11 Debts To Prioritize Paying off Now To Avoid Stress in Retirement

When preparing for retirement, making a plan to get out of debt should be part of the process. Yet paying down debt can seem like a daunting, or even impossible, goal. Many Americans are living with several different types of debt and aren't sure where to start.

If you're creating a pre-retirement budget to avoid excessive debt in retirement, consider prioritizing these 11 types of debt first.

Credit card debt can add up fast and really throw a wrench in your ability to build wealth. Check out the interest rates on your credit cards to determine what needs to be paid off first.

Paying just the minimum on a credit card balance where the interest rate is 20% or higher will really cost you long-term and devastate those with a fixed income in retirement, so addressing high-interest balances is a smart and often feasible place to start for many.

If you have any delinquent accounts or debt that's overdue, it should also be a top priority. Debt becomes delinquent when you've missed payments past the due date and the creditor begins reporting it as late, which can quickly escalate to collections or legal action.

Carrying this kind of debt into retirement is especially dangerous because it damages your credit, limits your financial flexibility, and can drain fixed income through fees, interest, or even asset seizure.

If you have any personal loans, look closely at the terms to determine if they should be a priority as retirement looms. Personal loans can have fixed or variable interest rates, and an interest rate that changes with the market can be challenging for retirees learning to live on a fixed income.

A home equity line of credit (HELOC) is essentially borrowing against the equity you have already built in your home. Your home is considered "collateral" for the line of credit.

HELOC interest rates can also be either fixed or variable, and an unexpected spike in a variable rate could mean having to make a difficult choice about whether or not to stay in your home. Losing your home in retirement due to the inability to pay is particularly devastating.

Your car loan might not seem like a priority as you approach retirement. Perhaps you locked in a decent interest rate and are comfortable with your monthly payment.

But think about your day-to-day needs during retirement. If you plan to drive less, paying off that monthly payment before retirement frees up cash for other priorities.

If you have existing medical debt, consider addressing that before retirement if possible.

Depending on what sort of medical debt you have, you may not have to worry about interest. Still, healthcare bills tend to increase with age, so starting from zero in retirement can be a significant advantage.

Tax debt should always be a priority to keep you in good standing with the IRS and to avoid interest accrued on unpaid taxes. If you owe the IRS money, interest will continue to compound, and it's important to consider that you still have to pay taxes in retirement.

Getting your tax situation sorted, even if you end up having to borrow from another lender at a lower rate to pay the IRS first, should be a pre-retirement priority.

Whether you still have debt from your own education or you took out loans to pay for a child or other dependents to go to college, student debt should ideally be prioritized before retirement.

The current average interest rate for undergraduates is 4.9%, and many borrowers end up with huge balances that can take years or even decades to pay off. Debt, such as high-interest credit cards, is a higher priority, but getting rid of student loan debt before retirement is ideal as well.

If you are self-employed and took out a loan to help pay for some aspect of your business, it's a good idea to pay that down before your steady, working income stops as well. This goes for those planning to sell their businesses as well. The sale should cover any outstanding business debts.

This one is debated a bit between financial experts, but if you can submit your final mortgage payment before you hang up your (literal or metaphorical) work boots for good, you probably should. Paying off your primary residence often means eliminating your largest monthly expense.

If a stress-free retirement is the goal, and it probably is for most of us, paying back any loans you may have taken from family or friends is important, too.

Finding the income to repay when living on a fixed income will be much harder than doing it while you're actively employed (and you'll avoid that strain on the family or friendship, too).

Prioritizing paying down debt is often a goal for those looking to retire early, but it's important for those of us planning to retire at the standard age as well.

Addressing debts now, whether you use a snowball method where debts are tackled from smallest to largest or prioritize high-interest debt first, can free you up to focus on other financial goals as that retirement date gets closer.