Retirement Planning: How to Balance Debt and Savings

It is common for Americans to struggle with debt while saving for retirement. According to various surveys and reports, many Americans have an obligation that they are trying to manage while also saving for retirement.

For example, a study by the National Institute on Retirement Security found that 66% of working households aged 55-64 had saved less than one year’s worth of their annual income for retirement. At the same time, many Americans are carrying significant amounts of debt. The Federal Reserve reported that in the first quarter of 2021, total household debt in the U.S. was $14.64 trillion, with the average debt per capita being $53,850.

How many retirees struggle to manage debt?

The statistics on the number of retirees struggling to manage debt can vary depending on the data source and the definition of “struggling.” However, here are some statistics that provide some insight:

  • According to a study by the Insured Retirement Institute, 68% of Baby Boomers (those born between 1946 and 1964) had debt in 2019, with an average debt of $107,000. Among those with debt, 44% said it was causing them financial anxiety, and 36% said it was making it difficult to make ends meet.
  •  The National Council on Aging found that 61% of adults over 65 had some form of debt in 2020, up from 51% in 2010. The most common types of debt were mortgages, credit cards, and medical debt.
  • A report by the Employee Benefit Research Institute found that among households headed by someone aged 75 or older, the percentage with debt increased from 31.2% in 2001 to 49.8% in 2019. The median debt load for these households also increased from $13,542 in 2001 to $31,000 in 2019.

These statistics suggest that many retirees are struggling with debt, which can negatively impact their financial security and overall well-being.

What are the best strategies to manage debt while saving for retirement?

Here are some tips that can help manage debt while saving for retirement:

Create a budget: 

Creating a budget is likely one of the most critical steps to managing debt and saving for retirement. This will help you understand your income and expenses and identify areas where you can minimize spending to free up money for debt repayment and retirement savings.

Prioritize high-interest debt: 

If you have multiple debts, prioritize paying off those with the highest interest rates first. This will help you save on interest charges and pay off your debt more quickly.

Consider debt consolidation: 

If you have multiple high-interest debts, consider changing them into a single, lower-interest loan. This can make it easier to manage your debt and may save you money on interest charges.

Build an emergency fund:

 Unexpected expenses can derail your debt repayment and retirement savings goals. To help protect against this, build an emergency fund with three to six months’ living expenses. This will help you avoid going into debt to cover unexpected costs.

Maximize retirement contributions: 

Maximizing your contributions to retirement accounts, like the 401(k)s and IRAs, is essential to build a nest egg for retirement. If you’re struggling to save while paying off debt, consider starting with a small contribution and gradually increasing it over time.

Seek professional advice: 

If you’re struggling to manage debt and save for retirement, consider seeking advice from a financial advisor. They can help you develop a personalized plan to manage your debt, maximize your retirement savings, and achieve your financial goals.

The Bottom Line

Having debt while saving for retirement can be challenging, as it can limit the number of money people can save for retirement and increase financial stress. However, it is essential to note that not all debt is created equal. Some types of debt (such as a mortgage with a low-interest rate) may be more manageable than others (such as high-interest credit card debt). Ultimately, it is vital for individuals to have a clear understanding of their debt and retirement savings goals and to create a plan to manage both effectively.