It may not be always practical to retire debt-free, but the closer you get to retirement, the heavier a burden debt can become. Image Credit: Shutterstock

Dubai: Carrying significant debt towards retirement is a burden, which is why every financial planner advises you pare down what you owe, whether you’re just hitting middle age or you’re entering your golden years. But how far is this feasible?

“It may not be always practical to retire debt-free, but the closer you get to retirement, the heavier a burden debt can become. Every dirham you pay to a lender is one you could spend on living expenses, healthcare, vacations or a legacy for your children,” said Dubai-based money coach Mirin Raul.

“While for most it’s not possible to retire completely debt-free, downsizing what you owe before you stop working is a good idea.” Raul and Parthiv Patnaik, a Dubai-based banking veteran with three decades of experience, shares a plan to pay down debt if you are in your 40s, 50s or 60s.

Paying down high-cost debt first is key in your 40s

Are you in your 40s? Patnaik advises that for those between 40 and 50 years old, retirement savings are most commonly affected by debt with a high interest rate, with credit card debt taking the biggest bite among others.

“If you are in that age bracket and carry a lot of such high-cost credit card debt, while trying to pay more than the monthly minimum, it will pay off to allocate extra money in your budget to paying off your cards, whenever possible,” added Patnaik.

“If you carry balances on multiple cards, pay down the one with the highest interest rate first, or consider consolidating your balances on the card with the lowest rate. Once you cut down outstanding credit card balances, do the same for other debt you may be carrying like auto loans.”

Even if retiring is at least a couple of decades away, the logic is that you are currently likely to be close to the most you would earn in your lifetime, which drives your earning power to your career’s peak, which is why you have more income to put toward eliminating your liabilities, explained Raul.

“It is also key to simultaneously pay close attention to your other goals, particularly saving for retirement. Experts suggest that you use available funds to maximise contributions to retirement accounts rather than pay off lower interest debt such as mortgage interest.”

50s: Time to rethink your high amount loans and refinance them

While paying off your home loan may not make sense as soon as you turn 50, housing debt is the largest expense for many households, including among those who are older. However, while paying off your mortgage can free up more cash in retirement, it might not always be the best option.

“If your home loan has a low interest rate, it’s wiser to invest your money than to put it toward extra mortgage payments. But if you’ve paid off your credit cards and contribute the maximum to your retirement accounts, it could make sense to reduce your mortgage,” added Patnaik.

“If you have good credit, which is likely if you have been paying off debt promptly for the last decade, you might be able to refinance your mortgage at a lower interest rate, which would reduce your monthly payments.”

Another alternative is downsizing to a home with lower property insurance, maintenance and utilities. “A smaller home often means less upkeep and maintenance, freeing up time and resources for other retirement pursuits,” added Raul.

“Aside from lower real estate-related insurance, and maintenance costs, downsizing your home in retirement can also reduce your housing expenses including mortgage payments, property taxes in several countries.”

In your 60s? Fix on a retirement age, how much further you can keep earning

While keeping debt to a minimum, a retirement in which your income goes exclusively to your needs and goals (rather than to your liabilities) is considered the best possible scenario, advised Patnaik. However, he also flagged that in reality it’s not always possible.

“Look for ways to work aggressively work towards paying down your debt and possibly extend your earning years in your 60s. This implies that if you can’t find room to boost your debt payments, look for ways to generate more income for at least a few more years,” Patnaik explained.

“When considering whether or not to postpone retirement by a few years, know that delaying the age can deliver bigger lifetime benefits. Being smart about when you withdraw your pension or gratuity from your workplace could mean more money to help manage any debt you have left.”

One would want to avoid keeping more debt just as you approach retirement, Raul added. “While watching your current spending habits and areas you can possibly cut, remember that by reducing living expenses now, you’ll need less to support your lifestyle in retirement,” she said.

Key takeaways

Financial planners often recommend that the strategy for managing debt is an evolving process that changes relative to your life stage and circumstances.

For many people, carrying debt in retirement is inevitable. While this is often viewed as the reality, amassing significant debt by retirement can be avoided.

Moreover, if carrying debt to retirement is the most likely scenario – the reasoning or logic one should keep in mind now is that the earlier you can formulate a strategy to confront it, the easier it is to tackle, and the better chance you give yourself of living the retirement you’ve envisioned.