A debt-free retirement is an achievable goal, especially if you live in Dayton or Southwest, Ohio. Thanks to the affordable cost of living and housing in southern Ohio, you have the opportunity to knock out your debt and live comfortably.
In this article, we’ll discuss key concepts you need to know about retiring debt free.
What Exactly Is a Debt-Free Retirement?
Debt means paying today for yesterday’s wants and needs. When you take out a loan, you are betting that you will be able to pay tomorrow for the item you can’t afford today.
Entering your retirement without the burden of ongoing debt payments like credit cards, personal loans, or a mortgage can be a game changer. Less debt in retirement means more peace of mind of mind around your spending and ability to handle unexpected costs.
Living your ideal retirement lifestyle should mean enjoying your retirement savings by spending freely rather than paying yesterday’s wants.
Why Is Retiring Debt-Free Important for Financial Freedom and Security?
When you retire and begin to live on a fixed income, you will find it easier to manage your expenses without the weight of paying for things you wanted previously. This is especially true if you have bad debt or high interest debt. like credit cards and personal loans.
Key reasons to plan for a debt-free retirement
- Freedom to spend on what matters to you today
- Reduces pressure on your retirement savings, especially in volatile market conditions
- Your ability to tackle unexpected expenses, like house repairs or new cars
The example below shows the impact of having no debt in retirement compared to a retiree with a mortgage, car payment, and credit card debt.
| Ohio Retiree with Debt | Ohio Retiree with No Debt | |
| Social Security Income | $3,000 | $3,000 |
| Investment Distributions | $5,000 | $5,000 |
| Total Monthly Income | $8,000 | $8,000 |
| Regular Living Expenses | ($5,400) | ($5,400) |
| Mortgage Payment (PITI) | ($1,400) | ($600) |
| Car Loan Payment | ($400) | ($0) |
| Credit Card Payment | ($800) | ($0) |
| Total Monthly Expenses | ($8,000) | ($6,000) |
| Monthly Retirement Freedom | $0 | $2,000/mo or $24,000/yr |
The retiree with no debt has more freedom to spend monthly and they can easily weather a stock market downturn that affects their income. The debt-free retiree will have more confidence.
How to Retire Debt-Free
Assess Your Current Debt
The first step is to build a clear picture of your current obligations. From credit card debt to student loan debt, create a list of your loans.
Next to each debt, write down:
- The loan balance
- The interest rate
- The minimum monthly payment
- The amount you are currently paying monthly on the debt.
This list should include ALL of your debts including any lingering car loans, personal loans, or mortgage payments.
Building this list will help you begin to strategize because not all debt has the same impact. Some loans might be considered good debt. Other loans, like high interest debt can hinder your credit score and dramatically reduce your ability to spend.
Implement Strategies to Intentionally Pay Off Debt
Once you’ve compiled your debt list, the next step is to develop a plan to pay them off. Some common effective methods include:
- Snowball Approach: Paying off your smallest debt first
- This strategy focuses on paying off your smallest loan first, building momentum as you work toward larger debts.
- Consider paying the minimum amount on all of your debts except the loan with the smallest balance. Pay as much extra as possible on this one.
- Once the smallest loan is paid off, you would then apply everything you were paying to the next smallest loan.
| Debt | Car Loan | Student Loan | Credit Card | Credit Card |
| Balance | ($18,000) | ($21,000) | ($8,000) | ($9,500) |
| Interest Rate | 4.25% | 6.21% | 23.99% | 24.99% |
| Minimum Payment | ($275) | ($400) | ($150) | ($175) |
| Your Payment | ($300) | ($500) | ($200) | ($200) |
| Snowball Approach | ($275) | ($400) | ($350) | ($175) |
| Difference | ($25) | ($100) | $150 | ($25) |
- Avalanche Approach: Paying off your highest interest rate first
- This strategy focuses on paying off your highest interest rate first, building momentum as you work toward debts with lower interest rates.
- Consider paying the minimum amount on all of your debts except the loan with the highest interest rate. Pay as much extra as possible on this one.
