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“It’s essential to be completely debt-free in retirement.”
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“You absolutely have to be 100% debt-free in retirement.” Here’s how to respond to that belief.
Having debt in retirement: a problem to avoid… or to manage?
The idea that you must be completely debt-free in retirement is widespread—and for good reason: not having to make monthly payments brings great peace of mind. However, it’s not always possible, nor necessarily the top priority for everyone. In some cases, trying to eliminate all debt before retirement can even hurt your overall financial planning. The key, therefore, is to understand the different types of debt, their impacts, and how to manage them effectively in order to enjoy a peaceful retirement.
The burden of high-interest debt
Some types of debt should clearly be avoided in retirement—especially high-interest debt such as credit cards or unsecured personal loans. The cost of carrying this kind of debt can quickly eat up a large portion of fixed income, particularly if your only sources of income are retirement benefits (such as the QPP, employer pension, RRSP, or RRIF). These debts should be repaid as a priority, ideally before retirement.
The mortgage: a debt that isn’t always urgent to pay off
The idea of retiring without a mortgage is appealing, but it shouldn’t be viewed as an absolute rule. In a low-interest-rate environment (like the one experienced in the 2010s), it can sometimes be more beneficial to keep a small, low-rate mortgage while maintaining liquidity for savings, unexpected expenses, or investments.
Furthermore, for some retirees, paying off a mortgage too quickly can mean giving up valuable tax advantages (such as RRSP or TFSA contributions) or weakening their emergency fund.
The key is to ensure that mortgage payments if they continue into retirement remain sustainable within the new retirement budget.