Debt can cast a shadow over your financial well-being, hindering your progress and limiting your opportunities for growth at any stage of life.
However, in the context of retirement, the weight of debt can become particularly burdensome. As you transition into a phase of fixed incomes and evolving priorities, the monthly obligations of debt payments can strain your resources and jeopardize your financial security. Fortunately, there are things you can do today to address debt before heading into retirement.
Mortgage Debt
According to Scott Nelson, the founder of MoneyNerd, it’s crucial to prioritize paying off mortgage debt before retiring.
Mortgages often come with high-interest rates, making them expensive to maintain over the long term. However, it’s important to be mindful of your specific agreement with the lender to avoid potential penalties. Some lenders may impose an Early Repayment Charge (ERC) for exceeding monthly overpayment limits or paying off the entire mortgage ahead of schedule. On the other hand, certain lenders may permit annual overpayments of up to 10% without any additional charges, referred to as an Annual Overpayment Allowance (AOA).
You have several options to pay off your mortgage faster or reduce the amount you owe. If you’re still many years away from retirement, you might benefit from refinancing to a shorter-term mortgage — such as a 15-year loan — that will also reduce the amount of interest you pay over time.
If you’re closer to retirement age, make additional payments on your current mortgage and pay it off faster. You can make an extra payment each month. Make sure your extra payment goes toward the loan principal, so your debt decreases faster. You also can use a work bonus to make an extra mortgage payment at the end of every year.
Or, you can downsize years before retirement to a house that requires a much smaller mortgage — and smaller utility, insurance and tax bills. Then, you can pay off your mortgage faster and free up more income to boost retirement savings, or cover costs in retirement.
Overall, evaluating your mortgage terms and considering strategic debt reduction can help ensure a more financially secure retirement.
Credit Card Debt
Financial advisor Young Pham from Bizreport shares that credit card debt with high interest rates can significantly impact your retirement savings. It’s important to prioritize paying off these debts as soon as possible. Remember, unlike mortgage and student loan interest, you can’t deduct credit card interest on your tax return.
To start, Pham suggests creating a budget that includes a dedicated portion of your income specifically for paying off credit card debt. Explore options such as transferring balances to a card with a lower interest rate or consolidating your credit card debt into a lower-interest loan.
Use an online credit card calculator to see how long it will take to pay off what you owe based on the monthly payments you make. For example, if you owe $5,000 on a card with a 15% APR and pay $300 per month, it will take one year and seven months to pay it off — and you’ll pay $642 in interest. If you increase monthly payments to $500, it will take only a year to wipe out your debt, and you’ll pay just $375 in interest.
Student Loan Debt
James Rochester, the Chief Finance Officer at CashBlog, tells GOBankingRates that taking care of student loan debt should be a priority before entering retirement. Studies show that a significant percentage of baby boomers with student loan debt have struggled to save for retirement due to its financial impact.
If you are still making payments on your student loans, it’s advisable to prioritize paying them off before retiring. By doing so, you can free up more money in your monthly budget, allowing you to increase your retirement savings and reduce expenses during retirement.
Consider exploring options such as refinancing your loans to secure a lower interest rate and a shorter repayment period. This approach will help minimize the total interest paid and accelerate the repayment process. Companies like SoFi and CommonBond offer loan refinancing services.
If you co-signed a loan for a student who is now an adult, it may be worthwhile to have a conversation about increasing their contribution to expedite the loan payoff. It is essential to avoid carrying this debt burden into your retirement years and ensure a financially secure future.
Auto Loans
Auto loans typically come with interest rates, and over time, the interest can add up significantly. By paying off your auto loan before retiring, you can save money on interest payments and use those funds for other retirement expenses.
Additionally, having an auto loan means you have a monthly payment obligation, which can impact your monthly budget during retirement. By eliminating this debt, you can reduce your monthly expenses and have more financial flexibility in retirement.
If you think you won’t be able to afford your car payments when you retire, consider trading in your pricey vehicle for a more affordable one. Ask yourself if you really need a luxury SUV. Look for a car you can buy with cash or with a smaller loan that can be paid off quickly.
Medical Debt
It’s a good idea to pay off medical debt before you retire, because healthcare costs can be hefty in retirement. Fidelity Investments found that a 65-year-old person retiring in 2023 will need an average of $157,500 (after tax) to cover medical costs in retirement.
You might be able to negotiate your medical bills and lower the amount you have to pay. Use free resources such as the websites Healthcare Bluebook or New Choice Health to find the cost for certain medical procedures and learn if you were charged more than the going rate. Call the billing department and politely push for a discount if the rate you were charged is higher than the average.
It might also help to meet with a financial advisor who can create a plan to get rid of debt and develop a timeline for retirement. If you need debt help but can’t afford a financial planner, reach out to a nonprofit credit counseling agency that offers free or low-cost assistance. You can also find certified counselors through the National Foundation for Credit Counseling.
