As you get closer to retirement, your financial priorities will start to change, and paying off debt will become more critical. Reducing and managing your debt before heading into retirement will lessen the burden and allow you to enjoy the retirement years.
Even if you retire with debt that you feel is manageable, there is no way to be able to predict problems in the future. A health emergency, a sudden change in your retirement savings, and other financial issues could arise and make finances during your retirement challenging. There are several strategies that you can use to pay off or manage your debt before retirement.
Put Together a Budget
To manage and pay off your debt, start now by compiling a budget that will help you know where you’re at every month. Budgeting now will give you some practice before you retire when you are on a fixed income. To create the budget, make a note of all of the money you have coming in each month. Then take into consideration all of your monthly expenses such as food, utilities, entertainment, and other bills. You now have a snapshot of how much money you are earning versus spending each month. The additional cash that appears in the budget can be used to save or pay down your debt faster.
Focus on Re-Paying Your Debt
It’s time to prioritize repayments so you can lessen your debt as much as possible. Since credit cards have the highest interest rates and you could have a revolving balance, these should be your priority. If you have other loans with fixed interest rates and payments like auto or mortgage loans, consider chipping away at those too. These types of loans are easier to plan for in retirement, but having one less payment in retirement can be worth it.
Two recommended methods to use as repayment strategies are the avalanche method and the snowball method. The avalanche method will have you make minimum payments on all of your debt except the one that has the highest interest rate. You focus your energy on paying that debt off first until it is wiped out. Once you have unloaded that debt, you move on and focus on the next highest interest debt, until all of your debt has been paid off.
The snowball method is a little different. With this method, you pay the minimum balance on all your debt except the smallest balance you have. All your extra funds will go toward paying this debt off first. Then you move on to the second-smallest, gaining momentum like a snowball rolling down a hill. The last debt you will pay off is the one with the highest balance.
Don’t Take on New Debt
As you get closer to the end of your career and moving into retirement, be cautious about adding more debt. Unless you are considering downsizing your home to move into a less expensive home and anticipate having additional money. It is especially risky to take out a 401(k) loan late in your career to cover other expenses. If you leave your job, the loan will be due. Also, it reduces your retirement savings and a taxable distribution.
A particularly bad idea is taking out loans for education. The average college debt is $20,000; whether you’re doing it for yourself or your kids, it’s generally not a good idea. In most cases, student loans can’t be dissolved, even in bankruptcy. Your Social Security payments can also be garnished up to 15% if you fall behind on payments.
Manage Your Debt
You might be able to negotiate lower fees or an interest rate on your credit card if you call your issuer. Consider talking to your lenders to explore options. You might also be able to save money by refinancing or consolidating your debt. There are credit cards which offer low or no interest on balance transfers for a certain length of time. Be sure to check if there is a balance transfer fee for this action. Low-rate personal loans or home equity lines of credit could also help consolidate your high-interest debt and save you money.
If you need with your financial needs, give the experts at NASB a call at 800-677-6272.