For many nearing retirement, financial planning can mean the difference between planning for your next cruise or worrying about the credit cards. Debt can be stressful at any time in your life, and especially pre-retirement.
Are you ready to tackle any of these sources of near retirement debt?
1. Credit Card Debt
Credit cards are quite useful, but if you carry a balance, the high-interest rates can quickly eat into your savings. If you are carrying a balance, adjust your spending down in order to chip away at the debt.
Before you hit retirement age, scale back and live for a few months on what you expect to be retirement income levels. This will keep you from running up credit card debt in retirement through false expectations. It is better to find out now so you can reprioritize your spending and/or scale back your retirement goals.
2. Borrowing Against a 401(k)
This can be useful to wipe out a short-term or high interest debt – but it must be carefully planned, used for as short a time as possible, and be the last resort for borrowing. Should you leave your job, you will have to repay immediately the outstanding loan balance, whether you were fired, quit, or retired. By definition, you must eliminate this debt by retirement age or face unpleasant repayment consequences.
3. Home-Related Payments
If you are planning to downsize or buy a second vacation and/or retirement home, be wary of mortgage terms that will extend well into retirement. Consider a 15-year mortgage if you can swing it, or put as much cash down as you can afford to keep the debt manageable.
If you are taking out home equity loans or lines of credit, keep the terms as short as possible and try to borrow only what you need.
While you may get tax breaks on the mortgage, your tax and deduction status may change as you shift into retirement mode. Check with your accountant if you are unsure how this affects your situation.
The common thread is to avoid overspending. Don’t go into more debt than you can reasonably repay should you suffer an unexpected drop in income.
4. Auto Loans
You may not be able to afford to pay cash for a car, but consider the long-term picture before you buy. Can you really afford the car you want to buy, or does it make sense to scale back to a used car or a less-expensive model? Don’t fall prey to the stereotypical mid-life crisis sports car or tricked-out SUV that costs a lot to buy, insure, repair and operate.
Buy a car that is within your means, and structure the loan so it is over a short a time as possible. Avoid today’s newer long term loans (7-8 years) that will lower your payments but cost you more in interest, and are likely to have you still owing money on the car when it is time to trade it in.
5. Assuming Debts of Others
Be very careful when considering co-signing any loan. Whether it is to help your child, brother-in-law, or work associate, you are effectively handing another person the ability to rack up debts that you have no control over but for which you are ultimately responsible.
If you have cosigned, see if you can buy it out or lower the debt enough so that the primary debtor can handle the remaining debt by him/herself.
Another common method of assuming debt is paying off your child’s student loans for them. It can be tough to watch the process, but your children can take responsibility for their own debt. For me, paying off my student loan also meant a positive FICO score jump.
Retirement is meant to be an enjoyable time, to relax and explore things you did not have time to do before. Be pre-emptive with your debt, and don’t let worries about debt ruin your retirement vacations.
The Short Version
- Before you hit retirement age, scale back and live for a few months on what you expect to be retirement income levels.
- Don’t go into more debt than you can reasonably repay should you suffer an unexpected drop in income.
- Buy a car that is within your means, and structure the loan so it is over a short a time as possible.
