Retiring With Debt: Should You Pay It Off Before You Stop Working?

Reviewed by the Prime Rate Editorial Team

Retiring with debt is no longer unusual, it is the norm. According to research from the Center for Retirement Research at Boston College, the share of older Americans carrying debt grew from roughly 40% in 1989 to more than 60% by 2019, and the trend has only accelerated since. Pandemic-era inflation, near-record credit card rates, and a generation of Baby Boomers quietly depleting savings to support adult children have made debt at retirement a structural reality, not a personal failing.

This article is for workers in their late 50s and early 60s who are approaching retirement with some form of debt on the books and need a clear framework for what to eliminate, what to hold, and what never to do. The recommendation only works if you treat different debts differently. The most common mistake is applying a single rule to a situation that requires a debt hierarchy.

How Common Is It to Retire With Debt? The Numbers May Surprise You

Carrying debt into retirement is overwhelmingly common, and the scale of it has grown sharply in the past decade. The LendingTree analysis of 2024 credit report data found that 97.1% of Americans ages 66 to 71 hold some form of nonmortgage debt. A separate Clever Real Estate survey from 2025 found that 64% of retirees carry debt beyond a mortgage, including one in three with more than $10,000 in non-mortgage obligations.

Mortgages dominate the picture for older borrowers. According to a May 2024 report from the Federal Reserve Bank of New York, roughly three-quarters of total debt held by Americans 70 and older is mortgage debt. That proportion matters because mortgage debt behaves very differently from credit card debt in retirement, both financially and legally.

Why the Trend Is Getting Worse

Several forces converged after 2020 to push more retirees into debt. Inflation eroded purchasing power on fixed incomes. The Federal Reserve’s rate hike cycle sent variable-rate debt, credit cards, HELOCs, adjustable mortgages, to multi-decade highs. And a demographic pattern that rarely gets named directly: 56% of Boomer parents made financial sacrifices to help adult children, according to a 2024 Bankrate survey, a dynamic that quietly drains retirement savings without any apparent overspending on the retiree’s own behalf.

The result is that retiring with some form of debt is no longer an edge case. It is the baseline. The question is which debts to treat as emergencies and which to treat as line items.

The Debt Hierarchy: What You Must Eliminate vs. What Can Wait

Not all debt is equally dangerous in retirement. The interest rate and the legal leverage a creditor holds are both relevant. Here is how to rank them.

Non-Negotiable Payoffs Before You Retire

Credit card balances are the clearest priority. With average APRs at 22.76% as of mid-2024, a $5,000 balance costs roughly $1,100 per year in interest alone. For a retiree receiving the average Social Security benefit of $1,862 per month, that is nearly 5% of annual Social Security income going to service a single credit card. If you want a framework for tackling those balances before retirement, our guide on paying off debt using the snowball vs. avalanche method lays out both approaches with the math behind each.

Federal student loans belong in the same non-negotiable category, but for a different reason: default gives the federal government authority to offset up to 15% of your monthly Social Security benefit through the Treasury Offset Program. This is categorically different from credit card debt. A credit card company cannot touch your Social Security check. The federal government, after loan default, can and does. The Trump administration resumed these collections in 2025 after a pandemic-era pause, making defaulted federal student loans arguably the single most dangerous debt a near-retiree can carry.

Middle-Ground Debts: Rate and Term Determine the Call

Auto loans and personal loans occupy a gray zone. A car loan at 7–8% with 18 months remaining is worth targeting aggressively; an extra $300 monthly payment eliminates it before retirement without disrupting your portfolio. A personal loan at 4% with a modest fixed payment is less urgent. Servicing it from a small cash reserve or part-time income in early retirement is often a better choice than liquidating investments to pay it off.

Low-Urgency Debt: Your 3–4% Mortgage

A fixed-rate mortgage locked in at 3–4% during 2020–2021 is worth keeping in most scenarios. Vanguard’s retirement planning guidance confirms this view: high-interest consumer debt should be prioritized, but low-rate mortgage debt does not need to be eliminated before a successful retirement. The math supports them: a diversified conservative portfolio targeting 5–6% annually beats a 3.5% fixed mortgage on an expected-return basis, especially when you factor in any remaining mortgage interest deductibility.

The Retirement Account Trap: Why Cashing Out Usually Backfires

Using a traditional IRA or 401(k) to pay off debt before or during retirement is one of the most expensive moves a pre-retiree can make, and it is far more common than it should be. The math is unforgiving.

A retiree in the 22% federal bracket who withdraws $40,000 from a traditional IRA immediately loses roughly $8,800 to federal taxes. Add a typical state income tax of 5% and that figure climbs to $10,800. If the withdrawal pushes modified adjusted gross income over the IRMAA threshold, currently $103,000 for individuals in 2025, Medicare Part B and Part D premiums spike for the following year, adding hundreds of dollars more in hidden costs.

