Most Americans Carry Debt in Retirement: Can You Retire Debt-Free?

7 Ways to Save More for Retirement, Starting Now
Erik J. MartinFebruary 3, 2022
Key Takeaways:
  • Most American retirees do not feel financially secure.
  • Just one-third have enough retirement savings, while 75% owe debt in retirement.
  • Two-thirds of retirees retired earlier than they planned, mainly for health reasons.

A recent study from Clever Real Estate uncovered some sad facts about American retirees:

 65% of retirees don’t feel financially secure, and 75% are currently in debt.

  • Only 38% of retirees (38%) saved the recommended amount before retiring.

  • Nearly two-thirds of retirees stopped working before they planned, mostly because of health concerns.

  • 43% of retirees say they struggle to pay their bills.

The bottom line is that most retirees find themselves financially unprepared when they stop working. So, what steps should you take to prepare for a more secure and comfortable retirement, preferably a debt-free retirement?

Saving for Retirement: Be Realistic

The Clever Real Estate report had some other interesting findings:

  • 52% of retirees wish they better understood retirement savings and investments in general.

  • 45% of retirees say they waited too long to start saving for retirement.

  • 33% of retirees say they wish they had invested in more high-risk/high-reward assets when they were younger.

  • 51% of respondents believe they will outlive their savings.

“The data makes it painfully obvious that retirees have regrets about their pre-retirement savings habits,” says Taelor Candiloro, research analyst with Clever Real Estate. “Being realistic about the amount you need to save for retirement allows you to build a more authentic savings plan earlier in life. That knowledge helps you prepare for incrementally and exponentially increasing your savings over time. And ‘over time’ is the key to savings.”

It’s wise to have a Plan B if you cannot work until you are 65 or older. And it’s vital to assess all sources of retirement income well ahead of your retirement date and estimate what your debt and savings will be when you retire. One rule of thumb for evaluating what you can afford in retirement is to take your after-tax income plus 4% of your total investments per year. Under this rule, if you have $100,000 saved, you can spend $4,000 per year in addition to pension, social security, and other income you receive. 

However, that rigid rule can fail if your portfolio doesn’t perform as expected or financial emergencies occur. Consider that retirees typically spend more than their pre-retirement income, with more than two in five retirees who participated in the Clever poll indicating they have difficulty paying their bills.

“The hard thing about saving for retirement is that it’s most effective when it’s a long-term plan. It’s not hard to be realistic about your financial needs in retirement once you are there. The trick is having this perspective when you are much younger,” notes Melanie Hanson, editor-in-chief for EducationData.org.

Is it Bad to Retire With Debt?

Having unpaid debt in retirement isn’t necessarily a bad thing, depending on the type of debt you still carry.

“There is such a thing as good debt or debt that’s used to fund purchases that generate long-term value,” Candiloro explains. “The best example of this would be a mortgage loan. Homes have proven to be a good long-term investment that can help you build wealth over time. Homes can also be upgraded or improved and can even increase in value due to other factors like location.”

Cliff Auerswald, president of All Reverse Mortgage in Orange, California, agrees.

“Popular wisdom would say that you should have your mortgage paid off before you retire. But there are actually several scenarios where it might make sense to not pay off your mortgage,” he says.

Some of these scenarios include:

  • You would have to pay off your mortgage out of your savings to pay it all off. “You’re better off keeping your savings to use during retirement in case unexpected expenses come up,” says Auerswald.

  • You have investments that produce more than what you pay in mortgage interest. “If you’re earning a 6% return on your investments, for instance, and your mortgage interest rate is only 2.7%, it makes sense to pay the mortgage with the investment dividends and keep the 3.3% that remains,” he adds.

  • You have other high-interest loans. “You’re better off paying off the high-interest loans than paying off your mortgage, which is typically low interest,” Auerswald says.

  • You can qualify for a tax deduction by prioritizing elsewhere. “Sometimes, you stand a better chance of qualifying for a tax deduction by funneling your money into your retirement account than by paying off your mortgage,” he continues.

Retiring with non-mortgage debt that still needs to be paid off isn’t ideal, believes Jeff Mains, CEO of Champion Leadership Group LLC.

“When it comes to finances, retiring with debt is generally deemed a cardinal financial offense. After all, every dollar you owe affects your income in retirement,” Mains says. “On the other hand, prioritizing debt reduction above retirement savings, especially when it comes to low-interest debt, might result in a smaller nest egg. It’s easy to get into consumer debt by overusing your credit card and having personal loans and debts owed to friends and family. I recommend wiping off any high-interest consumer debt as fast as possible and swearing off future reckless use of credit cards.”

When gearing up for retirement, your debt goals should complement your retirement goals.

“Having debt in retirement isn’t always a bad thing, but you should plan to make sure you can continue paying down your debt while still maintaining your standard of living into retirement,” suggests Candiloro.

