In an ideal world, people retire after they have paid off all of their debt. However, this is not always possible for a variety of reasons. While you should try to eliminate debt in the years leading up to retirement, many people stop working while they still have monthly credit card bills, mortgage payments, and loan installments. When this happens, it is important to formulate a strategic plan that will prevent this debt from becoming oppressive. Carrying debt means that you may not be able to realize all your retirement dreams, but, even worse, it could mean serious financial difficulties if you do not plan accordingly. If you’re retiring with debt, be sure to keep the following tips in mind.
Prioritize paying down the most expensive debt.
Most people have several different forms of debt, and some are more threatening than others, especially in retirement years. Many people view a mortgage as a good form of debt, since it represents an investment. Because of that, people often assign it a low priority compared to less beneficial forms of debt, such as credit cards. This sort of debt can snowball and cost a lot of money in the long run. Most credits cards have very high interest rates, so they should be paid off first, especially because they have no side benefits such as with student loans, which have tax-deductible interest. It’s important to sit down and figure out how much you owe and the interest rates on these different debts. Then, target the highest first. Focus on low-interest debt, such as a mortgage, down the road. In addition, it is worthwhile to think about the tax advantages of some debts, such as student loans.
Create and maintain an emergency fund.
Creating an emergency fund can seem daunting at first, but you should view it as a long-term project. Ideally, you would have amassed such a fund before your retirement, but even in retirement, it is necessary to set aside a little money each month in this account. Maintaining this cushion is important in the context of paying off debt because it can prevent the need to go further into debt. For example, if a major car repair becomes necessary, you can dip into your emergency fund rather than putting the whole repair on a credit card and increasing your balance even further. Ideally, an emergency fund will cover your living expenses for at least three months. In some cases, it may make sense to contribute money to an emergency fund rather than use it to pay down the principal on a debt, especially if the debt has a low interest rate.
Keep in mind that investment returns could outweigh interest.
Taking account of all interest rates on your debts can help you figure out if some debts can be deprioritized. While the monthly payment still needs to be made, some debts do not need to be paid down as quickly as possible. For example, car loans on new vehicles often come with very low interest rates. If you have an interest rate of 0.9 percent on a car loan, the additional money going to pay that debt would be better off in a low-risk investment that may provide a return of 3 percent or higher. In this situation, it makes sense to invest the money rather than use it to pay down your debt.
Think about selling off some assets.
Many people in retirement have assets they do not particularly need or want. Selling these assets can generate a considerable amount of cash that can be used to minimize debts. Sometimes, this could mean selling a home that is too large, especially if the gains from the sale would pay off the mortgage and fund the purchase of something more manageable. However, assets could mean a wide variety of different things, from artwork to older electronics, or even a vehicle that sits unused. As you approach retirement, or soon after you have stopped working, you should take inventory of your assets. Determine which assets you would be willing to sell to pay down your debts and potentially even generate some additional capital to invest.
Consider a part-time job to subsidize finances.
Retirement does not preclude someone from working. While taking on a full-time job would defeat the purpose of retirement, you may want to consider a part-time position, especially if you can work your interests into the position. For example, if you enjoy woodworking as a hobby, you can start creating items to sell at local farmers markets, craft fairs, or even nearby shops. People retiring from a specialized field may be able to use their skills as a consultant, which can allow you to earn a considerable amount of money in a comparatively short amount of time. Working part-time also helps beat the boredom that is sometimes associated with retirement—if your job is something you enjoy, it can provide entertainment that generates money, rather than consumes it.