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Getting Rid of Debt Before You Retire

January 4th, 2019 | 3 min. read

By Jacob Schroeder

Getting Rid of Debt Before You Retire - image

Retirement is about utilizing each dollar of your accumulated wealth to live comfortably on your terms and, hopefully, fulfill some of your biggest dreams. At least, this is how retirement is supposed to work. Unfortunately, people too often find their financial futures hindered by debt.

The Transamerica Center for Retirement Studies found that an alarming 40% of retirees cite “paying off debt” as a current financial priority, including credit cards, mortgage and other consumer debt. That places debt right alongside the top financial priority among retirees, which is “just getting by to cover basic living expenses” (39%).

Essentially, using debt to make purchases is borrowing from your future self with interest. Therefore, you should retire as much debt as possible before you retire. If you don’t, you’ll face the hard reality of having to pay off things from your past instead of finally living the dreams you’ve always had for your future.

Here are tips for managing debt as you near retirement.

Eliminate or reduce debt in your 50s

Most people retire in their early to mid-60s. That means to retire debt-free you should make “eliminating debt” one of your top financial goals in your 50s. Not only will it allow you to dedicate most of your retirement income toward whatever makes you happy, it also puts you in a better position should things not go as planned.

Consider that 51% of retirees say they retired earlier than planned, with half retiring five years or more early, according to a study from Prudential. Only 23% did so because they were ready to retire. Meanwhile, 46% retired earlier than planned because of health problems, 30% were laid off or took an early retirement package, and 11% exited the workforce to care for a loved one.

You could face a significant income shortfall should you retire much earlier than planned. Remember, in most cases the IRS restricts you from taking penalty-free withdrawals from your retirement accounts until age 59 ½ and the earliest you can file for Social Security is age 62. You don’t want debt adding a potential financial hardship.

There are many more important financial steps to take in your 50s to help you realize your dreams. You can find them in our free ebook, Your Money in Your 50s: A Retirement Planning Guide for Procrastinators and Avid-Savers.

Your Money in Your 50s cover -tilt

Download the E-Book Now!

How to pay off debt before retirement

Start tackling debt by separating the good from the bad. High-interest, revolving debt like credit cards is considered bad; whereas, low, fixed-rate debt like your mortgage and auto loans is considered good.

Although the goal is to eliminate all forms of debt, whether good or bad, you want to firstly get rid of bad debt, which charges you more in rates and fees. You can either start with your lowest balance and work your way up (snowball method) or pay off the account charging the highest interest rate and then work your way down (avalanche method). Choose whichever method you’re most likely to stick with to the end. To help reach your debt-free goal faster, call your credit card issuers to negotiate lower rates or have fees waived.

Avoid any new debt

Before you retire, it’s equally important to simply avoid any new debt, even when you have good intentions at heart. Adding debt late in your career could put you at greater risk of having to work longer, if you can, or having to lower your standard of living in retirement.

One particular type of debt plaguing older adults is student loan debt, as many parents and grandparents co-sign or take out loans to help pay for a child or grandchild’s education. According to the Consumer Financial Protection Bureau, the number of American consumers ages 60 and older with student loan debt quadrupled between 2005 and 2015, jumping from 700,000 to 2.8 million.

Taking on student debt later in life is an easy way to squander much needed money from your own retirement. And, if you default on a federal student loan, your Social Security benefit could be garnished.

Managing debt in retirement

If you’re unable to retire all your debt before retirement, then you’ll have to factor it into your overall retirement plan. Think of it as a non-discretionary expense you pay each month. Implement a debt-reducing strategy we discussed above and pay it off as soon as possible.

This unfortunately may mean modifying your lifestyle in retirement. It might be worth considering a part-time job for additional income to dedicate toward paying down debt.

Whether you are debt-free or not, by the time you retire it’s important to have built an emergency fund (three to six months’ worth of expenses) and/or substantial amount of cash savings. Retirement can last decades, and during that time you’ll likely face some major expenses, such as medical care, home repairs and a new vehicle or two. The cash will keep you from having to take an excessive amount from your invested savings or resort to using debt.