- Once the highest interest rate loan is paid off, you would then apply everything you were paying to the loan with the next smallest interest rate.
| Debt | Car Loan | Student Loan | Credit Card | Credit Card |
| Balance | ($18,000) | ($21,000) | ($8,000) | ($9,500) |
| Interest Rate | 4.25% | 6.21% | 23.99% | 24.99% |
| Minimum Payment | ($275) | ($400) | ($150) | ($175) |
| Your Payment | ($300) | ($500) | ($200) | ($200) |
| Avalanche
Approach |
($275) | ($400) | ($150) | ($375) |
| Difference | ($25) | ($100) | ($50) | $175 |
- Debt Consolidation Loan: Consider exploring a debt consolidation loan to combine multiple high-interest debts into one.
- There are consequences of consolidating government-sponsored debt such as federal student loans into private consolidation loans. Consolidation can potentially eliminate government benefits that reduce or waive student loans in the future.
- Consolidation isn’t always the answer. Sometimes it’s tempting to use balance transfers or loan consolidations as a way of delaying loan payoff.
- Downsizing: Consider selling your expensive or appreciated home and use the proceeds to pay off your home equity loan or other debts to prepare for a more affordable and debt free retirement.
- This concept also applies to vehicles or property you’ve outgrown.
Maximize Retirement Savings at the Same Time
While paying off debt is important, you shouldn’t neglect your retirement savings. Make sure to continue contributing to retirement accounts like your 401(k) or IRA to ensure that you have enough saved to sustain you once you’ve paid off all debts.
Some experts recommend paying off all of your debt before you begin investing. The power of compound interest kicks in after you’ve invested for a long period of time. The longer you delay saving, the harder it is for your investments to build momentum later in life.
At the bare minimum, you might consider contributing enough to your 401k to capture your full employer match. This is free money that you can’t get back if you skip retirement contributions.
You might even consider delaying your retirement by a few years. This can be a powerful way to knock out your debt and allow more time to maximize your retirement savings.
Avoid New Debt During Retirement
Because having debt can be a vicious cycle, it’s important to limit taking on any new debt in retirement.
Consider keeping credit card usage to a minimum and avoid large purchases that could lead to new monthly payments. If you don’t have the cash in your bank to pay the full balance of your credit card, then try to avoid spending on your card until you do. In the meantime, only spend using your debt cards or with cash.
When you pay off your loans consider setting up an automatic monthly savings of the same amount you were paying on your debts. This will help you create a healthy emergency fund to cover future unexpected costs. This can also help you create a reserve to pay cash for your next car purchase or home repair.
Additionally, you might also consider exploring part-time work, consulting, or monetizing a hobby in retirement if you feel like you need more income. This can help you avoid building unnecessary debt and create more freedom with your ability to spend.
Utilize Professional Help
Seeking help from a debt management professional or financial planner can help you optimize your debt repayment plan. These professionals can help you navigate various strategies like exploring unsecured loans or advanced student loan repayment plans.
Certain forms of good debt such as student loan and mortgage interest may be tax deductible, which can offer savings during tax season. Consulting with an expert will help you feel confident that you’re making the best choices to create a debt-free retirement.
Get One Step Closer to Retirement with Stage Ready Financial Planning
At Stage Ready Financial Planning, we specialize in helping Dayton & Southwest, Ohio residents who are 50 and older prepare for a debt free and financially secure retirement.
We will assess your current situation and guide you through steps to eliminate your bad debt, boost your retirement savings, and maximize the tax advantages available to you.
We partner with you to ensure you’re ready to retire successfully, invest with confidence, and reduce your tax liabilities. Schedule your intro call today!
FAQs
Can you retire if you are debt-free?
Potentially. Retiring debt free offers greater financial flexibility and security. Without monthly debt payments or interest payments draining your resources, you can enjoy more of your retirement savings and weather unexpected expenses.
It’s important to note that being debt free is one part of being prepared for retirement. You must also have enough retirement savings to live comfortably, the ability to pay for retiree healthcare, and be mentally prepared for how you will spend your time to create fulfillment.
What age should you be debt-free?
The sooner you can be debt free, the better. If possible,you should aim to be debt-free before retirement. The age you choose for when you retire will likely be determined by how soon you can pay off debt, create enough retirement savings, and have the healthcare coverage you need.
If you can’t pay off all of your debt before you retire, consider at least paying off high-interest loans, such as credit card debt or car loans.