Why Retiring With Debt Isn't the End of the World

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In a perfect world, you'll retire with no debt at all. But that might not be realistic. Most U.S. adults carry at least some debt with them into retirement. A majority even die owing money. (See also: Who Pays When Loved Ones Leave Debt Behind?)

The good news is while retiring with debt might not be uncommon today, it's also not a financial disaster. It mostly depends on the type of debt you bring with you into retirement.

The numbers

In a 2016 study, credit bureau Experian found that 73 percent of consumers died with debt. And these consumers didn't die with just a little debt: Experian reported that these individuals had an average debt of $61,554 when they died. Without counting mortgage debt, that figure fell to a still high $12,875.

As you near retirement, you might worry that you'll be saddled with too much debt after you leave the workforce. It's important to realize, though, that there are different types of debt, some better than others. Your monthly income in retirement matters, too: If you can easily cover your debts, and still cover your other expenses, your debt won't be as much of a financial burden.

Start with a budget

You won't know how bad your retirement debt might be until you first draft a household budget for your after-work years. This budget should include all of the money you expect to flow into your hands after you retire, including Social Security payments, pensions, and the income you'll be drawing each month from your retirement savings vehicles.

You should then list your monthly expenses, both fixed and estimated. This should include your housing costs, food, utilities, entertainment expenses, medical costs, and, of course, the money you'll have to spend each month to pay off your debts.

Once you have your expenses and your income listed, compare the figures. Will you have enough money to cover everything each month? Or will you be short?

If you have enough, that's good, though you'll still want to reduce your debt as much as you can before you leave the workforce. The less debt you enter your retirement years with, the better.

If you'll be short, it's time to make changes. Figure out ways to reduce your expenses, such as trading in a costly car or maybe selling your expensive home and making the move to a less costly condo or smaller residence. You might also have to scale back your plans for retirement; instead of traveling the world, you might have to be content with catching up on your golf game in your own community.

Good vs. bad debt

Once you've determined your budget, it's time to look at your debt.

You might think that all debt is the same. That's not true. Some debt is considered "good debt," while other debt is considered bad.

Good debt is debt you owe for something that can grow in value and provide you with financial benefits in the future. A mortgage is the most common form of good debt. If you're fortunate, the house that your mortgage is financing will grow in value while you own it. When you sell it, you might make a profit. Mortgage debt has the added benefit of coming with low interest rates and some tax benefits.

The most common form of bad debt is credit card debt. This debt grows over time and doesn't provide you with any possible financial benefits. It also often comes with sky-high interest rates. (See also: 5 Ways to Pay Off High Interest Credit Card Debt)

If you're nearing retirement and you have both mortgage and credit card debt, it makes financial sense to spend any extra dollars you have to reduce your credit card debt. Your mortgage debt, as long as you can afford the monthly payment in retirement, should not be a priority.

Attack your bad debt

If you want to eliminate your credit card debt — or at least a chunk of it — before retirement, you'll have to send extra money each month to your credit card providers.

Generally, financial experts recommend two main approaches here. You can follow the debt snowball strategy, in which you pay extra each month on the credit card that has the lowest balance. Once you pay off that card, you pay more each month on the card with the next lowest amount of debt, working your way through all your cards.

You can also go with the debt avalanche approach. This method works the same way, only you pay extra on your card with the highest interest rate first instead of the lowest balance. This method will save you the most money because you'll be eliminating your highest-interest debt first. (See also: Snowballs or Avalanches: Which Debt Reduction Strategy Is Best for You?)

Again, to free up enough money to pay down your debts — no matter which debts you choose to tackle — you might have to make lifestyle changes, such as cutting down on your meals out or your entertainment and travel expenses.

You'll have to determine how much of a financial burden your debt will be after you retire. The debt you bring into retirement might not scuttle your after-work plans. But if it might, that's why a bit of sacrifice now can really pay off later. (See also: 6 Ways You Can Cut Costs Right Before You Retire)

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