Don’t Let Debt Delay Your Retirement Plans


Today's retirees are carrying more debt through their retirement years than any previous generation.1 And while debt hasn't always been a way of life, it's a reality that many people face at some point in life and need help handling correctly.

Staying out of debt is a key component in a secure financial future. Paying off credit card balances each month and steering clear of any new debt, including automobile loans, is especially important in the years leading up to retirement.

Financial planners are encouraging soon-to-be retirees to rethink their approach to debt. Minimizing debt before retirement will free up cash flow that can be used to fund a retirement account. Staying out of debt during retirement will also help retirement savings go further. If you find yourself sinking into debt and want to pay it off, here are five steps most financial planners agree should help:

  1. Analyze the source of your debt. Did you get into debt because of a splurge? Because of an emergency, like job loss or medical bills? Or do you simply spend more than you bring in? Determining how you got into debt can help you fix the problem and keep it from happening in the future.

  2. Make a list of what you owe. Calculate your total non-mortgage/non-education debt from all the following sources:

    • Bank, department stores, retailer and gas credit cards
    • Overdue or back payment on rent, mortgage, utilities, cell phone plans and car payments
    • Medical bills
    • Loans from friends and families

    For each, calculate the total amount you owe, interest rate and minimum payment. If the total amount you owe is more than 20% of your monthly after-tax income, you should prioritize eliminating this debt, acting aggressively and quickly.

  3. Stop taking on more debt. Cutting up the plastic can help stave off more debt from coming in. If you feel you need it, save one credit card for emergencies. Otherwise, the rest are put away, or even cut up.

  4. Prioritize. Most experts recommend one of two popular strategies. Both start with a commitment to not accrue any new debt while, at the same time, paying down existing balances.

    • Strategy #1: Pay off the debt with the lowest balance first and work your way up until all the debt is eliminated.
    • Strategy #2: Pay down debts with the highest interest rate first, working your way down to the debt with the lowest rate, until all are paid off.

    Keep in mind that for either strategy, funds in your retirement accounts should rarely be used to pay down debt. Using your retirement savings to pay debt lowers your account balance, may increase your tax liability and also deprives you of potential earnings on the money withdrawn to pay the debt.

    If you find yourself in over your head with debt, consider trying to negotiate a lower interest rate with each of your creditors or even a lower interest rate debt consolidation loan, if available.

  5. Create a budget. Managing your monthly budget can be difficult. One of the most important aspects of controlling your budget is to determine where your money is going. This calculator helps you do just that. By entering your income and monthly expenditures, you can see how much you have left to save and where your money is being spent. In addition, you can click the "View Report" to see your entry results in detail, which can help identify areas for improvement.

The last years before retirement are also a good time to manage lifestyle expectations. GuideStone's retirement income calculator will help you estimate your monthly income during retirement. You can also use these free resources to create a financial inventory, calculate your net worth and even make a new budget based on your projected income.