4 Tips to Get Out of Debt Before Retiring in 2021

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Source: thebalance.com

In financial management, carrying your debts into retirement is usually deemed a cardinal sin. Each dollar you owe will only decrease your income in retirement. Nevertheless, blindly focusing on reducing your debt before savings, especially for low-interest accounts, could also compromise your nest egg.

For this reason, those who are approaching retirement have to carefully weigh the boon and bane of paying off their debt versus saving for retirement.

Suppose you wake up tomorrow, and all your debts are completely wiped out without a trace. You’d likely be overwhelmingly relieved. However, if you have zero balance in your life savings account, you’d still not be ready to retire.

Are you thinking of ways on how to calibrate your debt repayment without jeopardizing your plans for retirement? Here are the primary types of debt and how you can manage them before retirement:

1. Pay Off Credit Card Debt

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Credit card interest rates nowadays are hovering around 20 percent. In other words, you have to pay a dollar for every five you borrow. It doesn’t matter at which stage in life you’re now; if you need to pay this much, it will surely cripple your finances. This is especially distressing for people who live on a fixed income in retirement. As much as possible, you need to prioritize paying off high-interest debts before you stop working. Equally important is to avoid accruing new credit card debt.

For many people, the key is to simply refrain from using credit cards. Of course, you can use a credit card responsibly. You may pay down new balances every month and attack your old debts at the same time. However, you must be realistic about your spending habits. If you can’t handle your out-of-pocket expenses while also covering your existing minimum, it would be difficult to make any progress on your current balance.

The bottom line is that your most important job is to rid yourself of credit card debt before retirement. If you’re struggling to find cash to pay off your debt, consider selling your life insurance policy through companies like harborlifesettlements.com. This is a great way for eligible seniors to gain access to wealth before retirement.

2. Get Rid of Student Loans

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It’s easy to think that student loans are only a problem for those still far from retiring. But it’s actually an increasing problem for people who are about to retire. In fact, a 2017 study shows that about 2.8 million people over the age of 60 carry an average education debt balance of $23,500. A lot of this older population with student loans aren’t primary signers.

Instead, they’re co-signers for their kids or grandkids. Sadly, many of them didn’t really get their heads around the financial liabilities associated with such loans if the primary borrower fails to repay what is owed. Since the primary borrower has the account information, these people also usually have difficulties gaining access to information related to their loans. But if you can, try to pay this debt down as much as possible.

3. Eliminate Car Loans

Source: financialexpress.com

Car loans generally have low interest rates. Unlike many types of loans, car loans also often use simple compounding. In simple terms, they tend to cost less as time goes by than other debts. That’s why some people heading into retirement aren’t too overwrought about their existing car debts. However, you mustn’t put your savings at risk with unnecessary auto loans. Since they tend to creep up, car debts can be pretty dangerous, especially if you go underwater to buy a new set of wheels that you don’t need.

To avoid this, if you have two cars, you have to decide early on whether you need to stick with both of them following your retirement. As a retiree, you will likely drive less than when you were still working. It might not be a bad idea to put one of your cars up for sale. This way, you can do away with at least one outstanding loan. Just use a portion of your sales proceeds and savings on car insurance to pay off your remaining car’s loan.
What if you only have one car and can’t give it up in retirement? Think about trading it in for a more affordable model that you can own outright.

4. Settle Your Mortgage

Source: marinerwealthadvisors.com

Mortgage rates are usually low. Many people nearing retirement can get more value by pursuing investments than revving up their mortgage payments. If you’re the type who isn’t debt-averse and consider spending your extra money where it may have the most impact, it might make more sense to invest than pay down low-interest but tax-advantaged mortgage debt.

Of course, we can’t stress enough the importance of what brings you peace of mind. Does settling your mortgage loan relax you and make you feel good about your decision to the extent that it improves your quality of life? Then, you have to factor that in when making your decision.

Does retiring debt-free matter to you? If so, you have a few choices. Maybe the most obvious one is to pay your lender more than the agreed amount. Another option is to downsize. Sell your home and use the proceeds to buy a more affordable one in full. If you prefer staying in your current house, you can save by having your mortgage refinanced. This way, you can have a shorter loan term. Now, if you opt to wait until your retirement to clear your mortgage loan, see to it that you have a sufficient budget for payments in your savings.

Retiring with debt is not ideal, but failing to pay it off before retirement will not necessarily derail your plans. What matters is you know how to prioritize your finances and protect your savings. This is crucial in the years leading up to your retirement.

You should also have a financial plan in place either using a financial planner or doing it yourself with retirement and financial planning software like WealthTrace or Quicken. Those who like to be able to be in charge of their plan and access it whenever they want would likely want to go this route.

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