Help Me Retire: We’re 56, have $400,000 in debt, can save $50,000 a year and just want to retire — what should we do?

We have about $400,000 in debt. The highest interest rate is 4.99% (on the boat). The rest is under 3%. Here’s a breakdown: 
Home: $275,000   
Boat (major retirement plus!): $60,000
Car: $22,000
Credit-card Debt: $30,000 

Our income is as follows:
$152,200 — Max 401(k) contribution of $26,000 with 3% employer + 25 cents per dollar 
$10,000  — in real-estate transactions (side thing)
$20,000 — Husband’s income 

Our savings combined: 
$53,000 in individual retirement accounts 
$75,000 in annuities – minimum payout is $1,200 at age 65
$20,000 in the 401(k) (plus employer contributions)
$35,000 in money market accounts 

Sincerely,

L.B. 

See: I’m 65, have $500,000 in cash, no ‘impressive work resume’ and am terrified of investing — can I retire? 

Dear L.B., 

You’re right when you say financial calculators can be really confusing, what with all of the different variables to compute and the various scenarios to test out. It’s great that you’re even trying to do that, though — you’ll be prepared for your future retirement this way!

It is important to note, however, that even with all the calculations in the world, there’s no definitive answer. Investments fluctuate, health and life expectancy aren’t guaranteed and the unexpected always manages to occur (for good or bad). Your calculations will help you see what trade-offs you’re comfortable with and allow you to plan for the uncertain. 

First, let’s focus on your main question: do you save or do you pay down your debts? The answer, as always with financial planning, is “it depends.” Some experts say it’s best to pay down as much of your debt as you can, while others think some debts — such as a mortgage — are OK, especially in such a low-rate environment.

The bottom line: It comes down to what makes you most comfortable. Having $400,000 in debt, especially when it’s spread among a home, credit cards, a boat and a car, may make you nervous later in life, so you might want to spend down some of it with your extra cash flow. 

“Retirement is all about cash flow,” said Kay Allen, a financial adviser and founder of Allen Wealth Advisors. “The only debt you should have in retirement is debt that your retirement income can cover.” 

Having some debt is better than having no debt but also no savings. You definitely don’t want to use all of your assets to pay down these balances, so that you end up with nothing in the bank for your future. 

“Unfortunately, many people pay off their home and have no liquidity,” said Niv Persaud, managing director and founder of Transition Planning & Guidance. “They expect to tap into a home equity line of credit, but banks tighten how much money they lend, as experienced in the Great Recession.” 

If you’re going to pay off your debts, you should try to tackle the non-mortgage ones first, said Matthew Benson, owner and financial adviser at Sonmore Financial. “Most people’s biggest challenge with debt is it clouds their vision and makes it hard to see their goals,” he said. “If they were disciplined enough to stick to a payment schedule that paid off the boat, car, and credit-card debt before their target retirement, then I think that is a good strategy.” 

Paying off debts with the highest rates first is always a great plan, as you already know. Because the boat has a higher interest rate, you’re right to want to go for that one first, but you may also want to try to dwindle down that credit-card debt, Allen said. “Otherwise, they should save more each month as long as the anticipated rate of return on the savings can be reasonably expected to exceed the rate on the debt,” she said.

Even with this strategy, it would still take years for you to pay off the non-mortgage debts — though if you’re really disciplined, move the credit card balances to zero-interest cards and put that extra cash flow toward these debts every month, you could likely do it quicker. 

Triple-check expenses

I want to touch on another point you mentioned, though — that you’ll need 50% of your income for comfortable living in retirement. I’m sure you’ve already done a lot of planning, especially if you’re testing out financial calculators, but I want you to triple-check that you have accounted for all of the expenses you’ll likely face, especially if you retire “as soon as possible.”

 You should also gather all of the money you expect to generate in retirement income between now and age 65, when your annuity payout begins — if you only have a little more than $100,000 in savings right now, will you still have enough to live comfortably between now and then? 

Don’t miss: How retirement planning needs to change in the new year

“Many people underestimate how much they currently spend and how much they will spend in retirement,” Persaud said. “Retirement can last 20 or more years… that’s a long time.”

She breaks down spending into 10 broad categories: home, transportation, personal care, food and dining out, entertainment and travel, health-related, dependent care, charity and gifts, savings, and miscellaneous. Make sure you’re accounting for all of those categories when you determine if a 50% replacement rate is good enough — workers who retire at 62 have a median replacement ratio of 55%, but that was prior to the pandemic.  

Another way to estimate your financial needs: take your gross income, subtract taxes, then subtract your annual retirement account savings and you’ll get your living expenses, said Derek Tuz, partner at Aegis Financial Partners. 

What about health care?

If you retire in the next few years, you’ll also have to account for health insurance, which can be expensive when not tied to an employer. You won’t be eligible for Medicare for another nine years. On that note, you might want to look into other health expenses, like long-term care, especially as you’ll need your savings to stretch your lifetime. Not everyone thinks of retirement as a long time, but it could span 20, 30 or even 40 years, advisers said. 

A Health Savings Account is a tax-advantageous way to invest and pay for health expenses, if your employer offers one, Tuz said. They’re linked to high-deductible health-insurance plans, which could be too expensive for some folks, but the money is invested with pre-tax dollars and can be withdrawn tax-free if used for eligible expenses. In this regard, it trumps the 401(k), Tuz said. “The 401(k) is one of the best places to accumulate wealth, but it is not the best place to withdraw from,” he said.  

Also, before you retire early, keep in mind the risks associated with retirement and address them before you exit the workforce, Tuz said. He calls them the “Five Primary Risks of Retirement:” longevity, timing and sequence of return, maintaining purchasing power, over- or under-spending and health-care expenses. “The hardest part is four out of the five one has no control over,” he said. 

Early retirement — or financial independence?

Instead of asking yourself if you’re ready to retire, ask if you are financially independent, which is “the point in time where you have accumulated enough resources to maintain your lifestyle the way you define it for the rest of your life,” Tuz said. 

You have a nice income at the moment, but will likely feel more comfortable if you have more stashed away in a retirement or brokerage account for your future. I know you said you only started saving aggressively recently, so I would continue to make that a major priority before picking a specific date to retire.

A budget is an extremely beneficial tool to have, Benson said. “Like all things financial planning there will be errors in future assumptions,” he said. “The goal shouldn’t be to be perfect, but to mitigate the margin for error as much as possible.” 

Also see: Confused about Social Security, including spousal benefits, claiming strategies and how death and divorce affect your monthly income?  

Part of your projections will need to include Social Security, so you should think carefully about when and how you’ll claim those benefits. There is no right answer to when to claim, as it depends on a person’s age, health, life expectancy and financial needs, but the longer you wait until age 70, the more money you’ll get each month. 

As for financial calculators, MarketWatch also has a retirement planning calculator you can use, but you still might want to work with a financial planner — if even only once to create a plan — so you have the proper assumptions and goals laid out. They can walk you through numerous projections and help you create a plan for paying off debt and for saving as well.

The fact that you are testing out all of these financial calculators and looking for ways to pay down your debts and maximize your savings most efficiently will work to your advantage. I wish you the best.

Now read: I’m 52, won’t live past 80 and have $1.6 million. ‘I am tired of both the rat race and workplace politics.’ Should I retire?

Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com