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Why is it Important to Address Your Debt Before Retiring?

Retirement embodies a lifetime's dedication and perseverance, yet entering this phase with unpaid debt can overshadow the joyous moments ahead. Picture the weight of looming debts on your shoulders as you step into retirement, impacting not just finances but overall well-being. Your golden years should offer peace of mind and freedom, yet unpaid debts could compromise financial security, limiting resources for essential living expenses and leisure. Moreover, this added strain could heighten risk vulnerability and constrain financial flexibility. It's crucial to approach retirement with a comprehensive plan that addresses outstanding debts, integrating a thoughtful repayment strategy alongside tax and retirement planning for a more secure and fulfilling future.

The prevalence of pre-retirement debt among Americans underscores the urgency of this issue. A recent Employee Benefit Research Institute survey unveiled a stark reality: nearly half of retirees, accounting for 46%, carry some form of debt. Moreover, a substantial portion—39%—find themselves burdened with debts totaling $25,000 or more. These statistics underscore the pervasive nature of debt among retirees and the critical importance of proactively managing and resolving financial obligations before retirement age.

Why Paying Off Debt Is Important: 

  1. Impact on Retirement Income: After a lifetime of hard work, it is finally time to retire and enjoy the rewards of your labor. However, being in debt significantly limits your financial freedom. Paying off debt reduces your retirement income, leaving you with less money for those long-awaited recreational activities and necessities. 

  2. Debt Accumulation: Debt accumulates interest over time, potentially resulting in a significant financial burden. Taking care of your debt before retiring can protect your retirement savings and keep you from paying high-interest rates. 

  3. Risk Management: Carrying debt into retirement raises financial risk and can cause significant stress and anxiety. Debt obligations can make matters worse financially and put your retirement savings at risk in the event of unforeseen costs or market downturns. 

As people approach retirement age, they typically face different types of debt issues, including high mortgage payments, credit card debt, and even student loans. According to the Consumer Financial Protection Bureau, the number of older homeowners with mortgage debt increased from 22% to 30% between 2001 and 2011. A study by ValuePenguin states that the average credit card debt among Americans aged 55-64 is $9,760. Moreover, student loan debt among older adults is increasing. According to the Federal Reserve Bank of New York, borrowers aged 60 and older together owe $86 billion in student loan debt. As you will note, these debt burdens can delay retirement and limit financial flexibility for older individuals.

Addressing Debt Before Retiring

Planning for retirement is crucial, especially when dealing with debt. Here are some strategies to consider: 

  • Calculate Retirement Needs: Create a realistic budget for your desired retirement lifestyle and potential healthcare costs. This step will help you determine how much debt reduction is necessary before you can comfortably retire. 

  • Prioritize High-Interest Debt: Focus on aggressively paying down high-interest debt, such as credit cards and personal loans. Consider debt consolidation to secure a lower interest rate and simplify repayment. 

  • Consolidate Debt: If possible, consolidate high-interest debt into a single, lower-interest loan. Debt consolidation can streamline payments and reduce overall interest expenses.

  • Negotiate with Creditors: Contact creditors to negotiate lower interest rates, reduced payments, or settlement offers. Many creditors are willing to work with seniors to create manageable repayment plans.

  • Delay Retirement: If feasible, delay retirement to continue earning income and delay tapping into retirement savings. Working for a few more years can significantly improve your financial situation and reduce the need for debt. 

  • Increase Income: Explore opportunities to boost income, such as working part-time, freelancing, or monetizing hobbies and skills. Additional income can accelerate debt repayment and improve financial stability.

  • Downsize Housing: Consider downsizing to a smaller home or moving to a more affordable location. Selling a larger home can generate funds to pay off debt while reducing housing expenses in retirement.

Financial & Tax Planning Strategies 

Addressing debt before retiring is crucial in ensuring a financially secure retirement. Proactive tax and financial planning can help reduce debt in the years leading up to retirement. Here are some tax planning considerations to take into account:

  • Maximize Retirement Savings Contributions: Contributing to retirement accounts like a 401(k) or an IRA can reduce your taxable income and save you money on taxes. This can free up more funds to pay down debt. For example, making pre-tax contributions to a 401(k) plan reduces your current taxable income, and the tax savings could be applied toward reducing your debt.

  • Utilize a Health Savings Account (HSA): If you're eligible, contributing to an HSA can offer triple tax advantages—tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. This can be especially beneficial if medical debt is a concern. The money saved on taxes can be redirected to pay off debt.

  • Consider the Timing of Income Recognition: If you're nearing retirement and expect your income to decrease, it might be beneficial to defer income to your retirement years when you may be in a lower tax bracket. This strategy can provide more liquidity in the short term to address debt.

  • Debt Forgiveness and Tax Implications: Forgiven debt can be considered taxable income. If you're exploring debt settlement or forgiveness options, understand the potential tax consequences. Planning for any tax liabilities resulting from forgiven debt is essential.

  • Consult a Tax Professional: Tax laws are complex and change frequently. A tax professional can offer personalized advice based on your financial situation, helping you identify the best strategies for using tax planning to address debt before retiring.

Each of these strategies has nuances and should be considered part of a comprehensive financial plan. Balancing debt reduction with saving for retirement is crucial, and tax planning can be a powerful tool in achieving this balance.


Managing debt before retirement isn't merely a financial tactic; it's a route to tranquility. It guarantees financial stability, optimizes savings, and grants a feeling of liberation. Remember: The relief and peace of mind that can come from being debt-free in retirement is a goal worth striving for.

If you're looking for professional retirement and tax planning assistance, Rachel Scott, MBA, EA, from VSA Accounting Services, can provide expert advice and help you navigate the complexities of making this crucial decision. As you consider your retirement living situation, weighing each option based on how it aligns with your financial goals and lifestyle aspirations is essential.

If you have any family or friends who need help in this area, have them call us!

Rachel Scott, MBA, EA rscott@vsainc.com (800) 775-7009

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Please consult a qualified financial advisor and tax advisor to discuss your financial situation and goals.

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