Why You Should Be Debt-Free In Retirement

5 Benefits Of Settling Debt Before Retirement

Reduced financial stress: A debt-free life eliminates anxiety and stress, allowing retirees to enjoy their golden years

Increased disposable income: Without debt to repay, retirees can allocate their income towards travel, hobbies, and other pursuits as planned

Improved financial flexibility: Retirees can respond to unexpected expenses or financial opportunities without being burdened by debt

Enhanced retirement savings: Being debt-free allows retirees to preserve their retirement savings, ensuring a steady income stream. Otherwise, a part of it would go towards paying debt

Better health and well-being: A debt-free life would mean improved mental and physical health. This would enable retirees to enjoy a healthier, happier post-work life

When the Reserve Bank of India (RBI) raised interest rates by 2.5 percentage points between May 2022 and February 2023, Kolkata-based Sanjay Chatterjee (53) had to make a decision about his home loan. He realised that if he extended his tenure to keep his equated monthly instalments (EMIs) the same, he would be able to repay his home loan only by the time he was 64 years old.

Chatterjee, a government employee, did not want to extend his loan beyond his retirement years and has, therefore, increased his EMI to ensure his home loan gets over by the time he retires. This meant cutting down and compromising on his regular expenses.

In India, living with debt has become a reality with people having various forms of debt, such as home loan, car loan, personal loan, credit card debt and so on. But does continuing your debt payments after you retire make sense or should you aim to be debt-free in retirement?

Says Col. Sanjeev Govila (retd), certified financial planner (CFP) and CEO, Hum Fauji Initiatives, a financial advisory firm, “Being debt-free after retirement allows retirees to focus on their aspirations without worrying about EMIs eating into their limited resources.”

Sanjay says that though he plans to be engaged in some activity post-retirement, he does not want the burden of a home EMI on him after he retires from his job.

Why Retirement Should Be Debt-Free

Your retirement years should be the time to enjoy life without the burden of debt obligations. However, the decision to be debt-free by the time you retire may vary based on individual circumstances, including income sources, lifestyle expectations, and financial goals.

Says Abhishek Kumar, a Securities and Exchange Board of India-registered investment advisor (Sebi RIA), and founder and chief investment advisor of SahajMoney, a financial planning firm: “If one is fit and can find employment to generate active income, then they can consider continuing to pay their debt using income from employment. One can take up a consulting or contractual position so that they can generate active income to pay off their debt and manage their expenses as long as they are fit to manage it.”

While some retirees continue to work, relying on post-retirement income to manage debt can be risky if the money is not adequate.

Says Govila: “Despite extended working years, being debt-free by retirement should remain a core financial goal. Post-retirement income, even from continued work, is typically irregular and lower than in the prime earning years, making debt servicing riskier.”

It is important to consider that the job you take up post-retirement may be temporary due to fewer opportunities, newer technologies, and so on. Your health conditions could also play spoilsport.

In case you lose your earning power due to any reason, the burden to repay would come on your family. Therefore, aiming to be debt-free by retirement is a prudent goal to ensure financial stability and reduce financial stress in later years.

How To Settle Your Debt Before Retirement

Ensuring a debt-free retirement is possible, but requires careful planning and disciplined execution.

Says Madhupam Krishna, Sebi RIA and chief planner, WealthWisher Financial Planner and Advisors: “Start by taking stock of all your debts, including home loans, personal loans, credit card debt, and any other personal liabilities. Make a list of outstanding balances, interest rates, and monthly payments.”

You could consider paying off high-interest debt first. Accordingly, develop a comprehensive repayment plan to execute that. “This strategy, known as the avalanche method, helps reduce the overall interest paid. Alternatively, you can use the snowball method, which focuses on paying off smaller debts first to gain momentum,” says Krishna.

Paying smaller debt first can give you a sense of emotional relief of having fewer heads of debt left.

If you find this difficult, cut your expenses like Sanjay did. Once he had taken the home loan, Sanjay ensured that he did not take any other loan. He also made it a point to keep his credit card spends in check and pay his dues on time. When his EMIs increased, he ensured that he cut down on his discretionary expenses so that the higher EMI would not hurt him and so that he would be able to pay off his home loan before his retirement.

Says Sanjay: “My EMI had increased by almost Rs 8,000, so I had to squeeze in that extra amount from my monthly salary. Among other measures, we reduced eating out to twice a month from about five to six times a month.”

You could also consider increasing your income by taking up a side hustle. It could be a part-time job, freelancing, or monetising a hobby. You could use the additional income towards repaying your debt and accelerate the repayment process.

You could also use any unexpected windfalls, such as bonuses, tax refunds, or inheritance, to reduce your debt. This can significantly reduce your debt burden and speed up the journey to being debt-free.

If the situation is dire and out of hand, you could consider consulting a financial advisor or debt counsellor to create a personalised debt repayment strategy before the retirement date arrives.

How To Settle Debt Post-Retirement

If you have already retired and have some debt—because you were unable to settle your debt before retirement—there is still a way, but it may be tougher.

Says Renu Maheshwari, Sebi RIA, principal advisor, Finscholarz Wealth Managers, a financial planning firm: “In a dire situation, when the loan still exists at the time of retirement, a careful cost analysis should be done to make the most optimal decision. The cost of loan, tax advantage, return on investments, and earning capability should be the criterion in this analysis.”

A Rs 50 lakh loan at age 60 with a five-year tenure remaining could mean committing Rs 40,000-60,000 per month for the next five years depending on the rate of interest.

Remember that the funding for your expenses will also get hit.

Let’s take an example of a home loan of Rs 50 lakh, at a rate of interest of 8 per cent per annum and a tenure of 20 years. If someone takes the loan at the age of 45, it would mean one has to pay the EMI five years after retirement. With five years left, it would mean that one would need to pay an EMI of about Rs 41,000 every month. That would mean an additional monthly commitment after retirement.

Typically, lenders do not sanction loans with tenures extending into one’s retirement period, which means they will reduce your tenure, effectively increasing the outgo.

Says Kumar: “Generally lenders don’t provide loan with tenure more than one’s retirement years. But they may extend the tenure beyond retirement years in those scenarios when borrowers don’t have an option to increase their EMI due to rise in interest rates.”

Krishna adds: “Closing a home loan after retirement is possible, but it requires approval from the lender. Normally lenders will consent to it if they see cash flow after retirement. This can be a pension, rent, or any other income from consultancy work, freelancing, gig opportunities, or royalty.”

While it may be tempting to use your retirement corpus to pay off the home loan, weigh the pros and cons carefully before using your accumulated corpus to do so.

Being debt-free at retirement but having little savings would spell trouble. Depleting your retirement savings may also affect your financial security and ability to cover future living expenses.

Says Krishna: “Unsecured debt, such as credit card debt and personal loans, can be financially draining due to their high interest rates. Before dipping into your retirement corpus, evaluate the impact on your long-term financial security. Ensure that you still have sufficient funds to cover your retirement expenses and healthcare needs in retirement.”

But if you think you have enough and you can still use a part of your retirement corpus, compare the rate of interest on your unsecured debt with the returns on your retirement investments. If the interest you are servicing on your debt is significantly higher, it may make sense to use a portion of your retirement corpus to pay off the debt and save on interest payments.

If you have a significant portion of your home loan remaining, consider negotiating with your lender to extend the loan tenure or reduce the rate of interest. This can lower your monthly payments and make it easier for you to manage the loan after retirement. You could also seek help from family if you are comfortable with that, and your children can also help you out.

Paying off debt after retirement can be difficult, so one should try their best to clear all their loans earlier.

meghna@outlookindia.com