When planning for our golden years, we rarely consider how debt will fit into the picture. Debt and retirement are usually separate considerations in our financial landscape -- as well they should be. Unfortunately, sometimes they can end up dangerously entangled.

The dreaded debt dragon
In retirement, you're typically getting by on less income than you're used to -- often significantly less. (We can help you figure out how much you need to retire on.) By the time they've hit retirement age, many Americans have typically paid off their mortgages and have their other expenses under control. But times have changed.

A 2009 study from Harvard's Joint Center for Housing Studies found that many homeowners nearing retirement still have substantial amounts of mortgage and home-equity loan debt. According to a Moneywatch report on the study, 63% of those now in their late 50s and early 60s still owe on their homes, compared to 49% 20 years ago. Meanwhile, the average American household that carries a balance on its credit cards owes more than $10,000 there.

If you think that's skewed high because of college students, think again. Low- and middle-income retirees with credit card debt recently averaged more than $10,000 in obligations. If their interest rate is 15%, they'll be forking over $1,500 annually just for interest.

Meanwhile, other retirees and near-retirees are saddled with car loans and other obligations. All of these debts add up to significant mandatory payments that have to be made at a time when your income has shrunk -- and when you face a lot of uncertainty around other expenses, such as the ever-increasing cost of health care.

… And how to slay it
Fortunately, it's not too late to salvage your retirement. You can take steps now to improve your position considerably. For example:

  • Pay down your debt now! Even if it's more than $100,000, you can succeed. Some, like financial guru Dave Ramsey, will suggest that you pay off your smallest debts first, to develop some momentum. But it makes more sense to tackle your highest-interest-rate debt first, so that you wipe out the most onerous obligations. If you have $1,000 to put down, paying off a debt with 25% interest will save you $250 this year, versus only $80 in savings for an 8% debt.
  • Rein in your expenses as much as possible. If you need to aggressively pay down debt, then perhaps you don't need that large-screen TV, or even that DVR -- at least right now. You needn't suffer too much, either. Perhaps you can watch your one favorite HBO show at a friend's, and save the subscription cost. You might also generate some income by selling unwanted items taking up space in your basement or garage.
  • Consider planning to work a few more years. Just two more years can make a big difference. For some people, seven more years can bring in a million dollars more. While you work, you're putting off tapping your nest egg and letting it grow even bigger -- a win-win proposition.
  • Invest more effectively. Once your debt is under control, you might want to pack your portfolio with dividend-paying stocks, since they can provide a helpful income boost in retirement. 

The following dividend payers earn high marks from our Motley Fool CAPS community:

Company

CAPS Rating (out of 5)

Dividend Yield

Verizon (NYSE:VZ)

****

6.6%

PPL (NYSE:PPL)

****

4.8%

Kraft (NYSE:KFT)

****

4.0%

Abbott Labs (NYSE:ABT)

*****

3.0%

Paychex (NASDAQ:PAYX)

****

4.3%

Novartis (NYSE:NVS)

****

3.2%

Enterprise Products Partners (NYSE:EPD)

*****

7.4%

Data: Motley Fool CAPS.

When it's out of control, debt has the power to nearly destroy many lives. Even when it's under control, it can take a toll on our standard of living. Aim to be as close to debt-free in retirement as you can.

Longtime Fool contributor Selena Maranjian owns shares of Paychex and Novartis. Paychex is a Motley Fool Inside Value recommendation. Novartis is a Motley Fool Global Gains selection. Enterprise Products Partners and Paychex are Motley Fool Income Investor picks. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.