What should you pay off before you retire?

Retirement marks the beginning of a new chapter—one where financial stability is crucial to enjoying the fruits of your labor. However, debt can dampen those golden years and hinder your peace of mind. 

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To prepare for a worry-free retirement, you’ll want to evaluate your financial situation and learn what you can—and should aim to—pay off before retirement. This blog will explore what debts to prioritize and effective strategies for paying them off before retiring.

What should you pay off before you retire?

As you approach retirement, the goal should be to reduce your financial obligations as much as possible to free up disposable income—and, with it, flexibility. 

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Although all debt is not inherently bad, any liabilities you carry into your golden years can detract from your Social Security, pension, or savings. Whereas strategic debt repayment can ensure your cash goes toward living expenses and leisure—not interest payments. 

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So, how do you prioritize which debts to pay off first? Generally, you'll want to consider the following factors:

• Interest rates: Focus on high-interest debt first, which accrues faster and costs more in the long run.
• Monthly payments: Look at debts with significant monthly price tags that could weaken your retirement budget.
• Tax implications: Some debt, like a mortgage, may offer tax benefits. Weigh these against the peace of mind of being debt-free.
• Savings goals: You want to strike a balance between debt repayment and maintaining an emergency fund and retirement savings.

Types of debt and how to handle them

Let’s take a deeper look at each type of debt below:

High-interest unsecured debt

Credit card debt and personal loans often carry the highest interest rates on the market and have no tax benefits. Consumer purchasing power is low, and you’ll almost always shell out more in interest costs than other financing options. These debts will only eat into your savings if left to linger in retirement. Prioritize eliminating high-interest debt and wealth-building in your 40’s and 50’s. 

Auto debt

Car loans may have lower interest rates and payments that seem manageable, but they are ultimately a depreciating asset that can weigh on your budget. Once you've eliminated other high-interest debt, aim to clear auto debt before retirement to reduce monthly burdens.

Student loan debt

While not all retirees carry student debt, it's becoming increasingly common, especially for those who financed their children's education.

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If you're scheduled to pay loans off before retirement, then fret not. However, consider making extra payments when possible to accelerate your debt payoff date and reduce interest. 

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If you're on track to have student debt in retirement, shift focus to paying your loans after other unsecured debts. Federal loans may offer income-driven repayment plans, but carrying student debt into retirement can strain limited funds. Consider talking to a financial advisor to see what assets can be leveraged to cut down on student debt. 

Mortgage debt

Mortgages often represent the largest debt for many households. While some may argue that paying off the loan isn’t necessary due to potential tax benefits, being mortgage-free is the most effective way to lower household expenses. 

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When mortgage interest rates are low, it may make sense to focus on bolstering your retirement accounts. If you have a higher interest rate and monthly mortgage payments, or you have a sufficient nest egg, it can be a good idea to accelerate your payoffs for peace of mind. 

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Some homeowners leverage assets like home equity or a 401(k) to pay off their mortgage. However, it’s always best to consult a financial advisor before tapping assets. 

How to pay off debt faster 

Here are several ways to accelerate your progress:

• Cut unnecessary expenses: Review your budget for discretionary spending. Temporarily reducing money spent on dining out, subscriptions, or luxury items can free up extra cash for debt repayment.
• Negotiate with creditors: Reach out to lenders to discuss lower interest rates, extended payment plans, or one-time settlements. A creditor may be willing to negotiate if it means recovering their funds.
• Debt consolidation: Explore consolidation loans to see if you can roll multiple debts into a single loan with a lower interest rate. This can simplify payments and reduce overall costs. Be sure to shop around and prequalify to avoid hurting your credit score.
• Balance transfer credit card: Consider transferring high-interest credit card debt to a card with an introductory 0% APR. This strategy can save you money, but only if you pay off the balance before the promotional period ends.
• Home equity loan/HELOC: If you have sufficient equity, you may be able to secure a low-interest loan or line of credit. This can consolidate high-interest debts and reduce monthly payments. However, equity financing puts your home at risk if not repaid.
• Home equity investment (HEI): HEIs offer a lump sum payout in exchange for a share of your home's future appreciation. There are no monthly payments, which can help you pay off debts without increasing monthly burdens. Unlike a home equity loan or HELOC, you can qualify with a credit score as low as 500, and there are no income requirements. 
• Refinance: Refinancing existing loans, such as your mortgage, can lower interest rates and monthly payments, freeing up funds for other debts.
• Downsize: If debt is part of a larger financial issue—like not having enough funds to meet your bills every month—downsizing your lifestyle may be a necessary solution. Selling a larger home and moving to a smaller, less expensive property can help you generate equity to pay off debt and reduce housing-related expenses.

Final Thoughts

Paying off debt before retirement is one of the best gifts you can give your future self. By eliminating burdensome debts, you can set the stage for financial security. Any work to minimize your financial obligations will allow you to enjoy your retirement years with peace of mind and flexibility.

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