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Top 5 debts to prioritize paying off before retirement

Cassidy Horton
Updated
Debts to prioritize paying off before retirement (blackCAT via Getty Images)

If you're in your 50s or 60s and looking ahead to retirement, you might be wondering how to handle your existing debts. Should you pay off everything you owe — or focus only on debts that matter most?

While many people would love to retire debt-free, those ages 50 and up owe $97,012 in debt on average, according to a recent Experian consumer debt study. Which means retiring financially free and clear isn’t always realistic.

The truth is, not all debt is bad. And some types — like the high-interest kind — are more urgent to pay off than others. Here’s how to approach prioritizing debt before you retire, ranked by most important to tackle first.

Paying off high-interest credit card debt should be your top priority before you retire. These cards typically carry the highest interest rates among consumer debts, averaging around 21.51%.

“Carrying high-interest debt into retirement can be a real drain on your finances,” says Tyler Meyer, a certified financial planner and founder of Retire to Abundance. “It eats away at your fixed income, forcing you to spend a significant chunk of your retirement funds on interest payments rather than enjoying your golden years.”

If you had a $5,000 credit card balance with a 21.51% APR and only made the minimum payment, it would take you over 10 years to pay it off — and cost you an extra $7,750 in interest. This is more than double your original debt. These numbers become even more astronomical with higher balances.

That’s why paying off credit card debt should be top of your retirement prep list. These interest rates far exceed any returns you can safely earn on your retirement portfolio. Plus, credit card interest isn’t tax-deductible.

🎯 Strategies for paying down credit card debt

  • Use the debt avalanche method to pay off your highest-interest cards first.

  • Get a balance transfer card with a 0% introductory rate. (But watch out for fees.)

  • Use unexpected windfalls like tax refunds and bonuses to pay down balances.

⚠️ Strategies to avoid

  • Don't tap into your 401(k) or IRA to pay off credit cards. This can trigger taxes, as well as penalties if you’re under age 59½.

Dig deeper: 401(k) withdrawal rules: What to know before cashing out

After credit cards, prioritize paying off personal and unsecured loans next. These loans have an average interest rate of 11.92%, but rates can go up to 35.99% depending on your credit score.

Similar to credit cards, these interest rates usually exceed what you could expect to earn on your retirement portfolio, and the interest you pay isn’t tax-deductible. So it makes sense to pay them off as soon as you can.

The average personal loan balance is $21,119 among those ages 50 and up. If you had a 12% APR on a five-year term, your monthly payment would be around $470 — and you’d pay an extra $7,000 in interest.

But if you paid it off, you could eliminate that $470 payment in retirement and have an extra $5,640 each year to use how you’d like.

🎯 Strategies for paying down personal loans

  • Make extra payments when possible to reduce your principal faster.

  • Refinance if you can qualify for a lower interest rate.

  • Use any unexpected income or bonuses to make lump-sum payments.

⚠️ Strategies to avoid

  • Don’t tap into your 401(k) or IRA to pay off personal loans. This can trigger taxes, as well as penalties if you’re under age 59½.

Dig deeper: What is a personal loan? How it works — and what to know before you apply

After personal loans, focus on paying off auto loans next if it makes sense. The average auto loan rate is 8.20% for five-year terms and 8.32% for six-year terms, with the average loan balance among those ages 50 and up at $21,587.

If you carry a loan with these terms into retirement, it could put a strain on your budget. But if your auto loan has a low interest rate — like 2.99% — and you can comfortably afford the monthly payments, it may be worth paying it off gradually and investing the difference instead.

🎯 Strategies for paying down auto loans

  • Make extra payments when possible to reduce the principal faster.

  • Refinance if you can qualify for a lower interest rate.

  • Trade your vehicle in for a less expensive one to reduce or eliminate your loan.

⚠️ Strategies to avoid

  • Don’t tap into your 401(k) or IRA to pay off personal loans. This can trigger taxes, as well as penalties if you’re under age 59½.

