Joe Brown

Brown Advisory Group, LLC

Should You Have Debt In Retirement?

"In a perfect world, you would enter retirement with your home paid off, $2million in savings, and not a penny in debt. Unfortunately, our world is far from perfect."-Donna McElroy

Most financial planners urge their clients to eliminate as much debt as possible before they retire. While this is indeed a sensible approach to avoid having bad debt upend your retirement plans, life often has other plans. Medical emergencies, layoffs, or unplanned early retirement can blindside even the best-planned pre-retirees. Crises sometimes force seniors to draw down their accounts early, pay less on their credit cards, or even take on new debts. Carrying debt into retirement has some stressful effects. Excessive debt reduces a person's monthly cash flow, forcing cutbacks on high-priority items such as health care, transportation and travel, and leisure activities.  Paying off unplanned bills may mean drawing down accounts you had not planned on touching until much later in life, creating the possibility of running out of money before you die.

How can you tackle debt if you are already on a fixed income?

If you've entered retirement carrying credit card balances, car loans, or a mortgage, it can be challenging to tackle this debt on a fixed income. Your biggest ally at this point is the time you have now that you no longer work. Debt elimination expert and money coach Kristin Colca says that using your time to create a workable plan to pay off loans is a fantastic starting point. "It can be discouraging to think about improving your financial situation when you are on a fixed income. Sit with an experienced debt reduction specialist, work up a plan together, and resolve to wipe out your debt before it destroys your retirement." Says Colca. Colca says that you should take time to do a bit of research and preparation.

Review all your accounts. Wiping out debt requires some tough love. You must add up ALL loans, mortgages, and consumer debt. Make a list of the due dates, interest rates, and terms attached to each balance. Certain loans might require making additional payments, while others are ok with minimum payments. A good metric to know is the expected annual rate of return of your retirement portfolio. Suppose your anticipated rate of return is 6%, and the interest on your debt is 3%. If this is the case, you might hold off on paying those lower interest debts and allow your investment portfolio to grow instead. However, if the rates on your debts are the same or more than your expected annual rate of return, paying off the debt makes more sense.

Formulate or adjust your budget. Just because you've retired doesn't mean you can forget about having a budget in place. If you do not have a budget and are serious about getting rid of debt, you need to sit with a financial coach or advisor and make one as soon as possible. If you already have a budget, look for places to cut back and redirect the savings toward debt repayment. Consider different strategies you can use, such as the avalanche or snowball methods or using a computer application to assist you. "Technology can be your best weapon when it comes to both wealth accumulation and debt elimination. Many of my clients use "money GPS" dashboards that use math to eliminate debt more efficiently," says Colca.

Should you let your debts die with you?

Some retirees feel that attempting to live debt-free when they are over 65 is not worth the effort. They plan to let their debts die when they do. Depending on where you live, however, leaving debt behind may negatively impact your heirs.

The bottom line:

Although carrying too much debt is a bad idea at any stage of your financial life, it can have particularly harmful effects on a fixed income. It's best to take care of debt while you are still working. However, situations occur that are out of your control. It's wise to partner with a trusted advisor or debt specialist to explore all your options.

Joe Brown picture

Joe Brown

Brown Advisory Group, LLC

2445 Darwin Rd.

Suite 105

Madison, Wisconsin 53704

(608) 241-4425

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