When you retire, you shouldn’t have to worry as much because you won’t have to work full-time and can live your life more on your own terms. Yet for many Americans, financial challenges cloud retirement.
In particular, only 37% of retirees do not have any debt, according to an Employee Benefit Research Institute (EBRI) study. While that is not always a bad thing—some debt, like a low-interest mortgage, can be financially advantageous—that still leaves many people struggling in retirement.
Are you dreaming of a retirement where financial worries are a thing of the past? Well I hate to burst your bubble, but the reality might be a bit more… complicated.
Most of us imagine our golden years free from debt and financial stress. We picture ourselves traveling, pursuing hobbies, and enjoying life without those pesky monthly payments hanging over our heads. But is this dream actually realistic?
Let’s dive into the eye-opening statistics and practical strategies that could help you become one of the lucky ones who actually retire debt-free
The Shocking Reality of Retirement Debt
According to the most recent data from the Employee Benefit Research Institute (EBRI), only 37% of retirees are completely debt-free. That’s right—nearly two-thirds of retirees are still making debt payments during what should be their most carefree years!
This number might surprise you, since more than half of people who are about to retire plan to do so with no debt. The disconnect between expectation and reality is stark.
Even more concerning, previous studies showed even lower percentages:
- Only 23% of retirees aged 65 to 74 manage to achieve debt-free status
- Among those 75 and older, the percentage improves to 46%, but that still means more than half carry debt
What Types of Debt Are Retirees Carrying?
The debt portfolio of today’s retirees is diverse, but some debts are more common than others:
| Debt Type | Percentage of Retirees Affected |
|---|---|
| Credit card | 68% |
| Mortgage | 38% |
| Car loan | 34% |
| Home equity loan | 7% |
More than two-thirds of retirees who have debt have credit card debt, which is at the top of the list. The fact that credit card debt usually has high interest rates that can quickly wipe out retirement savings makes this even worse.
The Growing Trend of Retirement Debt
This isn’t just a temporary blip—it’s a growing trend that’s been building for decades:
- In 1989, only 58% of older households had debt. By 2016, that number jumped to 71%.
- Households led by individuals 65 and older saw debt rise from 41.5% in 1992 to 60% in 2016.
- The percentage of those aged 75+ with debt climbed from a mere 21% in 1989 to 53% in 2022.
Even more alarming, according to the Boston College Center for Retirement Research, eight in 10 middle-income Baby Boomers are still grappling with some form of debt, and nearly 30% allocate over 40% of their monthly income just to debt payments!
The median amount of debt has been going down, from $75,664 in 2010 to $61,000 in 2022, which is a good sign. However, the overall amount of debt has been going up.
Why So Many Retirees Still Carry Debt
There are several factors driving this trend:
1. Rising Housing Costs
The percentage of American households headed by someone 55+ with housing debt has increased from 24% in 1992 to 37% in 2022. (This actually peaked at 42% in 2010, likely reflecting the impact of the Great Recession.)
2. Skyrocketing Healthcare Costs
As we age, medical expenses tend to increase. Many retirees use credit to pay for these unexpected costs because they don’t have enough insurance or savings.
3. Insufficient Savings
Many retirees simply don’t have enough saved to sustain their lifestyle. The National Council On Aging reports that 80% of households with older adults are either financially struggling or at risk of falling into economic insecurity.
4. Extended Mortgages
Unlike previous generations who often paid off their homes before retiring, many of today’s retirees still have mortgage payments well into their 70s and beyond.
5. Forced Early Retirement
EBRI found that 58% of respondents retired earlier than expected, often due to health issues, job loss, or family responsibilities. This unexpected early retirement can throw off financial plans and lead to increased debt.
The Impact of Debt on Retirement Quality
Carrying debt in retirement isn’t just a financial issue—it can significantly impact quality of life:
-
Less Disposable Income: When a large chunk of your fixed income goes toward debt payments, there’s less available for travel, hobbies, or even basics like food and utilities.
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Higher Stress Levels: Financial insecurity can lead to anxiety and depression, which can take a toll on both mental and physical health.
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Fewer Choices: Being saddled with debt often means limited flexibility for lifestyle decisions, like downsizing or relocating to be closer to family.
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Vulnerability to Financial Shocks: Without adequate emergency savings, unexpected expenses can push retirees further into debt.
Good Debt vs. Bad Debt in Retirement
Not all debt is created equal, especially in retirement. Financial advisors often distinguish between “good” debt and “bad” debt:
Good (or Strategic) Debt
- Low-interest mortgage on a property that’s appreciating
- Debt that provides liquidity while allowing investments to grow at a higher rate than the debt’s interest
- Debt that offers flexibility for strategic financial moves, like Roth conversions
Bad Debt
- High-interest credit card balances
- Payday loans
- Car loans with lengthy terms
- Consumer debt for depreciating assets
As Kristin Bartlow, financial advisor and managing director at Journey Strategic Wealth, explains, “There’s an important distinction between bad debt and strategic debt in retirement.” Strategic debt can provide flexibility and allow your assets to grow, while bad debt just drains your finances.
