Retirement Planning / Wise Investing

Should You Get Out of Debt Before Entering Retirement?

Many people headed towards retirement are faced with endless “Should I?” questions: Should I move to a warmer climate or stay closer to family? Should I take Social Security now or delay it a few years? Should I pick up a part-time job or take up a few hobbies to stay active?

One of the most common and important questions we hear at Girard — and see debated throughout the industry — is, “Should I pay off debt before entering retirement?” While there are many schools of thought on this, we’re here to share our insight and provide best-practice tips to consider.

At the very least, a near-retiree needs to be aware of their debt situation. Generally, it is best to try and “retire” any debt before you retire from the workforce as this will help provide the flexibility needed when on a fixed income. That being said, from a financial planning perspective, debt is often categorized as either “good debt” and “bad debt.” Good debt could be a mortgage or home equity loan that provides a low or manageable interest rate and potential tax deductions on that interest. Bad debt, on the other hand, would be something like money owed on a high-interest credit card.

It is important to incorporate all outstanding debt (good or bad) into your overall financial plan. When creating a plan for a client, much of our focus is on trying to ensure they will be able to meet financial goals in retirement. This comes down to whether their income and assets will be enough to offset expenses and needs for the rest of their life. Having debt as a major part of those anticipated expenses impacts future financial success.

A good rule of thumb is to analyze debt via the “28/36” rule. This is often used by lenders who are looking to qualify people for additional debt, but it also helps us put a client’s debt situation into perspective. The concept behind the rule is that you should not be spending more than 28% of gross income on housing debt, nor more than 36% of gross income on overall debt (including housing, credit cards, car loans, etc.). If debt spending exceeds these thresholds, it may be wise to take a closer look at the overall debt situation.

For those interested in paying down or eliminating debt before retirement, here are a few helpful steps to take:

Prioritize debt. Review all of your debt and the respective interest rates involved. It’s quite important to prioritize paying off the higher-interest-rate debts, as they can make it hard to get out of the “ever-accumulating-interest stage.”

Budget and rebudget. See where you can cut spending in order to allocate additional payments toward debt. This could entail budgeting in a certain way until you pay off debt number one and then rebudgeting to target debt number two, etc. Or, depending on your situation, perhaps it would be realistic to simultaneously pay down two or three debts. Either way, it’s advisable to become laser-focused on your budget.

Don’t let the cycle continue. Be prepared to abstain from debt-accumulators while working to pay off previous debts. For example, if you continue to use your credit card for every purchase while simultaneously trying to pay it off within a certain time frame, you’ll likely never achieve the goal of eliminating that debt. Although discipline is required to reduce your reliance on debt-accumulators, it can be done.

Retirement is an exciting time —deservedly so. Pre-retirees should work closely with an advisor, especially in the three to five years before anticipated retirement, to review items like debt and put a plan in place to pay it down. In the best-case scenario, they will be able to eliminate all debt before entering their golden years. Are you ready to set yourself up for potential retirement success? The advisors at Girard are here to help. Contact us to have a conversation.


This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.


GirardSM is a marketing name used by Univest Financial Corporation to provide (1) investment and wealth management, fiduciary services and trust services through its subsidiary Univest Bank and Trust Co., (2) specific fiduciary and investment advisory services through Girard Advisory Services, LLC (3) securities products, insurance products and brokerage services through Girard Investment Services, LLC, a registered broker-dealer and member of FINRA(Opens in a new Window) and SIPC(Opens in a new Window), and a licensed insurance agency, and (4) investment management and related products and services to Pennsylvania municipal entities through Girard Pension Services, LLC.