Managing debt in 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.

Juggling credit card debt, a car loan and a mortgage? You have plenty of company: More than 65 percent of American households carry some level of debt, according to the Employee Benefit Research Institute. In families with a head of household who is 55–64 years old, that number jumps to 79 percent, which makes retiring with debt inevitable for many.

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

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.

Once you pay 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.

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

Housing is typically the top expense for Americans, including the elderly, according to 2016 data from the U.S. Bureau of Labor Statistics. If the start of your retirement coincides with your final mortgage payment, that’s great. However, while paying off your mortgage can free up more cash in retirement, it might not always be the best option.

For instance, 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.

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.

However, if you’ve paid off your credit cards and contribute the maximum to your retirement accounts, it could make sense to pay down your mortgage—particularly if it isn’t giving you much of a tax break.

One thing you shouldn’t do to reduce debt is cash out your 401(k) or other retirement accounts. If you’re younger than 59½, you could be charged income taxes and an additional 10 percent federal tax if you take money out of an IRA or 401(k). 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. In fact, if you’re older than 50, you’re eligible to make increased annual contributions to your 401(k) and IRA accounts.

Learn more from Merrill Edge about how much you can put in and how much even small increases could grow over time.

In your 60s

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.

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. Merrill Edge offers insights about Social Security and your retirement, including information about how 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. In addition, working in retirement is an important source of funding for many older Americans.

This is also a good time to 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.