How to Become Part of the 37% Who Retire Debt-Free
If you’re determined to join the minority of retirees who enjoy debt-free living, here are some practical strategies:
1. Compare Interest Rates on Debts and Assets
Aaron Brask, principal at Aaron Brask Capital, advises, “Compare the interest rate on your debt to what you receive from the fixed income side of your portfolios, like bonds, CDs, money markets, etc. In many cases, people are paying a higher rate than they are earning.”
If this is true for you, consider liquidating some fixed-income investments to pay off high-interest debt.
2. Understand and Optimize Your Cash Flow
“Cash flow truly is the engine that drives your finances, and without understanding your cash flow, it can make it almost impossible to make the right decision for you,” says Trevor Ausen, founder of Authentic Life Financial Planning.
Carefully track your income and expenses to identify areas where you can cut back and redirect funds toward debt reduction.
3. Prioritize High-Interest Debt
Start by tackling debts with the highest interest rates, typically credit cards. Even small additional payments can significantly reduce the total interest paid and accelerate your path to debt freedom.
4. Consider Debt Consolidation
If you have multiple high-interest loans, consolidating them into a single loan with a lower interest rate could save you money and simplify your finances.
5. Develop a Realistic Budget
Create a budget that accounts for all your income and expenses. Stick to it religiously and look for opportunities to reduce unnecessary spending.
6. Plan for Unexpected Expenses
Build an emergency fund to cover unexpected costs without having to rely on credit. Aim for at least 3-6 months of living expenses.
7. Consult a Financial Advisor
A financial advisor can help you develop a personalized strategy for managing debt and optimizing your retirement finances. They can also help you determine whether carrying some “good” debt might actually be beneficial in your specific situation.
The Bottom Line: Being Strategic About Retirement Debt
While the ideal of a completely debt-free retirement remains elusive for most Americans, being strategic about the debt you carry can make a significant difference in your financial well-being.
The goal shouldn’t necessarily be zero debt but rather zero bad debt. As financial advisor Kristin Bartlow notes, some debt gives you financial flexibility and lets your assets grow faster, while other debt just drains your finances.
By understanding the difference between good and bad debt, managing your cash flow effectively, and taking proactive steps to reduce high-interest debt, you can join the 37% of retirees who enjoy financial freedom in their golden years.
Remember, it’s never too early—or too late—to start working toward a debt-free retirement. Every dollar of debt you eliminate today means more financial freedom tomorrow.
I’d love to hear your thoughts! Are you surprised by these statistics? Do you have a plan for managing debt as you approach retirement? Share your experiences in the comments below!
FAQ About Retirement Debt
Q: Is all debt bad in retirement?
A: No. Some debt, like a low-interest mortgage, can be financially advantageous. The key is distinguishing between strategic debt that gives you flexibility and bad debt that drains your finances.
Q: What’s the most common type of debt among retirees?
A: Credit card debt is the most common, affecting 68% of retirees who carry debt.
Q: I’m already retired and have debt. Is it too late for me?
A: It’s never too late to improve your financial situation. Start by understanding your cash flow, prioritizing high-interest debt, and possibly consulting with a financial advisor for personalized strategies.
Q: Should I use my retirement savings to pay off debt?
A: This depends on your specific situation. Compare the interest rate you’re paying on debt versus what your investments are earning. Also consider tax implications and potential penalties for early withdrawals. A financial advisor can help you make this decision.
Q: How do I avoid taking on more debt in retirement?
A: Create and stick to a realistic budget, build an emergency fund, and avoid using credit cards for expenses you can’t pay off immediately. Also, be cautious about cosigning loans for family members, as this can create unexpected financial obligations.
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Distinguish Between Good Debt and Bad Debt
Still, retiring with debt isnt always negative.
“There’s an important distinction between bad debt and good or strategic debt in retirement,” said Kristin Bartlow, financial advisor, managing director at Journey Strategic Wealth.
Holding onto some debt can be strategic, such as if it gives you more liquidity and flexibility, she added. For example, you might want enough cash on hand to pay the upfront taxes when converting a traditional retirement account into a Roth account, which might ultimately save on taxes later on, depending on your situation. Carrying debt could also mean letting your other assets compound faster than the interest youre paying.
“The concern comes when retirees carry bad debt, like credit cards or high-interest loans, without a clear strategy on how to manage it,” she added.
Compare Interest Rates on Your Debts and Assets
Consider if youre carrying any debt because youre afraid of giving up liquidity. But that might not always be the smartest financial decision.
“I often tell people to look at their debt interest rate next to the interest rate they get on their fixed income investments, such as bonds, CDs, money markets, and so on.” Aaron Brask, principal at Aaron Brask Capital, said, “Most of the time, they are paying more than they are earning.” “Unless they need or want to keep more cash on hand, I usually tell them to sell some of their fixed investments to pay off their debts.” “.