Managing Debt Before Retirement

Managing Debt Before Retirement

Managing debt before retirement is crucial.  Carrying consumer debt in retirement can quickly reduce your monthly cash flow, or mean is you have to withdraw from retirement accounts faster than planned. Both situations put you at risk for running out of money during retirement.

Financial strain is a reality for many nearing the retirement phase.

  • Baby boomers carry an average credit card balance of $6,747 and $25,812 in total nonmortgage debt.
  • Generation Xers carry an average credit card debt of $7,718 and $32,878 in nonmortgage debt.

Whether you’re the last of the Gen Xers or the first of the Boomers, debt is a reality.  If you want to enjoy your retirement, you need to manage it properly.  The closer you are to retirement, the more accurately you need to calibrate the numbers between paying off debt and saving for retirement.

First, pay down high-interest-rate debt (such as student loans, credit cards, auto, and home).  Next move to a mix of debt repayment and investing when your debt interest rates are less than potential stock market returns.

  • Credit Card Debt = Pay first!  If your interest rate on a credit card is hovering at 20%, you’re paying one dollar for every five borrowed.
  • Mortgage Loan vs. Savings = Save first! If your choice is paying down a mortgage faster or contributing money to an IRA, you often end up ahead by prioritizing retirement savings.  This is also true if deciding whether to leave money in an IRA or withdraw it to pay your mortgage off.  Assume your IRA grows 6% that year and your mortgage interest rate is 3%.  That means for every dollar put into savings rather than paying down debt, you’ll end up with more money as a result.
  • Debt During Retirement = Pay with Caution!  One way to pay debts off is to use money from retirement plan distributions, Social Security income, or pension income. Tapping extra retirement funds can also be a solution. Use caution with this approach.  Taking a large distribution from your retirement account means reporting higher income that year.  It usually means you also pay more taxes.

Unfortunately, some of us head into retirement with debt, and it’s worth trying to get rid of as much as possible as early as possible.  If you’d like to review your financials and work out a plan for retiring as close to debt-free as possible, schedule a conversation with us today.

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