Withdrawals from tax-deferred accounts such as traditional IRAs and 401(k)s do more than generate a tax bill: they forfeit future growth on the withdrawn amount, and larger withdrawals can also increase the taxable share of Social Security benefits and trigger IRMAA surcharges on Medicare premiums, according to InCharge Debt Solutions. Those secondary costs are rarely part of the calculation when someone decides to liquidate an account to clear a debt.

Before age 59½, the 10% early withdrawal penalty stacks on top, making the effective cost of a $50,000 IRA withdrawal to pay off a mortgage potentially $12,000–$17,000 in combined taxes and penalties. At that price, carrying the mortgage is often the less costly path.

Better Alternatives to Liquidating Retirement Accounts

Several options deserve evaluation before anyone touches a tax-deferred account. Taxable brokerage accounts with low-basis positions may face capital gains tax, but at rates well below ordinary income, often 15% versus 22% or more. HSA reimbursements for documented past qualified medical expenses can free up cash tax-free. Cash-value life insurance loans are another avenue worth exploring with an advisor. For credit card debt specifically, a balance transfer to a 0% introductory APR card buys 12–21 months of interest-free repayment without any tax consequence at all. For a step-by-step approach to knocking out credit card balances, see our guide on paying off $10,000 in credit card debt.

Debt in Retirement Amplifies Sequence-of-Returns Risk

Here is the angle most debt-payoff articles never address: mandatory debt payments in retirement do not just cost interest, they force larger portfolio withdrawals during market downturns, permanently impairing recovery.

Sequence-of-returns risk is the phenomenon by which poor investment returns early in retirement, combined with ongoing withdrawals, can destroy a portfolio’s long-term viability even when lifetime average returns are acceptable. Carrying a $500/month debt obligation amplifies this: in a down market year, you are withdrawing more shares at depressed prices to cover both living expenses and that debt payment. Those shares are gone permanently and cannot participate in the recovery. A retiree without that payment sells fewer shares at the bottom and retains more of the rebound.

This is not a hypothetical concern. A retiree who entered 2022 with significant credit card debt and a portfolio allocated 60/40 was, in effect, making larger forced withdrawals than their neighbor with the same savings but no consumer debt, compounding the damage of a year when both stocks and bonds fell simultaneously. Understanding how your broader asset allocation affects this equation is worth reviewing alongside your Roth IRA versus Traditional IRA strategy, since Roth assets allow tax-free withdrawals that can be timed more precisely.

Should You Delay Retirement to Get Debt-Free First?

Delaying retirement to eliminate high-rate debt makes clear mathematical sense. Staying longer purely to pay off a low-rate mortgage usually does not.

For someone carrying $25,000 in credit card debt at 23% APR, every additional month of earned income used to attack that balance is more efficient than the equivalent portfolio withdrawal would be. The portfolio generates roughly 5–6% annually over a long horizon. The credit card costs 23%. That gap is not close. Working an extra six to twelve months to eliminate that balance protects the portfolio from forced withdrawals and closes the gap on a genuinely destructive interest rate.

The case reverses when the only debt is a fixed mortgage at 3.5%. Staying employed for an extra year to accelerate mortgage payoff means forgoing a full year of retirement, one more year of maximum 401(k) catch-up contributions, and potentially delaying Social Security past an optimal claiming age, all to eliminate debt that costs less than your portfolio likely earns. The opportunity cost is real and often exceeds the interest saved.

The Underexplored Middle Path

Phased or partial retirement, reducing hours to part-time while drawing Social Security or modest portfolio income, lets earned income cover debt service while investment accounts compound untouched. For someone with $15,000 in auto and personal loan debt and a stable part-time income opportunity, this approach often beats both full retirement with debt and full-time work for debt payoff. It is less clean than a binary choice, which is probably why most retirement planning conversations skip it.

Already Retired With Debt? Here Is the Practical Path Forward

If you are already retired and carrying debt, the priority shifts to income-side solutions that do not require touching your portfolio. Part-time work, even 10–15 hours per week, can generate $800–$1,200 monthly, enough to service most non-mortgage consumer debt without a single additional investment withdrawal.

Know your legal protections before you panic. Social Security cannot be garnished by private creditors. Credit cards, medical debt, and personal loans have no legal mechanism to touch your benefits. Only federal student loans in default (via Treasury Offset), unpaid federal taxes, and court-ordered child support or alimony can trigger benefit garnishment. This distinction matters enormously: a retiree carrying $12,000 in credit card debt is not at risk of losing Social Security income to that creditor. A retiree in default on federal student loans is.

