Dear Carrie: I’m retiring. My wife retires in four years. We don’t plan to pay off our “good” home mortgage debts, seeing as they provide tax relief. But my instinct is to settle all major “bad” debts (associated with credit cards, home equity lines of credit, etc.) in order to start retirement with a clean slate. Trouble is, we don’t have cash in hand to pay off these “bad” debts. My wife thinks that my instinct to start retirement debt-free is a crackpot idea. Is she right? — A Reader

Dear Reader: Though I usually hesitate to take sides in a marital discussion, I have to say I think you’re onto something. To me, starting retirement with a clean slate is far from a crackpot idea.

That said, there’s no one-size-fits-all rule about carrying debt in retirement. Though I generally agree that lowering debt before you retire is a good idea — especially “bad” debt, such as high-interest, nondeductible credit card balances — how much debt you can comfortably handle depends on the size of your debt relative to your projected income.

There is an industry guideline that bears consideration as you look to the next few years. You’ve probably already heard of the 28/36 rule, but now would be a good time to revisit it. This rule suggests that no more than 28 percent of pretax household income should go to home debt (principal, interest, taxes and insurance) and that no more than 36 percent should go to all debt (home debt plus credit cards and auto loans).

Realize, though, that this is primarily a pre-retirement recommendation. In retirement, I think it’s smart to be even more conservative and carry even less debt. And it’s not just about money. There’s also the emotional side. What will give you the greatest peace of mind?

As with so many things, it’s about planning and prioritizing, so I suggest that you and your wife crunch some numbers together.

Start With Some Calculations

First look at your current debt-to-income ratio. Does it fit within the 28/36 rule? If not, your first order of business would be to bring your debt to within those recommended percentages — immediately!

Next, calculate this ratio for your projected retirement income — once you retire and also when both of you are retired. To do this, you’ll need to estimate how much income you can count on during each stage of retirement. This includes guaranteed income from sources such as pensions, annuities, Social Security and real estate, as well as income from your portfolio, starting ideally at about 4 percent of your assets.

With these figures in mind, focus on your current budget, reviewing your essential and discretionary expenses. Can you reprioritize to direct more money toward debt now? Then look at your projected retirement budget. If you don’t pay the debts now (which might be easier with your wife still working), how will these payments impact your future cash needs? You can also try using a cost-of-debt calculator at to get a good understanding of the long-term expense of your debt.

Create a Payment Plan

Paying down debt will be easier if you have a plan. A credit card payoff calculator ( can help lay the groundwork. You imply that you have several credit card balances, so focus initially on the balance with the highest interest. Direct your extra payments toward that card, paying at least the minimum on the others. When you’ve put the top card to rest, focus on the next one. Once the credit cards are at zero, pay down other types of consumer loans, such as a car payment.

Consolidating all your credit card debt on one low-interest card is another viable approach, as long as you’re careful about loan consolidation fees. Another important caveat: You have to commit to stop using credit cards unless absolutely necessary!

Put Your HELOC to Work for You

As you say, your mortgage is “good” debt because interest is generally tax-deductible and low-rate and because you’re paying for an appreciating asset. The same goes for a home equity line of credit. You placed it in the “bad” debt category, but it really belongs on the good side.

In fact, a HELOC can be a positive tool for debt consolidation and repayment. Not only are interest rates typically low but also you can deduct HELOC interest on up to $100,000 ($50,000 for married people filing separately) of debt secured by home equity, no matter what you use the money for. So if you have sufficient funds available, you could transfer your credit card debt to your HELOC to potentially lower your interest rate, simplify repayment and get a tax break, too.

A word of caution: HELOCs sometimes have a 10-year term, after which they need to be renewed (harder to do when you’re retired) or paid off on a predetermined time schedule. And yet another caveat: Though mortgage debt has its advantages, it’s still debt that must be paid. Be sure that your mortgage and HELOC payments aren’t going to represent an inordinate percentage of your retirement income.

Be Realistic About Both Finances and Feelings

Again, successfully handling debt in retirement hinges on being realistic about your income. I’d check in with your financial adviser to make sure you’re on target with your projections.

Also consider your feelings. Will carrying debt into retirement cause you more angst than systematically paying it off now while one of you is still working? It’s a question only you and your wife can honestly answer — and now’s the time to decide.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at