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Debt and Your Retirement

6869770873_1528b7037eMost people’s vision of retirement not only involves freedom from work but also freedom from debt.   A debt-free retirement is a laudable goal, but it’s one that has become increasingly difficult for many to achieve:  two-thirds of people between the ages of 65 and 74 have some form of debt (Source: University of Michigan Retirement Research Center, September 2013).

The Debt-Free Retirement Goal

When you retire, you stop actively earning income and start living on your savings.   If you’re still paying off debt, those payments will be another fixed expense, which means you’ll have to draw more from your nest egg and have less to spend on things you truly enjoy.   By going into retirement debt free, you’ll lower your living expenses.

Reducing Debt before Retirement

If at all possible, you’ll want to eliminate your debt before you retire.   Of course, some types of debt are worse than others.   High-interest credit card debt can be a significant burden, so you’ll want to eliminate it as quickly as possible.  Look for areas in your budget where you can cut back and make extra debt payments, or consider a second job to make extra payments.

Getting debt-free before retirement may mean aligning your mortgage pay-off date with your retirement date; you may be able to bring your mortgage pay-off date closer by making extra payments.   Often, retirees want the peace of mind that comes with knowing they’ll own their home when they retire.   But that accelerated pay-off plan might not be right for everyone.  If you have a relatively low-interest mortgage, no other debt, and are already maxing out your retirement savings, you may feel comfortable sticking with your standard repayment plan, especially if you can get more from investing the money that you’d otherwise use to make extra mortgage payments.

One thing you shouldn’t doe: take money out of your retirement accounts to pay off credit card or mortgage debt.   If you focus all your financial resources on paying off your loans, you run the risk of retiring with inadequate savings.   Another potential misstep: prioritizing debt payoff over saving.   While you don’t want to be saddled with excessive debt, you also don’t want to end up cash poor in retirement without enough money to meet everyday expenses.

Debt in Retirement

Unfortunately, many people still end up nearing retirement holding a significant amount of debt.   If that’s your situation, you have several options.   One is to delay retirement for a few years while you concentrate on paying off debt.   Plus, if you continue to work, you’re not tapping your nest egg, and it can continue to grow.  In addition, if you delay claiming Social Security, your monthly payment may increase by up to 8% a year until you reach age 70.

If you must enter retirement with debt, you may need to pare down your lifestyle – traveling less frequently, moving to a smaller home, or giving up your boat or RV – to reduce debt and minimize the risk of outliving your retirement savings.   You could also continue to work part-time or as a consultant.   That can bring in extra income, and many people enjoy a more gradual transition to full retirement.

Finally, know that going into retirement with debt poses some other specific risks.   While most creditors can’t garnish your Social Security payments, child support, or certain other types of payments, you may lose up to 15% of your Social Security benefit. Please call if you’d like to discuss this in more detail.

Photo Credit: 401(K) 2013 via Compfight cc

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