As retirement gets closer, you should get more serious about getting rid of your debt. When most people calculate the amount of money they need to have during retirement, they don’t typically consider debt payments. So, if you retire and you haven’t paid off your debt, you’ll have to make some serious living adjustments to live off your retirement income and continue paying your debt. Or worse, you might have to come out of retirement and return to work until you can pay off your debt for good.
The further you are from retiring, the more time you have to pay off your debt. You can take your time, but the years may fly by before you know it.
You should get rid of credit cards and other unsecured debts first. These debts typically have the highest interest rate and no fixed repayment period. As a matter of fact, if you make the minimum payment the credit card issuer sets in your billing statement, it could take several years to pay off your debt. In that time, you’ll have paid a ton of interest, money you could have been putting into your retirement savings.
You don’t necessarily have to stop your retirement contributions to pay off your debt, but it depends on how much money you have left after all your expenses are paid. If you don’t have enough leftover after taxes, retirement, and other expenses, you may consider reducing your retirement savings for a few years, just until you can pay off your debt. Then, once your debt is fully paid, you can start your contributions where you left off.
Debt Relief Options Before Retirement
You have several debt relief options available, but you should choose the one that works best with your finances and the one whose consequences are acceptable for you. You can pay off the debt on your own with a plan that you create, but it likely requires you to pay more than the minimum each month on at least one of your accounts. The more you can pay each month, the sooner you can probably pay off your debts.
Another popular option is consumer credit counseling. It may be a safe choice, with the credit counselor negotiating a lower interest rate and monthly payment with your creditors. Credit counseling goes on your credit report, but likely doesn’t hurt your credit score, and could a payment similar to your current minimum payments.
In the past few years, debt consolidation was another popular option. Homeowners would use the equity in their homes to consolidate their debt and pay off the debt at a lower interest rate and fixed repayment period. However, home equity loans aren’t as plentiful as they once were. They were always risky too, because you put your house on the line for your credit card debt.
You could consolidate your debt by borrowing against your retirement plan, but this money typically has to be repaid within a certain amount of time. And if you leave your job, you’ll probably have to repay the balance immediately or withdraw your retirement funds. That could mean taxes and early withdrawal penalties.
Debt settlement is another popular option where you settle your credit card debts for less than the full balance due. But, you typically have to first miss payments.
As you see, there are a variety of options available for paying off unsecured debt and there’s not one correct choice for everyone in debt. The closer you are to retirement, however, the more important it likely becomes to pay off your debt fast so you can avoid paying that extra expense out of your retirement income.