For retirees with debt levels that genuinely exceed what fixed income can service, nonprofit credit counseling agencies offer debt management plans that often reduce interest rates to 6–9% without the credit damage of settlement. The Consumer Financial Protection Bureau provides resources specifically for older Americans dealing with mortgage and consumer debt on fixed incomes. These are practical tools, not last resorts.

Where This Recommendation Falls Short

The honest concession is this: the “pay off high-rate debt before retiring” framework assumes you have enough time and income to do so without gutting your portfolio. A significant share of Americans approaching retirement do not. For them, the recommendation creates a false binary.

The drawback is structural. A 63-year-old with $18,000 in credit card debt, a $280,000 retirement account, and a job that has already offered a buyout package does not have an obvious path to eliminating that debt before retirement without either drawing down the account or staying employed past an employer-imposed timeline. For this reader, the “pay off first” rule demands something the situation may not allow.

The catch with most debt-payoff frameworks is that they assume retirement is a voluntary date. For many pre-retirees, it is not. Health limitations, layoffs, caregiving responsibilities, and employer restructuring all impose retirement timelines that income-based debt payoff plans cannot accommodate. In these cases, retiring with debt is not a planning failure, it is the only available option.

The tradeoff also runs in the opposite direction from what most articles assume. Retirees who fixate on debt payoff sometimes underfund retirement accounts in their final working years, missing out on employer 401(k) matching contributions that represent an immediate 50–100% return on capital. No debt payoff strategy beats a 100% employer match. If eliminating debt means stopping contributions and losing the match, the debt is winning by default.

There is also an emotional component worth naming plainly: 65% of Americans aged 65 and older with debt consider it a problem, including 29% who call it a major problem. The psychological weight of debt on a fixed income is real, and overpaying low-rate debt purely for peace of mind is not irrational. But it can create a different and harder-to-reverse financial stress if it depletes the portfolio to the point where unexpected expenses, a medical bill, a car repair, require high-rate borrowing to cover. The tradeoff is genuine and does not resolve cleanly for everyone.

Where this recommendation falls short most clearly: anyone with health issues, a shortened employment horizon, or significant low-rate fixed debt may find that managing debt in retirement is the better path than aggressive pre-retirement payoff at the cost of portfolio growth or employer match capture.

Frequently Asked Questions

Is it okay to retire with debt?

Yes, depending on the type of debt. Carrying a low-rate fixed mortgage into retirement is generally acceptable and may be the smarter financial choice compared to liquidating retirement assets to pay it off. High-interest consumer debt like credit cards is a different matter, at 20–23% APR, it directly drains fixed income and should be eliminated before retirement if at all possible.

Should I cash out my 401(k) to pay off debt before retiring?

Almost never. A traditional 401(k) or IRA withdrawal adds the full amount to your ordinary taxable income, potentially triggering a higher bracket, IRMAA Medicare surcharges, and, before age 59½, a 10% early withdrawal penalty. The combined tax cost frequently exceeds the interest you would save on the debt being paid off.

Can creditors garnish my Social Security in retirement?

Private creditors, credit cards, medical debt, personal loans, cannot garnish Social Security benefits. Only federal student loans in default, unpaid federal taxes, and court-ordered child support or alimony have that authority. Understanding this distinction changes how urgently different debts need to be addressed.

What is the best debt to pay off before retiring?

Credit card debt at 20%+ APR is the highest priority, followed by any federal student loans at risk of default. After those, evaluate auto and personal loans by rate and remaining term. A fixed-rate mortgage below 4–5% is the lowest priority and may not be worth paying off before retirement at all.

Does carrying debt into retirement hurt my credit score?

Carrying debt does not automatically hurt your credit score, what matters is your credit utilization ratio and payment history. If you continue making on-time payments and keep revolving balances below 30% of available credit, your score can remain strong in retirement. For a fuller picture of what affects your score, see our guide on what constitutes a good credit score and how to use it.

How does debt in retirement affect Social Security benefits?

Consumer debt itself does not reduce Social Security benefits. But the tax implications of large retirement account withdrawals to pay debt can indirectly affect benefits: higher income from IRA withdrawals can make more of your Social Security taxable, up to 85% of benefits are taxable above certain income thresholds, and may trigger IRMAA surcharges on Medicare premiums.

What if I cannot pay off my debt before I retire?

Focus on the debt hierarchy: eliminate high-rate consumer debt first, even if that means a modest delay or phased retirement. If full payoff is genuinely out of reach, explore balance transfer cards, nonprofit credit counseling, or income-driven repayment for federal student loans. Retiring with manageable low-rate debt is far better than depleting your retirement account to achieve a debt-free balance sheet on paper.