How We Are Going into Retirement Debt Free

Editor’s note: This article is part of our “Debt Free” series, a Next Avenue initiative made possible by a grant from the RRF Foundation for Aging.

My wife and I made a pledge some time ago that we would not take on debts we couldn't pay off. Part of that commitment was to ensure that our two daughters were not saddled with college debt. So far, our plan is working.

Short-term debt is anathema to us. When we took out a home equity loan for home improvements, we despised the idea and paid it off as soon as possible. It felt like we were wearing fiscal scarlet letters.

There is a way to avoid debt in retirement, but it involves a multi-layered strategy that's best started well before retirement. It's still possible to retire debt-free, although ongoing financial discipline is the key.

More and more Americans carry debt into retirement. The amount of debt held by those aged 65 to 74 quadrupled from 1992 to 2022, according to the Federal Reserve. The range of outstanding debt was from $10,000 to $45,000 per household. The reasons vary, although inflation is a big factor. Millions are struggling to keep with the cost of living, so they often load up credit cards to cover ordinary recurring expenses.

Ilyce Glink, CEO of Best Money Moves, a financial wellness company that uses technology to help people make better financial decisions, said it is essential to know your monthly expense profile. "Most people don't know their monthly nut," she's found.

Another question to ask about your expenses and debt payments is "what kind of debt do you have?" Mortgage debt can be managed and paid down with accelerated principal payments (see below), refinancing (when rates drop) or longer loan terms.

Then there's a simple math question: How much debt you carry into retirement should be based on whether you will have the cash flow to cover debt repayments — in addition to your other monthly expenses. You may also even consider working past your targeted retirement date to improve your cash flow situation.

I've done numerous community talks about how to avoid college debt. The burden of some $1.6 trillion in college debt today is second only to home mortgages. Although I worked my way through college with a tiny scholarship — and earned my B.A. degree in three years at a commuter college — we didn't want our daughters to have that albatross of student debt around their necks as they entered the adult world.

Whatever you do, do not take out college loans (such as a PLUS loan) as a parent or grandparent unless you can pay it back before you retire. If you can't pay off college debts, you might be still paying off loans well into your seventh decade. Surprisingly, the average total student loan balance today for those 60 and older is $126 billion, which has jumped twentyfold over the past 15 years, according to the Federal Reserve Bank of New York.

If you need to finance a certificate or graduate degree, see if your employer has a tuition-reimbursement program. The best strategy for pre-retirees with dependents or children at home is to consider low-cost options such as community and commuter colleges. Also choose colleges that are generous with scholarships and grants.

It is also wise to  save during your peak earning years in state-sponsored, tax-free 529 college savings plans. We covered all our daughters' room-and-board expenses through these programs; tuition was paid for through college scholarships. They also applied and received several private community scholarships. Several search engines make it easier to identify appropriate scholarships.

A few solid principles guided us. They can be practiced by anyone, preferably early in one's working life, although it's never too late to engage in prudent debt practices.

• Keep ample reserves. Everyone needs an emergency savings account, which is also a backstop for big, short-term expenses like major appliance replacement, car repairs and unexpected medical bills. You can stash this cash in a federally insured money-market account. Better yet, have a set amount deducted from your paycheck and automatically deposited in your emergency fund so that you're saving every payroll period. Most financial gurus say to reserve from three to six months of monthly expenses in your reserve account. You also need to cover essential expenses for insurance, out-of-pocket deductibles and property taxes.

• Pay off your credit card balances within grace periods. Do this and you essentially get an interest-free loan for about a month. Beyond that period, finance charges and late fees compound your debt and are onerous: A national average of 20% for annual percentage rates, according to Bankrate. Better yet, use a rewards card to get cash back or airline/hotel credits. That's what we've done, although we always pay off our monthly balances.

• Don't borrow more than you can pay back. This is the simplest concept to adopt. Your monthly debt payments shouldn't exceed your income. It's always a bad idea to borrow to pay your bills. Get a budget if you need to implement a spending plan. Several free online tools and apps can help.

• Don't borrow from your retirement funds. You can set up automatic savings from your paycheck into your 401(k), 403(b) or 457 plans. In general, 401(k) borrowing from your 401(k) account — or, worse, withdrawing from it — are bad ideas. Withdrawals are taxed immediately, and loans may be, too, if you change employers.

• Save for anticipated expenses. We knew we had to replace our furnace, air conditioner, roof and flooring roughly 20 years after we bought our current home. Our money-market fund had ample cash for those essentials.

• Pay off your mortgage. Did you know you can pay down the principal with additional monthly payments? The more you pay, the sooner your mortgage will be paid off. We did this early in our marriage. You also save big on total interest. Let's say you have a $300,000 mortgage at 6% with 25 years remaining until payoff. If you paid an extra $500 a month, you'd knock 9 years and 4 months off the term. Better yet, you'd save nearly $109,000 in interest. Use online calculators and play around with the numbers. It's the most satisfying exercise you'll ever do with basic math — if you're able to maintain those extra principal payments. Sources of cash for mortgage paydowns include company bonuses, inheritances and cashing in whole-life insurance policies.

There's little question you'll hit some potholes on the debt-fee highway. Job loss, roof replacement and out-of-pocket medical bills slightly derailed us several times. The best safety net for us, though, was to save aggressively during peak earning years and ghosting that cash unless we really needed it. That was tough to do, but so far, it's worked for us.