It may sound surprising, but many people in their 50s and beyond are still carrying education debt, whether from their own studies or from helping their kids. In fact, nearly 25% of all federal student loan debt is held by folks in this age group.

If you started college at 18 and are now in your early 60s, you may have faced some of the highest starting interest rates, according to a recent Education Data Initiative report. Paying off these loans before retirement could be advantageous, especially if your loan rates are high.

That said, whether to pay off student loans before retirement isn’t always clear cut. Student loans aren’t automatically discharged in bankruptcy, and defaulting could lead to Social Security payment garnishment. On the other hand, you may be able to deduct up to $2,500 in student loan interest per year on your taxes without itemizing your deductions.

🎯 Strategies for paying down student loans

  • Compare the loan’s interest rate to potential investment returns.

  • Consider income-driven repayment plans to lower monthly payments.

  • Explore loan forgiveness options if you work in public service.

  • If the loans are for a child’s education, discuss transferring the debt to them if they’re established in their careers.

⚠️ Strategies to avoid

  • Don’t tap into retirement accounts to pay off student loans, as this can trigger taxes and penalties.

  • Don’t let your loans default — it could lead to Social Security garnishment in retirement.

According to Meyer, mortgage debt is often the biggest question mark in retirement planning. “Prioritizing paying it off can give you peace of mind and reduce your monthly expenses, which is a big plus on a fixed income,” says Meyer. “However, if your mortgage rate is low and you have a good cushion of retirement savings, it might make sense to continue making payments as planned and let your investments grow.”

Unlike with other debt, you can deduct from your taxable income home mortgage interest you paid on up to $750,000 of your mortgage debt (or $375,000 if married and filing separately).

Bobbi Rebell, a certified financial planner with CardRates, offers additional insight. "If you have a very low interest mortgage and you have money invested in vehicles that offer a higher return — which these days, even a very safe CD or money market often does — it can be OK to have debt into retirement," says Rebell. "When you factor in the tax-deductibility of mortgage interest, the potential to earn a higher return investing money rather than paying off the low-interest mortgage makes financial sense.

🎯 Strategies for paying off your mortgage

  • Make extra payments when possible to reduce your principal faster.

  • Refinance to a lower rate or shorter term as rates fall, if it makes financial sense.

  • Split the difference by paying down part of the mortgage and investing the rest

  • Consider downsizing for retirement to reduce or eliminate your mortgage.

  • Talk to a trusted retirement advisor about the best path for you.

⚠️ Strategies to avoid

  • Don't tap into retirement accounts to pay off student loans, as this can trigger taxes and penalties.

  • Don't sacrifice retirement savings or emergency funds just to pay off your mortgage early.

Related reading: How to invest your money after retirement — and make it last through your golden years

As you approach retirement, you might wonder whether to focus on paying off debt or boost your retirement savings. The truth is, it's not always an either/or decision.

While being debt-free in retirement can provide peace of mind, it's not always possible or even necessary. Some retirees manage well with mortgage payments or other low-interest debts.

The key is to prioritize strategically while balancing four financial goals:

  1. While you’re working, contribute enough to your 401(k) to get any employer match to avoid leaving free money on the table.

  2. Tackle high-interest debt like credit cards that can erode your wealth faster than most investments can grow it.

  3. Build an emergency fund to avoid taking on new debt for unplanned expenses.

  4. Balance additional retirement savings with paying down lower-interest debts as it makes sense to your budget.

🔍 Is it OK to use retirement savings to pay off debt before retiring?

Tyler Meyer, a certified financial planner, says that using retirement savings to pay off debt before retiring is a tricky decision. “While it can feel good to be debt-free, depleting your retirement nest egg can leave you financially vulnerable down the road,” he says. “In many cases, it’s better to keep your retirement savings intact if the debt has a low interest rate.”

Add these strategies to your money management to minimize your debt as you get closer to retirement:

  • Create a detailed budget. Monitoring your spending now can help you identify extra money in your budget for debt payments. Similarly, creating a budget for retirement can help you estimate how much debt you can comfortably manage later on.

