Nobody likes the idea of carrying significant debt in retirement. These tips may help you pare down what you owe, whether you’re just hitting middle age or you’re entering your golden years.
It’s not always practical to retire debt-free. However, the closer you get to retirement, the heavier a burden debt can become. Every dollar you pay to a lender is one you could spend on living expenses, vacations or a legacy for your children. You don’t need to retire debt-free, but downsizing what you owe before you stop working is a good idea. Here’s a plan that can help:
- Shrink credit card debt first. Nothing eats into your retirement savings faster than debt with a high interest rate, and credit card debt may be at the top of this list. If you carry credit card debt, try to pay more than the monthly minimum and, if possible, allocate extra money in your budget to paying off your cards as quickly as possible. If you carry balances on multiple cards, pay down the one with the highest interest rate first, or consider consolidating your balances on the card with the lowest rate.
- Reduce loans you can’t deduct next. Once you cut down outstanding credit card balances, do the same for other non-tax-deductible debt you may be carrying, such as auto loans. The same strategy applies here: Tackle the loan with the highest interest rate first. Although retirement is still decades away, you may be close to the height of your earning power and thus have more income to put toward eliminating your liabilities.
- Keep saving for retirement. At the same time, continue paying attention to your other goals, particularly saving for retirement. In fact, it may make more sense to use available funds to maximize contributions to your retirement accounts rather than pay off tax-deductible debt such as mortgage interest.
If possible, work toward the goals of debt reduction and savings in tandem—capturing tax benefits while taking advantage of available savings opportunities.
- Keep debt to a minimum. A retirement in which your income goes exclusively to your needs and goals (rather than to your liabilities) is ideal. So continue to work aggressively toward paying down your debt.
- Extend your earning years. If you can’t find room in your budget to boost your debt payments, look for ways to generate more income.
- Consider postponing retirement a few years. Delaying the age when you take Social Security payments can deliver higher lifetime benefits. Being smart about when you claim Social Security could mean more money to help manage any debt you have left.
- Reevaluate your budget. The last thing you want is more debt just as you approach retirement. Take a hard look at your current spending habits and find areas you can cut. By reducing living expenses now, you’ll need less to support your lifestyle in retirement.
Your strategy for managing debt is an evolving process that changes relative to your life stage and circumstances. For many people, carrying debt in retirement is unavoidable. But the earlier you can formulate a strategy to confront it, the easier it is to tackle—and the better chance you give yourself of living the retirement you’ve envisioned.