Opinions, reviews, analyses & recommendations are the author’s alone and have not been reviewed, endorsed or approved by any of these entities.
Being in debt while you are still working can be a nagging problem and even prevent you from saving for retirement. But carrying that debt into retirement can also be dangerous, and in some cases, even more so.
When you are in retirement, you are working with a fixed income. The simple truth is, you can't afford to have a majority of your income eaten up by debt payments.
To get the most out of your retirement, you need to make sure you have as much money as possible to fund the lifestyle you desire. Here are three types of debt you should work on eliminating before you retire.
If you are living with a fixed retirement income, you might not be able to afford to make the extra payments on the money owed. If you are spending years in repayment, much of your fixed-income ends up going to high interest payments.
Credit card debt can not only wreck your credit score, but it's also costly to pay off. For example, if you have a credit card with a $5,000 balance with 18% interest, it will take you roughly 84 months to pay it off. Not only that, but you will pay close to $4,320 in interest over that period.
HOW TO PAY IT OFF
It's best to come up with a plan to eliminate unsecured debt during your working years. A straightforward approach to paying off credit card debt is to list out your present debts, figure out which cards charge the most interest and pay those off first before moving on to the ones with less interest. Go to Debt.com to see how long it will take to pay off your credit cards. Here is a list of articles that will help you come up with a plan to pay off credit card debt:
- Pay off Debt With the Debt Snowball Method
- How to Pay Down Debt Using the Avalanche Method
- How to Create a Plan to Pay Off Debt
Taking advantage of balance transfers to eliminate debt faster might also be an option. You can transfer your total balance to a card with a lower interest rate than what you are currently paying to save time and money on interest payments.
STUDENT LOAN DEBT
Student loans are often viewed as a “younger-aged” problem, but the truth is, more and more older Americans are finding themselves on the hook for educational loans. Not only is this debt they took out for themselves, but the major problem is when parents take out loans for their children's education.
The process of being accepted for a Parent PLUS loan is minimal. There is only a basic credit check and no underwriting to determine whether the borrower has the income or ability to repay the loans. With emotions involved, it's easy to take on more than you can handle. You may not realize it, but in retirement, even a small amount can prove difficult to repay.
Funding your child's education can be an emotional topic.
I would love to help my son pay for college, but I won't sacrifice my own retirement to do so.
Instead, I took another approach and started planning and saving early for his educational costs. Two weeks after my son was born, I opened a UTMA account.
Throughout the year, I save my leftover change from my cash spending and invest it in his UTMA at the end of the year. I will save what I can during my working years, and I will help him as much as I can financially, but only to a limit that I can honestly afford.
The truth is, helping my son pay for his education is important to me, but he also has more time than me to pay off his student loans. When I am a senior living on a fixed income, I will not be able to generate more money to repay these debts, and I can't replace the retirement savings that I take out for repayment.
HOW TO PAY IT OFF
When you are in a financial bind, there are different ways to you can repay your student loan debts that make it a little easier on your budget. For example, if you only have Direct Loans, there are Income-Driven Repayment Plans that allow you to make monthly payments based on your income and family size.
If you decide to use one of these options, you have to keep in mind that it will extend the period of time that you will be paying off your student loans. I recommend using these options if you are in a financial hard spot, but make sure your time on these plans is limited. If you can, I recommend sticking to the Standard Repayment Plan, which will pay off your student loans in the shortest amount of time while saving you the most money on interest.
There is an option to consolidate Parent PLUS loans. You could possibly decrease high interest rates but the parent must qualify based on credit and income. Refinancing is another option for Parent PLUS loans.
Many people who own homes or property take out 30-year mortgages in their early 30s and manage to pay off their loans by the time they retire. But what happens when you buy a home or property later in life?
If you end up carrying mortgage debt into retirement, that will make what's already your greatest monthly expense even more burdensome. Just like with people, the older a home becomes, the more money it costs to keep them “healthy.”
Dealing with a mortgage payment and the up-keeping costs of owning an older home during retirement can cause substantial income restrictions. If you work on getting rid of your mortgage payment before retirement, that's one significant bill you don't have to worry about.
If you can pay off your mortgage before retirement, you can significantly decrease your housing costs, eliminate your biggest expense, and you can make your savings last much longer.
If you can, try buying a home on the low-end of what you can afford and avoid refinancing your home, which usually extends your repayment period.
HOW TO PAY IT OFF
One way to tackle your mortgage debt is by making extra payments to your loan. Think of it this way. The more extra payments you make on your mortgage, the more each one of your regular payments goes straight to the principal balance. Try making an additional house payment every quarter or dividing your mortgage payment by 12 and add that amount to each monthly mortgage payment that you make.
Just a word of caution. If you are thinking about making extra mortgage payments, make sure you talk to your mortgage company because they might charge prepayment penalties. When completing an extra mortgage payment, make sure it's getting applied to the principal balance of your loan and not next month's payment.
It's critical to take steps to ensure you have an effective debt management strategy in place and to take early action steps to eliminate debt before you retire.