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12 Surprising Ways Debt Can Impact Your Retirement Plans

Uncover the hidden ways debt can steal your golden years.

By Sandy Baker

Edited by Chris Kissell

Updated Sept. 24, 2024

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Debt is a burden that can weigh on your retirement finances. The more you have, the less you can save for retirement. Once you actually enter your golden years, debt can continue to be a problem.

Here are some of the surprising ways debt can undermine your retirement plans. Addressing them today can help you save money and lower your financial stress.

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It delays retirement

Carrying debt can make it difficult to retire comfortably — or even to quit working at any point. Trying to pay off debt month after month leaves you with less money to put toward retirement goals.

As a result, you may have to work longer to reach the level of retirement savings you need to meet ongoing expenses.

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It limits the ability to build wealth

The more debt you have, the less money you can put into a 401(k) or other retirement savings plan. That robs you of the ability to grow your wealth through compounding interest.

Imagine you're paying $100 in credit card debt every month. That's money that can't grow over time. If you put that same $100 into a savings account or CD that earns 5% interest for the next 20 years, it would build to nearly $40,000.

That's the value of compounding interest.

It prevents you from moving where you like

Do you have plans for retirement, such as buying a home on a beach in Florida or retiring abroad? That's harder to do when you have debt.

A reduced ability to save for retirement during your working years means more limitations on what you can do later. That fancy retirement home on the beach may be out of reach for good.

Resolve $10,000 or more of your debt

Credit card debt is suffocating. It constantly weighs on your mind and controls every choice you make. You can end up emotionally and even physically drained from it. And even though you make regular payments, it feels like you can never make any progress because of the interest.

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It puts you at the mercy of inflation

Inflation can cause the cost of living to skyrocket for seniors, who don’t have the silver lining of seeing a significant bump in their income.

Those living on a fixed income can find that a period of significant inflation cuts deeply into their budget. As we have seen recently, inflationary periods often trigger higher interest rates, making debt even more expensive to carry.

It damages your credit score

Carrying high levels of debt can hurt your credit score since the amount you owe makes up about 30% of your FICO credit score.

That means if you have to apply for a loan, you'll likely pay higher interest rates, leaving you with even less money for your retirement plans.

It makes paying bills difficult

Keeping your head above water can be challenging when you're in debt. Not only do you have to pay those credit card bills, but you still have to find cash to cover a mortgage or rent, utilities, gas, insurance, and many other costs.

Penny-pinching your way through your golden years doesn’t sound great, but that outcome might be inevitable if you don’t address your debt now.

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It impacts mental health

Carrying debt into retirement can even impact your mental health. It makes life more challenging to live, which means more worry. It might even reduce your ability to socialize and engage with people as you'd hoped.

That can impact the overall quality of your life. With less debt and more savings, there's a greater ability to breathe easily during your senior years.

It can mean a smaller Social Security check

Retiring early is difficult when you have substantial debt, so you might need to delay your plans.

In other cases, people might still retire but are forced to claim Social Security early. When you claim your benefit early, you get a smaller monthly check than you would if you delayed claiming.

It might force you into a longer loan term

It’s not uncommon for people to refinance their mortgages and car loans. But tapping into a lower interest rate on a refinance might extend the repayment terms, stretching your debt further out ahead of you.

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It might send you back to work

Retirement is supposed to be the time when you stop working. But if you have debt and your Social Security benefits and savings aren't enough to cover your costs, you might have to pick up part-time work.

It makes you vulnerable to budget shocks

Seniors who carry debt are more vulnerable to unexpected shocks to their budget, such as sudden car or major home repairs. Without savings, seniors may be forced to go even more deeply into debt.

It reduces your options for care

The reality of aging is that you might need help with basic day-to-day activities at some point. If you're deeply in debt and don't have adequate savings, your care options might be limited.

In fact, the end result might be that you need to qualify for Medicaid just to get nursing home care.

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Bottom line

Carrying debt during your younger years means a reduced ability to save for retirement. That can delay retirement or rob it of some of its luster.

The best way to avoid this fate is to get out of debt as soon as possible. Reducing debt will help you get ahead financially so you can better enjoy your golden years.

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