The last thing you want to do when it comes time to retire is to take all of the money you’ve saved and use it to pay off debt. That’s bad for your retirement plan and for your stress levels. The more in control you are of how your money will work for you, the more secure you’ll potentially be when it’s time to move on from the working world.
Whether it’s credit card debt, mortgage payments, car payments or other lingering loans, if you’re approaching retirement with a considerable debt balance hanging over your head, it may be time to create a strategy.
Here are 10 steps you can take now to take control of your debt before and after you retire.
1. Make a budget. As a good starting point, review your monthly expenses and figure out exactly how much money you have to put toward your debt each month. Bankrate.com offers a good budgeting tool.
2. Pay off credit cards and lines of credit first. Because these credit sources reassess every month, it can take years to pay off. For example, if you make the minimum payment on a $10,000 balance, you could end up paying more than $5,000 in interest.
3. Manage credit cards wisely. If you can’t pay the balance in full every month, do your best to make more than the minimum payment. And keep an eye on your mail. Those zero-percent-interest balance-transfer deals can actually be worth it, as long as the transfer fees are reasonable and you make a note of when the regular interest rate resumes. A financial professional can help with the fine print.
4. Be smart about student loan debt. If you or your child took out student loans to finance their education, it’s time to take another look at how the loans are structured and who is paying them. Many financial professionals advise that you start repaying loans as soon as they come due and make more than the minimum payment. After your child graduates, look into jobs that provide student loan forgiveness – like teaching or public service – or jobs that offer student loan repayment assistance as a benefit. Once your child is working, require them to contribute a certain amount each month to paying down the debt – or to take the loan over completely. Some student loan debt can be consolidated as well.
5. Mortgage debt: Friend or foe? Mortgages can be refinanced to tap into your home’s equity, and loans can be paid off faster if you apply extra money toward the principal each month. But some financial professionals consider mortgages “good debt” – at least as long as mortgage interest remains tax-deductible.
6. Pay highest interest rates first. While scrutinizing credit card balances is a smart strategy, it’s also worth looking at all your debt and paying off accounts with the highest interest rate first – whether those are credit cards, car loans or home equity lines of credit. Those account balances can grow quickly and cost you the most money in the long run.
7. Avoid taking on more debt. It may be tempting to take out a consolidation loan or apply for a new credit card to pay off your larger balances, but those typically come with fees and higher interest rates. Deal with the debt as intelligently as you can now, rather than pushing it into the future and causing yourself more stress down the road.
8. Some debts are worth keeping. Surprisingly, becoming completely debt-free isn’t always the answer. Consider retaining debt in cases where you can make more in investments than you’re paying in interest (examples include a zero-interest credit card or a low-interest car loan) or when the debt is tax-deductible.
9. Don’t put every last penny toward debt. Avoid putting so much toward debt that you don’t have cash on hand in an emergency. At the very least, be sure you have nine to 12 months’ worth of living expenses in your savings account. If you don’t have emergency reserves, you may end up taking on even more high-interest debt to cover unexpected expenses such as car repairs or medical bills.
10. Pay as much as you can while you’re still working. If you have yet to retire – especially if you work at a company that provides an employer match on retirement savings – focus as much as you can on paying down debt in your remaining working years. This may include purchasing or paying off a dependable car you can use after you retire and making big purchases like furniture, appliances, and electronics.
Things to Consider
- Make a budget you can live with
- Make a list of all your debts: how much and what the interest rate is
- Keep track of your progress in getting debts completely paid off
- Read our article on how to manage your money in retirement