What About Your Retirement Debt?

So much is written about eliminating your debt, paying off your debt, and being totally debt free at any and every age in life that you may believe that it’s always the only goal you should have. Financial independence (FIRE) depends to a huge degree on not owing money to anyone or anything.

Many recommend that you reduce or eliminate your debts, especially if you're about to retire. But are there times it makes sense to keep retirement debt?

Truthfully, it’s a wonderful goal and for some people it actually can be achieved. It’s not common, but it does happen. When you owe debt, more than you can ever repay, it can ruin your life. But today’s post isn’t about that subject. There are many posts about it, so I want to look at debt from a different angle. What about debts you hold after you retire….your retirement debt?

The Biggest Debt You Might Have in Retirement Is Your Home

I have often said that one of your goals in life is to eliminate or limit your debt. I’d say eliminate it completely, but for almost everyone around that never happens. We have debt not just because we are irresponsible in our spending, but mostly because it is sometimes necessary. One serious debt maker is health and healthcare. But let’s assume that you are a healthy retiree in this post. What might be your biggest financial concern? How about owning a home as the prime example of that?

Your mortgage

Most people have to borrow money to buy a home. They take mortgages and usually they are for a term of 30 years. Most of us think—or at least hope—that at some point over that time frame they somehow will be able to pay off that loan and own their home free and clear—in less than 30 years. Nice dream, but it usually doesn’t happen. If you buy a home and you’re young, there is a good chance you can pay it all off well before your traditional full retirement age. That will give you a nice asset to have a hold of in retirement and eliminate a really big payment in those years, too.

But what if you bought your dream home when you’re 40 or 50? Then you are probably looking at a mortgage payment until you are 70 or even 80.

When you borrow money to buy a home, you’re paying someone (usually a bank) to temporarily—for 30 years or so—use their money. If what you buy with that money goes up in value by more than what you pay to use it, you get richer. If it doesn’t, you get poorer. Over the years, in the long run, values have gone up and people have gotten richer.

No one I know buys a house and pays cash for it the first time. But, it is possible that you may have been lucky enough to buy and see great appreciation like we had in the 1990’s so that when you sold it you walked away with a great profit from its appreciation. Some people who did that trick then bought another home and actually could pay for it with their profits (especially if they downsized). But, that was then and this is now, so don’t count on that trick happening again anytime soon.

Owning a home in retirement

That’s why when you head into retirement, if you do own a home, it’s recommended by many to own it outright or at least downsize it and not have any kind of mortgage.

Just as an additional concern, keep in mind that owning a home still means real estate taxes, home repairs, utility bills like sewer/water and other utilities that you also have. In my own case, about $500 a month just goes towards that even without adding in mortgage payments, maintenance and repairs (and don’t forget HOA fees if they apply).

It doesn’t mean you have to rent, but rather own a home you can still love and afford yet be without the debt. Plenty of experts, probably most, agree that having retirement debt is not a good thing if you can help it. Some, though, make a distinction between good debt and bad debt.

Good and Bad Debt in Retirement?

You may feel a sense of pride and financial independence when you’re completely debt-free, but there are some instances where even if you could pay off the entire debt today, you shouldn’t. Yes, you read that correctly.

How is that possible and why? The following are examples of when keeping the debt and making the minimum payments makes sense.

What if your debt can actually reduce your tax liability?

If you can deduct some of the interest you pay on a debt (which may be the case with your home mortgage) when you file your annual income taxes, you may be better off keeping the debt and using the tax advantage—especially if you have a low interest rate.

If you have a mortgage rate like the ones that have been around for a long time now that reached all-time record lows like 3% and even now still are around at 4-4.5% then owing on that debt may still be ok, even in your retirement years.

Despite the new tax laws that limit tax deductions, in some cases your interest and real estate taxes can lead to substantial savings on your income tax bill. If you fall into that category and all the cards fall into the right places, you may be just fine staying in your home, paying your “cheap mortgage” and taking the benefit of a nice savings on any taxes due. In some cases, retirees can actually walk away with no taxes owed and even an earned income tax credit paid to them! Check with a tax accountant and see if this is good advice for your situation.

What if you can make more income with your money than you would by saving the interest when paying off the debt?

If you have say a car loan with a great low-interest deal like a 1.9% or 0.9% interest rate on a car loan, but could earn a 3% or more return on your money in a no-risk or very low-risk investment, you’d come out ahead by investing your money that you’d otherwise use to pay off the entire debt now. If you can do it, why not do it?

Any time you can increase your income by actually netting more money, I’d have to say go for it. A car payment may last you 2, 3, 4, or even 5 or 6 years and that means an extra percent or two you’d have during most of that time frame. Cash flow may be an issue and that’s important. I will talk about that in a moment.

