Mortgage debt in retirement: the most common situation

Nearly 10.7 million people age 65 and older have a mortgage, according to census data.⁵ For many Americans, this could be the largest debt you carry into retirement.

If your primary goal is to enter retirement debt-free, you could focus on paying off your mortgage first. But for many, maintaining a low-interest mortgage in retirement may allow you to preserve savings, maintain liquidity, or continue pursuing other financial goals.

A financial professional can help you evaluate these factors to determine whether entering retirement with a mortgage makes sense:

• Is the mortgage interest rate relatively low or high?
• Is the interest rate fixed or variable?
• How many years remain on the loan?
• Can your retirement income comfortably cover the payment?
• What would happen to your savings if you used a large portion of it to pay off the mortgage early?

Student loan debt is becoming a retirement planning issue

Student loan debt is no longer just a challenge for recent graduates. A growing number of Americans are carrying student loans into their 60s and beyond, either for their own education or through Parent PLUS loans taken out to help children attend college.⁶

The average student loan balance is $43,392 for borrowers age 62 and up. Federal student loan debt for this group has increased by more than 33% since 2017.⁷

Unlike a mortgage, student loans aren’t tied to an appreciating asset. You still need to account for those payments in your retirement income plan, but there may be fewer financial benefits to carrying the debt long term.

The Department of Treasury reports that nearly 25% of student loan borrowers are in default.⁸ When your loans are in default, the Department of Education can garnish tax refunds and Social Security benefits to collect payments.⁹

For these reasons, it’s important to incorporate student loan payments into your retirement income plan just like any other recurring expense.

How debt changes retirement income needs

Every debt payment you carry into retirement is a fixed expense that competes with other spending needs. As a result, this could impact how much retirement income your plan needs to generate for you each month.

Many retirement income strategies aim to cover essential expenses with reliable income sources, and discretionary expenses with investment portfolio returns.

Depending on your goals, these reliable sources of income could include:

• Social Security
• Defined-benefit pensions
• Whole life insurance
• Different types of annuities

Insurance can help protect debt-carrying households

If life takes an unexpected turn in retirement, your debt won’t just disappear. For example, take a couple who enters retirement with a remaining mortgage balance of $100,000. Their retirement income plan works well as long as both spouses are alive and receiving Social Security and retirement income.

But what happens if one spouse dies unexpectedly? Without a plan in place, the surviving spouse may still be responsible for the mortgage payment while living on a reduced household income.

This is one reason life insurance can be an important part of a retirement plan, especially for retirees with debt. A death benefit can help provide funds to pay off a mortgage, eliminate other outstanding debt, or help replace lost income so surviving family members aren’t left carrying the financial burden alone.

Disability insurance can also play an important role during the years leading up to retirement. According to the Social Security Administration, approximately 25% of today's 20-year-olds will experience a disability before retirement age.¹⁰

If an illness or injury prevents you from working, disability insurance can help replace a portion of lost income and reduce the risk of falling behind on debt payments or retirement contributions.

Building a plan that balances debt, savings, protection, and retirement income

Retirees with debt can often benefit from having a complete retirement plan that brings together these four key elements:

• Debt strategy. Determine which debts should be prioritized and how they’ll fit into your retirement timeline.
• Savings and investment strategy. Continue building wealth while balancing competing goals like debt repayment and retirement readiness.
• Protection strategy. Help ensure unexpected events don’t derail your finances or create burdens for loved ones.
• Retirement income strategy. Create a plan for covering monthly expenses, including debt payments, throughout retirement.

At New York Life, financial planning is an ongoing process that considers all of these factors together. Rather than treating debt, savings, protection, and retirement income as separate decisions, a financial professional can help you understand the trade-offs and build a strategy designed to adapt as your life evolves.