6 Tips to Ensure You Retire Debt Free
When you retire, the last thing you want to worry about is making room in your budget to pay off debt. If you end up having a lot to pay off after you’ve left the workforce, you could eat through your budgeted money much faster than you thought. Unfortunately, too many people find themselves in this situation.
“According to EBRI, the average debt for households age 55 and over increased from $73,727 in 2007 to $75,082 in 2010, and total debt payments as a percentage of income increased from 10.8% in 2007 to 11.4% in 2010. This is an unsettling trend when you combine it with the fact that housing is a major component of debt for families age 55 and older,” according to Forbes.
And, how do you expect to do anything fun once you’ve retired if you always feel like you’re strapped for cash? To avoid this problem, make sure you are debt free by the time you retire. That means your mortgage should be paid off, your credit cards have zero balances, and you should own a car that has been paid off. Ready to find out how you can retire with no debt? Read these six tips.
1. Make a budget
Get on track by creating a monthly budget for yourself. In order to improve your finances, eliminate debt and get on retirement track, you need to know exactly what you’re dealing with. Start by keeping track of your income and expenses, and make sure your budget accounts for everything – monthly expenses, yearly expenses and occasional expenses. Make sure you also account for any fluctuations in your monthly expenses (such as utility bills), according to Military.com. Once you understand your budget you can begin figuring out ways to add cash to it by finding places to decrease your expenses. The extra cash will help you pay off your debts more quickly. Once you’ve eliminated them entirely, you can start building up your retirement nest.
2. Pay more than the minimum
This is extremely important if you’re hoping to eliminate your debt. The smaller the payment, the longer it’s going to take you to repay the charges. Rather than pay a tiny amount, pay as much as you can each month. If you usually pay a $100 minimum, do whatever you can to double that to at least $200, according to The Motley Fool. Examine your expenses (this is where budgeting comes into play) and figure out where you can cut down on expenses – forego going out to eat and buying Starbucks coffee. Take that money and make sure it’s going toward your monthly payment. Those small sacrifices will help you increase your payments, which in turn, will save you at least hundreds of dollars in interest payments.
3. Match up your mortgage payoff date with your retirement date
Use an authorization calculator to do this, Forbes suggests. So, if you’re planning to retire in seventeen years and have a thirty-year mortgage of $200,000 at 5 percent, you can make an additional principal payment of $385 per month, which will change the payoff date to match the time you’re going to retire, says Forbes.
And, since you’re keeping the mortgage at a thirty-year fixed loan instead of a fifteen-year fixed loan, you keep the flexibility of not having to make the extra payment (there may be times when other financial obligations come up).
4. Borrow against your life insurance
The Motley Fool writes that you can borrow against your life insurance policy if it has a cash value. Yes, you’re borrowing your own money and the interest rate is often well below commercial rates. You can also take more time to repay the loan. Just make sure you actually repay it – should you die before you get the chance, the outstanding balance plus any interest will be deducted from the face value of the policy that is payable to your beneficiary.
“While that seems a small price to pay to get out of debt now, it could be burdensome to your loved ones should you sleep the eternal sleep before paying it back,” per The Motley Fool.
5. Temporarily reduce your retirement contributions
Tread carefully with this one. This is something you should only consider if you have a lot of credit card debt and aren’t able to get a second job to help eliminate some of your debt, according to Forbes. If you’ve got a lot of debt and are running out of ways to eliminate it, then it’s time to consider temporarily lowering your contributions to at least the level that your company matches. The difference will pay off your credit cards by using a “debt blaster” strategy.
“This strategy works by paying extra on the debt with the highest interest rate while paying the minimum on everything else. Then, as each debt is paid off, take the entire payment and add it to the next highest-rate debt until all your debt is paid off,” says Forbes. Immediately after, you need to increase your contributions to your retirement plan and get rid of your credit cards for good.
6. Consider debt consolidation
This should be your very last option. “If you’re at or near retirement age and are still dealing with thousands of dollars in credit card debt, look at your options for consolidating or eliminating the debt. In some cases, bankruptcy may be the only choice,” Free Credit Score writes.
If your situation becomes dire, make sure you take some time to discuss your situation with a bankruptcy lawyer. In most cases, there’s still a chance you can eliminate your debt with the help from a credit counseling agency, which will help you figure out how to consolidate your bills into one monthly payment with a lower interest rate. An agency should be able to help you get out of debt more quickly, allowing you to enter your work-free years debt free as well.