If you’re planning to retire at 65, the data suggest there’s a good chance life may have other plans. In this episode of the Wise Money Show, we explain why so many people retire sooner than expected and how to build a retirement plan that can adapt to unexpected changes. Learn the Five-Factor Retirement Plan, how to stress test your retirement readiness, and the steps you can take now to prepare for whatever the future holds.
Season 11, Episode 47
Download our FREE 5-Factor Retirement guide
Read our blog!
Listen on Podcast
Subscribe on YouTube
This information is for general financial education and is not intended to provide specific investment advice or recommendations. All investing and investment strategies involve risk, including the potential loss of principal. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results. This video may discuss estate planning concepts but does not constitute legal advice. Please consult an attorney for advice specific to your situation.
How Paying Off Debt Can Help You Retire Sooner
When you think about preparing for retirement, saving and investing probably come to mind first. How much do you have in your 401(k)? Are you contributing enough each year? Is your investment strategy appropriate for your goals?
Those are important questions, but there is another side of retirement planning that can have a major impact on your financial future: debt.
Paying down debt before retirement can reduce the amount of income you need each month, give you greater flexibility when markets are volatile, and potentially put you in a position to retire sooner than you originally planned.
Why Debt Matters in Retirement
Your retirement plan ultimately needs to answer a basic question: How much income will you need to support your lifestyle when your paycheck stops?
The more debt you carry into retirement, the higher that number may be.
Imagine entering retirement with a mortgage payment, a car payment, and credit card debt. Those monthly payments don’t disappear just because you stopped working. Your retirement income needs to cover them in addition to groceries, utilities, healthcare, insurance, travel, hobbies, and everything else you plan to spend money on.
Reducing or eliminating debt can lower your required monthly income and potentially reduce how much you need to withdraw from your investments.
That’s why debt should be considered as part of your overall retirement strategy—not as a completely separate financial goal.
Start With High-Interest Debt
Not all debt should necessarily be treated the same.
High-interest debt, particularly credit card debt, can make it difficult to build wealth because interest charges continually work against you. If you’re carrying a balance from month to month, paying that debt down may deserve priority alongside building an emergency fund and saving for retirement.
One approach is to list your debts along with their balances, minimum payments, and interest rates. From there, you can determine where additional dollars could have the greatest impact.
Once a debt is eliminated, don’t automatically absorb that old payment into your lifestyle. Consider redirecting some or all of it toward the next debt or another financial goal.
Should You Pay Off Your Mortgage Before Retirement?
For many households, the mortgage is their largest debt and one of their biggest monthly expenses. That makes the question of whether to pay off a mortgage before retirement especially important.
There isn’t one answer that works for everyone.
Your mortgage interest rate, remaining balance, available cash, investment assets, taxes, and retirement timeline should all factor into the decision. Aggressively paying down a low-interest mortgage, for example, may not always be the best use of every available dollar if doing so causes you to neglect retirement savings or other priorities.
But eliminating a mortgage before retirement can significantly change your cash-flow needs.
Suppose your retirement lifestyle requires $8,000 per month, but $2,000 of that amount is your mortgage payment. Paying off the mortgage could eventually reduce the amount your portfolio needs to support. That can have a meaningful effect on your retirement projections.
The key is to evaluate the mortgage as part of your entire financial plan rather than simply deciding that all debt is automatically bad.
Debt Can Affect When You Are Ready to Retire
Your retirement date and retirement spending are closely connected.
If you plan to retire at 65 but still have several large debt payments at that point, your plan may require substantially more retirement income. If those debts can reasonably be eliminated by 62, however, the numbers could look different.
That doesn’t automatically mean you can retire three years earlier. Social Security, healthcare coverage, taxes, investment assets, pensions, longevity, and other factors still need to be considered.
But lowering your fixed expenses gives you another lever to pull.
This becomes especially valuable because your actual retirement date may not be entirely within your control. A health issue, caregiving responsibility, job loss, or change within your industry could cause you to leave the workforce earlier than planned. Preparing your finances for that possibility can give you more options if circumstances change.
Don’t Sacrifice Everything Else to Become Debt-Free
Becoming debt-free can be a great goal, but it shouldn’t necessarily come at the expense of every other financial priority.
For example, throwing every available dollar at a mortgage while ignoring an employer 401(k) match could mean giving up valuable retirement benefits. Similarly, draining your emergency fund to pay off debt could leave you relying on credit cards the next time an unexpected expense occurs.
Your debt strategy should work alongside your emergency savings, retirement contributions, tax planning, insurance coverage, and other financial goals.
Build Debt Payoff Into Your Retirement Plan
Instead of viewing retirement savings and debt payoff as competing goals, consider how they can work together.
Ask yourself: What debts do we expect to have when we retire? When will each debt be paid off? How would eliminating a payment change our retirement spending? Could we redirect today’s debt payments toward retirement savings once the debt is gone?
Most importantly, stress-test the plan.
Run the numbers based on your expected retirement age, but also consider what would happen if retirement came two or three years earlier. If the plan doesn’t work, paying down debt may be one of several adjustments that can improve your retirement readiness.
Retirement planning isn’t simply about reaching a certain portfolio balance. It’s about building a financial life that can support the lifestyle you want—even when the future doesn’t unfold exactly as expected.
