3 Reasons Too Much Debt Can Negatively Impact Your Retirement (and What to Do About It)

While some people throw off the bonds of employment and ride into a wealth-filled retirement, they are not the norm. Actually, they've never been the norm. The average retiree has the same financial concerns as the rest of us. And one of those financial concerns includes debt.

Life happens, and no one intentionally enters retirement with a boatload of debt. Still, it's important to remember why we want to keep debt at a minimum. Take a look at the following reasons.

1. Inflation is a reality

It's as natural as the tide. Throughout American history, there have been years of low inflation followed by periods of high inflation. According to the American Institute for Economic Research (AIER), something that cost $100 in 1992 would cost roughly $209 in 2022 -- thanks to inflation.

Living on a fixed income makes everything more difficult during periods of inflation. If you're also dealing with too much debt, that leaves even less money to handle the ebbs and flows of the economy.

None of us can guess what's around the corner. The best we can do is prepare for the worst, which means keeping our debt load low.

2. We're entering retirement with less

Everyone, from financial advisors to television money gurus, tells us we need a huge nest egg to retire in style. Honestly, the numbers are intimidating.

Clever Real Estate recently conducted a study of 1,000 retirees, and the findings may surprise you. Some experts recommend having $555,000 in savings by the time we retire (although many recommend much more).

However, according to the survey, only about 12% of retirees have that much put away. On average, the average retiree has $170,726 in savings. Worse yet, Clever found that around 37% of retirees have no savings at all.

The less we have to fall back on during retirement, the more debt can cripple our ability to do what we want and cover unexpected expenses.

3. We're living longer

In 1940, the average American had a life expectancy of 63½ years. By 1960, it was just under 70 years. In 1980, life expectancy had extended to 73½ years, and today, we're sitting at just shy of 80 years.

Medical advancements are incredible, and as long as a person remains relatively healthy, there are few downsides to living longer. However, carrying excess debt is a sure way to tarnish the fun of those golden years.

There are plenty of reasons a 75-year-old may go back to work, including a desire for stimulation and socialization. But if that person works to pay off debt instead, it changes the entire dynamic.

Finding a balance

Life happens, and things come up. For most of us, suggesting that we'll never borrow money or put an unexpected expense on a credit card is unrealistic. However, the financial services company Charles Schwab suggests we use the "28/36 Rule." Here's how it works:

• 28%: We spend no more than 28% of our pretax income on housing. This includes principal, interest, taxes, and insurance. Or, if you rent, 28% should cover that expense.
• 36%: We spend no more than 36% of our pretax income on all debt, including credit cards and loans.

You'll notice that the 28/36 Rule doesn't say we should be debt-free. It simply says that our debt must fit inside specific parameters. Let's say a person has a net retirement income of $5,000 monthly from all sources. According to the 28/36 Rule, their housing should cost no more than $1,400 per month, and their overall monthly debt costs should not exceed $1,800.

Meanwhile, 36% does not apply to all monthly bills, only to fixed costs. The remaining 64% will cover other expenses, including taxes, groceries, utilities, clothing, and additional monthly costs.

If you have years before it's time to retire, that's great. Not only do you have more time to save and invest for retirement, but you also have time to work toward living within 28/36 Rule parameters. If you're already retired and carrying more debt than is comfortable, a nonprofit organization like the National Foundation for Credit Counseling (NFCC) may be able to help.