. You may be taking a significant tax deduction on your mortgage interest payments. If your home loan has a low interest rate, it might be wiser to invest your money than to put it toward extra mortgage payments. But if you’ve paid off your credit cards and contribute the maximum to your retirement accounts, it could make sense to reduce your mortgage—particularly if it isn’t giving you much of a tax break.
  • Consider refinancing. If you have good credit, you might be able to refinance your mortgage at a lower interest rate, which would reduce your monthly payments. Another alternative is downsizing to a home with lower property taxes, insurance, maintenance and utilities.
  • Keep your 401(k) off limits. One thing you shouldn’t do to reduce your mortgage (or any debt) is cash out your 401(k) or other retirement accounts. If you’re younger than 59½, you could be charged income taxes, an additional 10 percent federal tax and perhaps even state taxes if you take money out of an IRA or 401(k).1 You might even pay more in extra taxes than you would pay in interest on your debt. Most important, though, by taking money out of your retirement plan, you won’t have access to those funds in retirement, when you’re likely to need them most.
  • Aim to put more toward retirement. Once you turn 50, you’re eligible to make increased annual contributions to your 401(k) and IRA accounts. You may want to take advantage of this higher limit.

In your 60s: Keep your sights on a debt-free retirement

  • Keep debt to a minimum. A retirement in which your income goes exclusively to your needs and goals (rather than to your liabilities) is ideal. So continue to work aggressively toward paying down your debt.
  • Extend your earning years. If you can’t find room in your budget to boost your debt payments, look for ways to generate more income.
  • Consider postponing retirement a few years. Delaying the age when you take Social Security payments can deliver higher lifetime benefits. Being smart about when you claim Social Security could mean more money to help manage any debt you have left.
  • Reevaluate your budget. The last thing you want is more debt just as you approach retirement. Take a hard look at your current spending habits and find areas you can cut. By reducing living expenses now, you’ll need less to support your lifestyle in retirement.

Your strategy for managing debt is an evolving process that changes relative to your life stage and circumstances. For many people, carrying debt in retirement is unavoidable. But the earlier you can formulate a strategy to confront it, the easier it is to tackle—and the better chance you give yourself of living the retirement you’ve envisioned.

  1. Effective 3/27/20, in accordance with the CARES Act, a Coronavirus-Related Distribution (CRD) of as much as $100,000 of all your eligible employer-sponsored retirement plan or IRA assets is permitted before December 31, 2020. The CRD may be repaid to an eligible retirement plan within three years. Individuals who choose not to repay the distribution will be required to include the taxable portion of the distribution in income evenly over three years from the date of distribution, unless they elect otherwise. With limited exceptions, the 10% additional tax that usually applies to distributions prior to age 59½ is waived for CRDs.
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The material provided on this website is for informational use only and is not intended for financial, tax or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation.

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