How Much Should You Save Before Retirement?

How much you should save will depend on when you plan to retire and the standard of living you want to maintain during retirement. Based on those variables, experts like Candiloro advise aiming for a savings factor of anywhere between 8 to 12 times your annual income, depending on the age you plan to retire.

“Most Americans earn an annual average of $51,480. If they want to retire by age 67, they’ll probably want to have at least $514,800 saved by the time they retire,” says Candiloro.

However, you might want to up that savings quotient to 10 to 12 times your income if you plan on doing a lot of traveling or taking on additional expenses during retirement.

“Some people might want to budget a bit higher to cover for anticipated medical expenses as well,” Candiloro cautions.

Hanson says a reasonable rough estimate is to plan on spending 80% of what you did while you are working.

“From there, estimate how long you plan to be retired and use an inflation calculator. This will get you to a total likely needed over the course of your retirement,” says Hanson. “Remember that some of this will come from things like Social Security income and pensions, and more of it will likely come from investments that can continue to earn interest while you are retired.”

How to Save for Retirement and Retire Debt-Free

To effectively and adequately salt away enough money for retirement – ideally a debt-free retirement – it’s important to follow recommended strategies.

“Try to meet your finances where they’re at right now. Create a savings plan that works for you where you are so that you have a foundation from which to grow when your financial situation changes,” Candiloro says.” And when constructing a savings plan, find a number that makes sense for your current budget and start saving that amount. Plan to then increase that number yearly if you can afford to – even an increase of a few dollars can help you get your savings ball rolling.”

Remember to take full advantage of your employer’s retirement offerings, especially a 401(k) plan if provided, and max out every dollar match your employer offers. If you don’t have access to a 401(k), open a Roth IRA and start contributing as much as you can.

“If you have any student loan debt outstanding, refinance this debt as soon as possible and pay it off as aggressively as you can,” Hanson suggests. “Additionally, always pay off your credit card balance in full every month if possible.”

When constructing an investment plan or portfolio, think about your tolerance for risk at your current age.

“If you are saving over a long period and have many years before retirement, investing in riskier assets can pay off. But if things go awry, your investment will still have time to recover before you need that money,” Candiloro notes. “If you have a shorter time horizon to save, investing in a mix of risky and safe investments, or going with safe investments across the board, is a better way to guarantee you have something to take with you into retirement.”

Also, take the time to list out all of your debts and figure out which debts you want to pay off first – which is often best determined by the rate of interest charged.

“One of the most effective ways to start chipping away at your debt before retirement is to take it on in chunks. Ask yourself: Which debt is within your budget to pay off first? Start there, and then go down the list,” recommends Candiloro.

What if It’s Too Late to Save Enough to Retire?

Considering that two-thirds of retirees surveyed did not have enough savings – and 30% had none – how can you fix this problem, especially if you are near retirement age? Ponder these action steps you can take:

  • Sell your home and downsize. “This can be an effective choice for retirement, even if things aren’t financially tight. A large home takes time and effort to maintain when you may not want to be able to spend that kind of time,” says Hanson.

  • Take a second job and save the earnings. This can be a great choice if you truly love to work. “But if that second job requires work that causes wear and tear to your body, you could see increased medical expenses as you age,” cautions Candiloro.

  • Sell off unneeded assets. “This can be effective, especially if you have depreciating assets like vehicles, which also come with maintenance and licensing costs,” Hanson points out.

  • Restructure/refinance debt to pay less interest and clear balances faster. “For some debts, creditors may work with you to adjust your payment amounts or interest rate or consolidate your loans. However, consolidation can sometimes temporarily hurt your credit score,” says Candiloro.

  • Explore a reverse mortgage. “A reverse mortgage can be a great choice, so long as you’re not going to move again and don’t plan on leaving the home to anyone as inherited property,” explains Hanson.

  • Consider moving to a less expensive location with a lower cost of living. “If you can afford to move, consider working with an experienced real estate agent who can address your financial concerns and help you find a home that fits your budget and will likely increase in value over time,” Candiloro adds.

  • Retire later or work part-time during retirement. Consider that 56% of respondents to the survey mentioned above say they should have delayed their plans to retire.

  • Discharge debt through bankruptcy or debt settlement and save as much as you can. “This could be a sound solution if you have no other options available. However, be aware that not every debt is dischargeable through bankruptcy, including alimony, child support, or tax liens,” says Candiloro. “Also, keep in mind that a bankruptcy can remain on your credit report for 7 to 10 years and affect other financial decisions you hope to make.”

  • Scale back your lifestyle now and in the future. Start tightening your financial belt and being more discretionary about purchases and credit card transactions.

Retiring debt-free or with minimal debt increases your comfort and security. Examine your current situation and set your course now for the best retirement you can manage.

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