Heading toward retirement with debt

Resources · Life and money · 5 min read Advanced

Key points

• Retirement usually means a lower, fixed income, so debt repayments take a bigger share.
• The years before retirement are often when extra repayments have the most room.
• Using retirement savings to clear debt has tax and long-term trade-offs.
• A clear list and a target date make the choices easier to compare.

What retiring with debt really means

Retiring with debt means your repayments come out of a smaller income than the one you have now. Is that manageable? It depends on how much you owe, the interest rate, and what your retirement income will be.

Plenty of people reach retirement still owing on a home loan, a car or credit cards. That isn’t a failure. But it does change the maths. And the earlier you look at it, the more options you usually have.

Why debt feels different in retirement

While you’re working, a pay rise or a bit of overtime can rescue a tight month. In retirement your income is usually fixed. It might come from a government pension, retirement savings, part-time work, or some mix of them.

So repayments take a bigger slice. A $700 monthly repayment is a very different share of a smaller income. There’s also less room for surprises, and health costs and home repairs often climb with age.

Then there’s the interest. Every dollar of it comes out of savings you can’t easily rebuild.

A worked example: a home loan near retirement

Say you have 10 years until you plan to stop work, and you still owe $60,000 on your home loan.

Assumptions:

• Balance: $60,000
• Rate: 6% a year, charged monthly
• Rates never change

The same maths works in any currency.

Clearing it in five years costs about $494 more a month. In return you save $10,336.39 in interest and get five working years free of the repayment. Some people use those years to build retirement savings faster. Others would rather keep the lower repayment and more breathing room now. Both are fair choices.

Credit card debt on a fixed income

Credit card debt costs far more. That’s why it tends to matter most as retirement gets closer.

Assumptions:

• Balance: $12,000
• Rate: 20% a year, charged monthly
• No new spending

Look at the $300 row. If you retired today, that card would still be costing you money more than five years in. Our guide to snowball or avalanche explains two common ways to decide which debt to go after first.

Ways people clear debt before retiring

Most people end up using some mix of these.

The simplest is making extra repayments while you’re still working, because your income now is usually higher than it will be later. When one debt is gone, keep paying the same amount and roll it onto the next one. Working a little longer, or going part-time instead of stopping, can help too. Even a year or two can give you room to clear a balance.

Downsizing is another route. Selling a larger home can clear a home loan, but it comes with sale and moving costs, and it changes where and how you live.

Then there’s using retirement savings. Some people withdraw a lump sum to clear debt, and this one deserves real care. Depending on your country and age, withdrawals may be taxed, limited or penalised. Money you take out also stops growing, and that money has to last the rest of your life. Some people do it to get rid of a high-interest debt. Others protect their savings and repay over time. The rules change often, so check the current rules where you live first.

Getting a clear picture

Whatever you decide, these steps help:

1. List every debt with its balance, rate and minimum repayment. Our guide to listing every debt you owe shows how.
2. Estimate your retirement income. Count any pension, retirement savings drawdowns and part-time work.
3. Compare the two. How much of that income would repayments eat?
4. Pick a target date. A set month to be debt-free, like your planned retirement date, gives you something real to aim at.

If repayments are already hard to cover, or you’re worried about what happens once your income drops, free debt help is confidential and can talk through your options with you.

Common questions

Is it bad to retire with debt?

Not always. A small, low-rate debt with repayments you can afford may be fine. High-interest debt, or big repayments on a fixed income, is where the strain usually shows up.

Should I use my retirement savings to pay off debt?

That depends on your country’s tax and withdrawal rules, the debt’s interest rate, and how long your savings need to last. Keep in mind that withdrawals can shrink your income for decades.

Can you get a mortgage paid off before retiring?

Often, yes, with extra repayments in the years before you stop work. How fast depends on your balance, your rate and how much extra you can pay.

Try it

Find your Freedom Date to see the month your debts could be cleared, then compare it with your planned retirement date. The home loan extra repayments calculator shows what extra repayments could do on a home loan.

General information only, not financial advice. Your situation is your own.