Being in debt doesn’t mean you have to delay your retirement plans. But make sure your debt payments are at a manageable level based on your expected retirement income. Start by asking yourself these key questions:
- Are your payments at a manageable level?
- Can you refinance the loans at a lower interest rate?
- Do you hold any “bad debts” like credit card balances?
And estimate your debt levels in retirement:
1. How much retirement income do you expect to have? Use the Social Security Retirement Estimator to figure out your estimated amount of Social Security Retirement Benefits. Also, add any pensions that you or your spouse may have, and any expected retirement income that you might receive from a 401(k), traditional or Roth IRA, annuity, or other workplace retirement plan.
2. How much debt do you have to pay each month? Add up your monthly debt payments — including mortgage, car payment, credit card payments, and other financial obligations.
3. Calculate your debt-to-income ratio. Divide your monthly debt payments by your monthly gross income (before taxes) you expect to receive in retirement. What is this ratio? If your debt-to-income ratio is higher than 43%, this can be a sign that you are overextended.
Many people will have a lower income in retirement than they had while they were working. A general rule of thumb in financial planning is that retirees should plan to live on 80% of their pre-retirement income. Can you still manage your debt payments on that budget? If not, you may need to adjust your retirement plan or delay retirement until more of your debts are paid off.
Keep in mind: not all debt is “bad,” and you don’t have to be completely free of debt to be able to retire. If your debt payments are at a manageable level and you have a plan to pay them off, you don’t have to delay your retirement. But if you are currently planning to retire and you’re concerned about how much debt you still have, remember that you have options to pay off debt faster. Doing so could help you build momentum for a more comfortable retirement.
Fulton Bank, N.A. Member FDIC
