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Published: Dec 13, 2022 7 min read
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Kiersten Essenpreis for Money

Debt repayment is an increasingly common standard line item in the monthly budget. About two-thirds of Americans carry debt, according to a Wealth Watch survey from mutual life insurance company New York Life. Credit card debt, home loans and auto debt are the most common, the survey found.

In the third quarter of 2022, household debt hit $16.51 trillion. That's an increase of $2.36 trillion compared with the end of 2019, according to the Federal Reserve Bank of New York. Credit card, mortgage and auto loan balances all increased in the third quarter, the report found. The overall balance of student loans, another big pain point, decreased, but millions of Americans are still struggling to pay off student debt.

The average amount of debt for U.S. adults who say they carry debt is $22,354 excluding mortgages, according to Northwestern Mutual’s 2022 Planning and Progress Study. Nearly one-third (32%) of Americans’ monthly income on average goes toward paying down debt other than mortgages, the study found.

People are feeling the burden of managing their debt, and 58% think debt is holding them back from reaching financial goals, according to New York Life. “Even with accounting for inflation, the amount owed on all types of debt has grown, putting workers, and especially those nearing retirement, in financially precarious positions,” says Dylan Huang, senior vice president and head of retirement and wealth management solutions at New York Life.

How to balance debt and savings

Debt can cloud your financial future, but you can find ways to tackle repayment and still work toward retirement.

Embrace budgeting

How much money comes in in each month, and where does it go? Knowing the answer to these questions can help you build healthier habits that help you pay down debt and save for retirement.

Warren Ward, a certified financial planner (CFP) and financial advisor with WWA Planning & Investments, often works with clients on zero-based budgeting. “We look at every significant expense to make sure it is truly important to the client. Until we achieve the planned-for level of savings/investment, we continue to probe for expenses which can be reduced,” he explains.

Use resources offered by your employer

Many employers sponsor retirement plans. If your company offers matching 401(k) contributions, you can strengthen your retirement savings. “I believe you should never leave an employer match on the table, if possible,” says Shawn Stone, a chartered retirement planning counselor with Retirement Planners of America, a firm specializing in retirement.

Your employer might also offer resources that you can use to improve your financial wellbeing. New York Life’s Huang recommends looking into potential benefits like student loan repayment assistance, healthcare savings vehicles and childcare support. Using these kinds of benefits could help reduce your reliance on credit cards.

Increase your cash flow

Upping your monthly cash flow can give you more room in your budget to pay off your debt and save for retirement. Extra cash can also be used to start or grow your emergency fund. “So, whenever the next emergency hits, you're not back in debt again,” says Marigny deMauriac, a CFP and CEO of deMauriac Financial Consulting & Wealth Management. She suggests options like negotiating a raise, making a career shift or taking on a side hustle to increase cash flow.

Save what you can

Figure out how much you can set aside for retirement within your current budget right now. Over time, those savings will add up. “Time is your biggest asset, followed by compound interest, when it comes to investing,” deMauriac points out.

What is a good strategy to pay off debt?

How do you pay off what you owe when interest keeps accruing? Two popular debt management strategies can break down debt repayment into doable steps.

The snowball method

People like the snowball method because it gets the ball rolling. Use whatever you can to pay off your smallest debt first and work your way up from there. Motivation comes from clearing up account balances.

The avalanche method

It actually makes better financial sense to use the avalanche method, since you prioritize paying down debts with the highest interest rate. That will save you money, and you can use those savings to tackle remaining loan payments.

How can you be debt-free before retirement?

If you are just starting out in your career, build healthy spending and saving habits early. Making the maximum contribution to retirement accounts, focusing on student loan repayment, paying off your credit card each month, and contributing to an emergency fund can set you up for success.

Healthy habits are also useful for people who are nearing retirement, but there is less time to cut down on debt. How much do you owe, and how much can you repay with your current budget before you retire?

Even with debt, you can retire

Some Americans are delaying retirement, which can give you more time to reduce your debt and save up. But you might find that you still have debt as your target retirement date nears. Baby boomers carry an average of $24,136 in non-mortgage debt and $198,203 in mortgage debt, according to the State of Credit 2021 report from Experian. People 50 and older also hold a significant chunk of the outstanding student debt in the U.S.

You can retire with debt if repayment fits into your budget. Calculate your retirement income and spending, including debt obligations, in advance.

“With a better understanding of expenses, individuals may wish to ‘test drive’ their retirement budget by estimating the monthly amount they will have available and live within their post-retirement budget,” says New York Life’s Huang. “This will help to determine if their current living expenses should be adjusted to fit a simplified lifestyle and what a post-retirement budget may look like before they get there.”

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How to Save for Retirement Even When It's Getting Harder