Only 37% of Retirees Are Debt-Free

Retirement is ideally a time of less stress, when you no longer have the demands of a full-time job and can live life more on your own terms. Yet for many Americans, financial challenges cloud retirement.

In particular, only 37% of retirees do not have any debt, according to an Employee Benefit Research Institute (EBRI) study. While that is not always a bad thing—some debt, like a low-interest mortgage, can be financially advantageous—that still leaves many people struggling in retirement.

Fortunately, you can take steps to shore up your retirement finances.

The State of Retirement Debt

In retirement, your expenses typically decrease. For instance, you may have paid off your mortgage.

That contributes to why 77% of families headed by someone ages 55-64 have debt versus 65% of those headed by someone ages 65–74 or 53% of those with household heads ages 75+, according to another EBRI survey.

Still, most retirees do owe money, including 10% who say their debt levels are unmanageable or crushing.

Among retirees with debt, the most common source is credit cards.

Retirement debt has also become more common. Nearly 67% of households headed by someone ages 55+ have debt as of 2022, versus about 54% of those same household types carrying debt in 1998, according to EBRI. However, balances have been falling, with the median debt levels dropping from $75,664 in 2010 to $61,000 in 2022.

Why Retiring Without Debt Is Rare

The many possible explanations behind the growing trend of retiring with debt vary by retiree.

One is that rising housing prices have made it harder to pay off a mortgage by the time retirement starts. In 1992, only 24% of American households headed by someone 55+ had housing debt versus 37% in 2022, according to EBRI. Granted, this peaked in 2010 at 42%, perhaps reflecting how economic downturns like the Great Recession also contribute to retirement debt.

Economic slumps and other challenges like inflation can also throw off normal income versus spending behavior, pushing some retirees into debt that they have trouble getting out of.

If something like that happens to you, like a job loss causes you to rack up credit card debt while not having an income to put toward your 401(k), you might be tempted to delay retirement until you get on a better financial footing. However, EBRI found that 58% of respondents retired earlier than expected.

“For those that can afford to, they hopefully have run the numbers and are comfortable with maintaining their debt and retiring,” said Trevor Ausen, founder of Authentic Life Financial Planning. “For those that retire with debt they don’t want, they likely were forced to retire, whether it’s due to job loss, medical issues, or family reasons. Many people do not get to decide when they retire.”

Managing Debt in Retirement

For those looking to avoid debt in retirement, there are several strategies to consider.

Compare Interest Rates on Your Debts and Assets

Consider if you’re carrying any debt because you’re afraid of giving up liquidity. But that might not always be the smartest financial decision.

“I often advise people to compare the interest rate on their debt to what they receive from the fixed income side of their portfolios, like bonds, CDs, money markets, etc. In many cases, they are paying a higher rate than they are earning,” said Aaron Brask, principal at Aaron Brask Capital. “Unless there is a need or desire to keep more money liquid, I generally recommend that they liquidate some of their fixed investment holdings to pay off debt.”

Consider Your Cash Flow

For those who don’t have the funds to pay off debt, digging into money coming in versus going out is key.

“Cash flow truly is the engine that drives your finances, and without understanding your cash flow, it can make it almost impossible to make the right decision for you,” Ausen said.

If you see that your inflows are being eaten up by large outflows like car payments, for example, then moves like selling a vehicle or finding an additional source of income may be necessary to improve your cash flow. The more money you have coming in versus out, the faster you can pay off debt.

Distinguish Between Good Debt and Bad Debt

Still, retiring with debt isn’t always negative.

“There’s an important distinction between bad debt and good or strategic debt in retirement,” said Kristin Bartlow, financial advisor, managing director at Journey Strategic Wealth.

Holding onto some debt can be strategic, such as if it gives you more liquidity and flexibility, she added. For example, you might want enough cash on hand to pay the upfront taxes when converting a traditional retirement account into a Roth account, which might ultimately save on taxes later on, depending on your situation. Carrying debt could also mean letting your other assets compound faster than the interest you’re paying.

“The concern comes when retirees carry bad debt, like credit cards or high-interest loans, without a clear strategy on how to manage it,” she added.

The Bottom Line

Retiring debt-free isn’t right for everyone. Some people prefer the mental freedom of being debt-free, but in some cases, carrying debt is the best option for your overall finances.

A more precise retirement planning goal would be to avoid bad debt in retirement, while using good debt to reach your goals like gaining flexibility, lowering taxes, or optimizing asset growth, said Bartlow.