Easy Ways to Become Debt Free Before Retirement
As you begin to think about retirement, you’ve probably thought about things like draw-down strategies and the amount you will need for yearly expenses. And, as you probably know, the lower your yearly expenses, the less you will need in your retirement nest egg.
So, if you’re finding that you can’t quite make the numbers work between what you have set aside for retirement and what you need to live, you may want to consider the goal of becoming debt free before you retire.
The following are a few tips to help you pay off your debt before you retire.
Create a Budget
The first and most important step you’ll want to take to become debt free is to set up a budget. If you’ve never created one before, it may seem daunting at first – but it doesn’t have to be.
A budget can be as simple as a record of expenses compared to your income. You may use a spreadsheet to manually track these items, write them down with pen and paper, or you may review your bank statements.
Or, you can use tools to help automate this for you. Mint is one of my favorite tools for budgeting because it does all the work for me. After connecting my accounts, it tracks both my expenses and my income in real-time. I can set expense categories and monthly limits. If I go over in a category, Mint notifies me.
Whichever method you use, a budget is pivotal for you as you prepare for retirement. Once you’ve set one up, look at your categories. Start to consider which areas are negotiables (in case you need to remove them or reduce them later) and which aren’t negotiable.
Most of all, take a look at your expenses that go toward debt. Review how much of an impact this has on your budget and consider if reducing debt is the right plan for you.
If it is, consider the following tips to tackle your debt by category.
RELATED READING: How to Set up a Cash Budget and using the Envelope Method
Student Loans Hindering you From a Debt Free Retirement
It may be decades since you last attended college, but there’s a chance you could still have student loans to your name.
According to the Wall Street Journal, in 2017, on average, student loan borrowers in their 60s still owed $33,800. What’s worse is more than 40,000 people aged 65 and older defaulted on student loans in 2015, which is a 362% increase over the previous decade.
Why is this so high? Often, these student loans aren’t their own; they’re for their children or grandchildren. Roughly 93% of all new private student loans to undergrad students have an adult signature on them – usually by parents and grandparents.
If you’ve graciously co-signed on loans for a student, remember that you are liable for paying those off, and you should consider those as your debts, too.
How do you get rid of those as soon as possible? You have a few options: pay them off or refinance.
Pay the loans off
The easiest way to get these off your mind and out of your debts is to pay them off.
If the loans are for you, consider any additional room you may have in your budget to put a little extra money toward your student loans. Every little extra bit helps.
If these student loans aren’t for your education, you may want to work with the student to get a plan in place for quick payoff. You may not be interested in paying them off yourself, and that’s absolutely fine. Help the student understand the impact of a few extra dollars each payment to expedite the payoff process.
Refinance the student loans
One of the reasons a co-signer is needed on student loans is because of the lack of credit history of many entering college students. However, once the student is out of college and has a career, that student may have established credit. Encouraging the student to refinance loans under his or her own name will free your role of this debt being yours, and may help the student get better rates.
We refinanced my husband’s graduate school student loans recently and saw a significant reduction in his interest rates. Changing nothing else about our payments, that would have allowed us to pay off the loans almost a year sooner.
Pay Off Your Mortgage
A recent study found that 44% of people in their 60s and 70s in retirement still have mortgages on their homes. While some do plan to pay the mortgage off within a few years, roughly 17% of them say they may never pay it off.
If you are at all able, try to pay off your mortgage before you retire. As you think about your monthly required expenses in retirement, housing costs could add a significant amount to those expenses. And, greater housing expenses add to the amount of money you’ll need in your nest egg to retire.
If you feel that you’ll be downsizing your home when you retire, consider your options for finding a place where the sale of your larger home could cover the entirety of the expenses of your new home. You’ll have a place to live and no mortgage payment.
Slash Credit Card and Consumer Debt
As you get closer to living on a fixed income, ensuring that you can afford what you spend is of utmost priority. This means that you’ll want to steer clear of racking up credit card debt and consumer debt that you may not be able to afford in retirement.
This is where the budget you set up can really come into play. Understand what your income is each month and how you can pay for your expenses without taking on more debt.
If you already have credit card debt, this is a good time to pay it off. Whether you were using credit cards for medical bills, vacations, or large purchases – the balance can follow you for years if you don’t make it a priority.
This is likely the first debt of all debts you’d want to pay off because the interest rates can be astronomical. Paying down the minimum balance won’t be enough to make a sizable impact.
Considering a Debt Free Retirement
If you’re hoping to have a debt free retirement, know it’s possible to achieve. Whether you have credit card debt, a car loan, a mortgage, student loans, or any other debt – you can pay it off before retiring. Use budgeting tools to get you where you want to be so that you don’t have money stress while in retirement.