Step 12: Pay Off Debt

IF WE AREN’T ON TRACK to retire debt-free, we should make a big push to pay off all loans before we quit the workforce. Why? There are the obvious reasons: Once we retire, we’ll no longer have a paycheck to service those debts, plus—by paying off all loans—we lower our cost of living and make retirement more affordable.

But there’s a less publicized problem: If we carry debt into retirement, we’ll need to generate additional income to service those loans. That might mean selling winning investments in our taxable account or making bigger annual withdrawals from our retirement accounts.

That extra income will lead to a larger annual tax bill. But it could also have a knock-on effect, triggering taxes on our Social Security benefit, while also raising our Medicare premiums.

For many folks, the biggest debt they’ll need to eliminate will be their mortgage. If your home loan isn’t scheduled to be paid off until after your expected retirement date, consider making extra-principal payments, so the loan is paid off sooner. To figure out how much you need to add to each monthly mortgage check, use the Mortgage Calculator at

To be sure, paying off mortgage debt will mean less mortgage interest to deduct on your tax return. But as mentioned in step 5, the tax savings may be little or nothing—because you claim the standard deduction or your total itemized deductions are barely above your standard deduction.

Next: Step 13: Quitting Time

Previous: Step 11: Revamp Insurance

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