What about debt that reduces your risk?

If you pay off all your debt, but then have very little or no cash left in the bank, you are actually putting yourself at risk if you ever need money. That’s true whether you are 25, 50, or 100 years old.

Life can throw you curve balls at any time and that’s why you do need to have some cash on hand, “just in case” kind of cash. Call it an emergency fund, a nest egg, or any name you like, when you are rushing off to be totally debt free you still have to think about that “what if” scenario.

Say you spend $50,000 to pay off a low-interest home loan, but leave yourself with almost zero accessible cash. If there is an emergency, you may be forced to take another loan, only this time it’s a high-interest loan. In this case, it would have made more sense to keep your cash on hand while continuing to pay your low-interest loan. It goes to that old saying about a “bird in the hand”.

Cash Flow – Let’s talk about it

Your cash flow is always an important topic. It is a fact that sometimes bills come along and are due and you just don’t have your cash on hand right this minute. Maybe you get paid on the 15th of the month and your electric bill is due on the 10th? If you haven’t budgeted properly—or worse, have no budget—you may often find that you are waiting for money to come in before you can pay it out. That is cash flow and it sometimes can be an issue, especially for lower wage earners. Now look at a retiree.

Retirees don’t get paychecks

Hopefully they do get some form of income (Social Security, a pension, and/or other forms of income), but it’s more than likely less than when they were actually working and earning income.

Even borrowing to cover certain expenses with today’s relatively cheap fixed rates lets retirees keep a portion of their money readily accessible and that could be safer than paying off your mortgage if you are left without a cash safety net or emergency fund.

Because of these issues, cash flow and budgeting are totally essential to financial success. Retirees may be the most likely to benefit from keeping some low-interest debt and using their cash as their back-up safety net in retirement than anyone else!

What the Past Has Shown

A University of Michigan study found that retirees who do thrive while holding retirement debt have higher sources of other income as well as more education and greater financial sophistication. They managed well with debt all their lives, are comfortable with it, and know how to best deal with it.

It isn’t weird to think about how your finances will be when you are 60 even when you are 30. In fact, you should be thinking about it. Even though no one can accurately predict what their life will be life 30 or 40 years from now, one thing is pretty certain. Everything will cost more and you won’t be working and earning at your peak—if you are earning any income at all.

Final Thoughts

I am not advising low-income retirees to carry a credit-card balance or use adjustable-rate loans or to carry high mortgage rates and balances because those practices are always risky and especially dangerous when you’re living on a fixed income in retirement.

For most retirees, no mortgage and/or low or no debt is probably the best kind of action to take. Keeping your expenses low in retirement and having a low income won’t matter nearly as much to you in retirement than it will when having big debts, but having some debt can wind up being a good decision!

What are you planning about your debt in retirement? Do you have a plan? How will you cope with debt when you are 50, 60, 70, or older?


  1. Sharon

    My hubby & I both went thru divorces & money problems in our 40’s. We’re in our 50’s now, and really behind the gun. As we get closer to retirement we are planning to downsize & move to a smaller town just an hour away from our city where homes are very affordable. We won’t have our present home paid for entirely but we hope there’s enough equity to help us buy a small home more easily. We both weren’t thinking ahead when we were younger unfortunately. I’ll most likely need to hold a part time job till at least 70 if my health remains decent. In fact we have an older friend at 72 who is still working full time. I don’t know how he does it, but he is getting tired! My mom may also leave me an inheritance, but that’s not something I can totally count on, as she is becoming more eccentric at almost 90 years old. At least my hubby & I are both used to living more frugally, so we will soldier on. Our retirement will not be like the tv commercials with cruises & golf lol

    1. Sharon, I know it seems difficult when you start thinking about all the impediments that may be in your way towards a peaceful retirement. However, step one is recognizing all those facts that you’ve listed and actually making real preparations which you are doing. One possible form of encouragement I can give you is that in your sixties, and now for me about to enter my seventies, spending definitely declines, particularly on the luxury items in life. That happens primarily because I have most of the things I need and I spend most of my money today on sustaining myself and my wife with good food and healthcare. Looking for ways to make your life more affordable (downsizing is a great option) and putting away as much as you can now as fast as you can toward your retirement will reward you. I wish you nothing but good luck and thank you so much for sharing your story.

  2. Hi Gary,

    This post has been very helpful. You make good points about bad and good debt in retirement. My husband and I are in our late 50s and just recently we started looking at our retirement and thinking about where and how. Our biggest goal is to keep our house if possible while we are still working, pay off the mortgage, and then to sell it. I hope that by the time we are ready to sell the house it will be enough equity and appreciation to fund our retirement.

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