Is It OK to Retire With Debt?

Some money experts argue that retiring with certain kinds of debt is not such a bad thing. But their advice doesn't necessarily apply to the average retiree.

Is It OK to Retire With Debt? Photo by Monkey Business Images /

Is it a good idea to retire with debt? Ask that question a generation ago, and you’d hear a loud and unequivocal “no” from most anyone. Today, however, some argue that debt may be OK in retirement, depending on the type of debt and how it is managed.

Debt among elders

Older Americans are carrying bigger loads of debt into their post-work years than in the past. According to a 2013 study out of the University of Michigan Retirement Research Center:

  • The share of Americans ages 56 to 61 with debt grew from 64 percent in 1992 to 71 percent in 2008 (the latest year studied).
  • The median amount of debt in this age group grew from $6,200 in 1992 to $28,300 in 2008 (amounts in 2012 dollars).

One of the biggest reasons debt is increasing among elders is that fewer have paid off their mortgages. The University of Michigan researchers said baby boomers’ financial insecurity grew in large part because many boomers used mortgages with small down payments to buy costly homes.

Additionally, the share of homeowners 65 and older with a mortgage is growing, from 22 percent in 2001 to 30 percent 2011, according to the Consumer Financial Protection Bureau, or CFPB.

College debt is another big weight on retirement today. Student loan balances grew faster among borrowers over age 60 than any other age group between 2004 and 2014 — increasing 850 percent during that decade, according to the Federal Reserve Bank of New York.

Good debt, bad debt

Plenty of experts — probably most — agree that debt in retirement is not a good thing if you can help it. Some, though, make a distinction between good debt and bad debt.

Good debt is borrowing for assets that appreciate — as with a mortgage that lets you enjoy the rising value of real estate in an “up” market. Bad debt is borrowing for an asset that loses value — such as a car or boat.

As Money Talks News founder Stacy Johnson has put it:

“When you borrow, you’re paying someone to temporarily use their money. If what you buy with that money goes up in value by more than what you pay to use it, you get richer. If it doesn’t, you get poorer.”

One retirement expert who sees a role for debt in some cases is Laurence Kotlikoff, economics professor at Boston University. He has told MarketWatch that a mortgage with a fixed low interest rate may actually be helpful if your pension or other retirement fund grows slower than inflation.

Kotlikoff, an expert in Social Security and retirement planning, explains:

“When inflation takes off, you get to pay back your mortgage in watered down dollars and this offsets the fact that your pension or other stream of fixed nominal income loses real purchasing power. So retiring with debt can be a hedge against inflation, provided it’s long-term fixed term borrowing.”

Another advocate for the use of certain debt in retirement is Tom Anderson, author of “The Value of Debt in Retirement.” He has told Wealth Management Magazine that borrowing to cover certain expenses with today’s relatively cheap fixed rates lets retirees keep a portion of their money readily accessible. That could be safer than, for example, paying off your mortgage if you are left without a cash safety net or emergency fund.

The best mortgage is no mortgage

Anderson’s other arguments for debt, though, are more complex.

“[H]e argues that financial advisers need to adopt a more sophisticated view of client debt, taking advantage of low-cost borrowing opportunities to boost liquidity and wealth,” the magazine explains.

In other words, Anderson is talking about wealthy retirees who can use the money they borrow to make more money and who have the cash to pay off the loan at any time. He isn’t advising low-income retirees to carry a credit-card balance or use adjustable-rate loans — two practices that are risky any time and especially dangerous when you’re living on a fixed income.

Retirees who can thrive while holding debt are ones with higher incomes, more education and greater financial sophistication, the University of Michigan study said.

When you’re on a fixed income, even a cheap mortgage takes money you could use elsewhere.

“[A]s more seniors carry significant mortgages into retirement, they put themselves at risk of losing their nest eggs and their homes,” said Richard Cordray, director of the CFPB, urging older Americans to pay off their mortgages before retiring.

For most retirees, no mortgage is the best kind of mortgage of all. Keep expenses low in retirement and a low income won’t matter nearly as much.

Get ready for a safe retirement

If you’re facing a retirement with debts, consider these measures:

  • Delay retirement. Waiting to retire offers a couple of powerful pluses: Holding off from touching your nest egg lets it grow larger for when you need it more. Also, leaving Social Security untapped longer means that your monthly payment will be bigger when you do take it.
  • Get a job. Many people retire but find their income isn’t enough and go back to work for a while longer. Take on a part-time job, for example, so you can fatten your emergency fund. (Bank that money, don’t spend it.)
  • Say “no” to student loans. Unless you are wealthy, don’t co-sign a school loan for kids or grandkids. As much as you want to help, that’s money you’ll need for living in retirement. See “More Than 1 in 3 Co-Signers Lose Money.” So let the kids pay their own way. They have many more working years ahead to pay it off.

What’s your strategy for eliminating “bad” debt or all debt? Share your thoughts in comments below or on our Facebook page.


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