  • Consider "semiretirement" or delayed retirement. Consulting or working part-time or for a few extra years can give you the extra income — and financial security — you need to tackle debt. It's also a way strengthen social connections and contribute your valuable skills.

  • Consolidate your debts. If most of your debt is the high interest kind, consolidating them into one loan with a lower rate could simplify payments and help you pay off what you owe quicker. You can typically consolidate expensive card debt, medical debt and personal loans.

  • Tap into home equity. A home equity loan or line of credit might offer lower interest rates than other forms of debt, and because there’s no restriction on how you can use it, it offers a way to consolidate debt. But carefully weigh the rewards with the risk of losing your home if you’re unable to repay what you borrow.

  • Negotiate with creditors. You may be able to lower your interest rates or secure better payment terms simply by calling your creditors and explaining your situation or hardship. As a last resort, debt settlement could be an option, especially as an alternative to bankruptcy.

Dig deeper: 6 steps to starting a consulting business in retirement (and how it can help your budget beyond the income)

🚨Take caution with early 401(k) withdrawals

While you might be tempted to take withdrawals from your 401(k) to pay off debt — what some people describe as “borrowing from yourself” — doing so can push you into a higher tax bracket, come with penalties and potentially set back your retirement plans by years. Plus, you'll lose out on potential investment growth that will be nearly impossible to recover from as you near retirement.

Under the Secure 2.0 Act, your employer can allow you a one-time withdrawal of up to $1,000 for personal emergencies without penalty for "unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses." But you must repay what you withdraw within three years, when you're eligible for another emergency distribution, if you qualify. And it applies to 401(k), 401(b) and 457(b) retirement plans. Talk to your employer or your plan's manager to learn whether you're eligible for an emergency expense distribution.

Still have questions about which debts to prioritize before retirement? Explore these answers.

A popular rule of thumb is to make sure your total monthly debt payments (including housing) don’t exceed 36% of your gross monthly income. Don’t forget to include in your calculations all income sources — such as Social Security, pensions and retirement account withdrawals, and even alimony or similar support. See our guide to budgeting in retirement for tips on managing your finances on a fixed income.

Yes, in most cases. A financial advisor can help you manage your money as you plan for retirement, while giving you a sense of how much you can spend during retirement to make your savings last. Their market expertise may also help maximize your savings. If you’re anxious about retirement, working with an advisor can also give you peace of mind by assuring you that you’re on the right path. Start with our guide to finding a trusted retirement advisor.

Not if you can help it. Generally, you want to continue saving for retirement while you pay off debt, at least enough to get your full employer match. After that, focus on high-interest debt and building an emergency fund. Once those are under control, you can reroute your focus to maxing out your retirement contributions.

If you’re already living on a fixed income with little wiggle room, you could take a larger retirement distribution to pay off debt, but this may push you in a higher tax bracket. You could also consider taking a part-time job. Start with our guide to the best jobs for seniors and retirees.

If you don’t have that option, consider the help of a nonprofit credit counseling service. The National Foundation for Credit Counseling is a good starting point for legitimate, certified counselors who will have your best interests in mind.

It depends on the type of debt. Generally, your estate must repay your debts using your assets before your heirs can inherit what's left. If you're the joint owner of a debt, the other owner will be fully responsible for it. The exception is your mortgage — most mortgages aren’t transferable, which means only those who signed the loan are responsible. Accounts with designated beneficiaries — like life insurance policies — typically pass directly to your heirs without being considered part of your estate.

Cassidy Horton is a finance writer who specializes in banking, insurance, lending and paying down debt. Her expertise has been featured in NerdWallet, Forbes Advisor, MarketWatch, CNN Underscored, USA Today, Money, The Balance and Consumer Affairs, among other top financial publications. Cassidy first became interested in personal finance after paying off $18,000 in debt in 10 months of graduation with an MBA. Today, she's committed to empowering people to stand up and take charge of their financial futures.

Article edited by Kelly Suzan Waggoner

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