Starting your retirement off while you still have debt can lead to financial hardship. As incomes generally decrease upon retirement, debt repayments could leave you short on cash making it difficult to meet obligations and enjoy a reasonable standard of living.
Therefore, it is important to reduce and ideally eliminate debt before you retire. Read on to discover 3 tips to help you tackle your debt and enter retirement debt-free.
Why Debt Can Hurt Your Ability to Retire Comfortably
The average Baby Boomer had just over $6,000 in credit card debt in 2020, according to a survey by Experian, while an analysis by Credible revealed that Americans in their 60s who owe student loan debt have an average outstanding balance of $33,000.
Entering retirement with debt can significantly impact your standard of living, as briefly outlined earlier in this article, but holding debt during your working years is also bad news for your retirement. This is because it makes it more difficult for you to build a nest egg, as your debt repayments eat into your income and can greatly reduce how much money you can save per month.
So, it’s important to eliminate your debt as soon as possible, even if you’re not paying a particularly high rate of interest on it.
How to Eliminate Debt
1. Work Debt Repayment Into Your Budget
Having a budget is important whether or not you have debt repayments to make, but it’s even more important if you are trying to clear any debt. You should calculate your monthly income and expenditure, and try to cut spending if possible so you have more money to go towards debt repayments.
Be realistic when budgeting how much of your debt you’ll pay off each month, and remember to factor in interest and other fees (such as late penalties.)
2. Pay Off High Interest Rate Debt First
If you have a mixture of debt to pay off, such as credit card debt, a personal loan or a student loan, you should prioritize the debt that has the highest interest rate, as this is the most expensive debt to continue to hold.
Once this debt has been paid off, you can move onto the debt with the second-highest interest rate (and continue doing this until all of your debt has been paid off.)
3. Consider Debt Consolidation
Debt consolidation can be a smart move if you hold different types of debt. By consolidating your debt, you essentially take out a new loan at a lower rate of interest to pay off your existing loans which have a higher rate of interest.
This can save you a lot of money in the long run, but if you’re very close to paying off your debt, it might not be worth doing.
A Quick Summary
- It’s important to eliminate debt before you enter retirement, as it can put a strain on your finances once you stop working.
- Many Baby Boomers retire with thousands of dollars of debt, but you can retire debt-free if you follow our tips to pay off your loans before you enter retirement.
- Consolidating your debt can be an effective way to reduce your monthly payments, as can paying off your most expensive debt first.
- It’s important to work debt repayments into your monthly budget so you have a target to hit and have an idea of how long it will take you to fully pay off your debt.