In the past, it was the norm to pay off all your debts before entering retirement, including your mortgage.
Today, things aren’t the same. Many people are retiring with various types of debt such as mortgages, credit cards, car loans and student loans. And while every situation is different, I think it’s best to retire as debt free as possible or at least work toward reducing your debt as much as possible before your golden years.
If you reach retirement and find you still have debt in your name, these strategies can help you get out of the red.
Prioritize payments.
It’s important to understand that not all debt is created equal: There’s good debt and bad debt. Think of good debt by using the old adage, “It takes money to make money.” Good debt helps you generate income and increases your net worth. Conversely, bad debt is when you purchase depreciating assets such as cars.
If it doesn’t go up in value or generate income, you should avoid going into debt to buy it. Bad debt can also carry high interest rates, as with credit cards, making it difficult to pay off quickly and resulting in paying far more than you originally borrowed. Paying off your debt can be overwhelming. But prioritizing the elimination of your “bad debt” first can help you climb out of the hole quicker.
Create a budget.
If you haven’t done so before, I strongly suggest creating a budget. You may be surprised to find areas where you can cut expenses. Start by taking a cold, hard look at what you have coming into your accounts versus what’s going out.
This can be particularly important as you transition from a steady paycheck into retirement. Setting a reasonable goal for your monthly debt payments can help you create a plan for paying off your loans while also providing you with a timeline, so you can better understand when certain debts will be paid off. And while it may be obvious, at this stage of your life, you should avoid adding more debt to your balance sheet. A budget can go a long way in holding you accountable and can help you stick to a consistent repayment plan.
Consider a part-time job.
By definition, retirement means not working anymore, so the idea of going back to work may not fill your heart with joy.
However, even a temporary part-time job can provide some additional income and make a big difference in how quickly you get out of debt. The beauty of encore careers is you can think outside the box. If you enjoyed your previous job, you can consult with your former employer.
But you may also want to consider hanging out a shingle as a sole proprietor — or maybe you want to keep things simple and pick up a few hours at a local business that piques your interest such as a nursery, library or favorite retailer.
Keep in mind that if you started claiming Social Security benefits before your full retirement age, earning too much from a part-time job may reduce those benefits.
Stop supporting your kids.
It’s common for parents to help their adult children. According to a recent Merrill Lynch study, nearly 80 percent of parents with adult children between ages 18 and 35 provide financial support, spending an average of $6,600 per child per year. The study also found 7 out of 10 parents surveyed said they’ve put their kids’ financial needs ahead of their own need to save for retirement.
While it may be a parent’s instinct to help their children, this can be a grave mistake as it can sacrifice your financial independence in retirement and keep you in debt even longer. Sit down with your children and come up with a plan for them to take control of their own finances so you can better focus on managing your own.
Consult a financial advisor.
An experienced, qualified financial professional can help you better understand how best to tackle your debt. It’s not easy to get your finances in order, but having a knowledgeable professional in your corner can help you achieve your financial goals and get you on the right path.
Retiring with debt is far from ideal for many and it may be discouraging to find yourself buried in bills at this time in your life. However, with some proactive steps you can start significantly reducing your debt and eventually reach a point where you can celebrate being debt-free.
Skip Johnson is an advisor and partner at Great Waters Financial, a financial-planning firm and insurance agency with locations in Minneapolis, Richfield, Minnetonka, White Bear Lake and Duluth. He appears regularly on Fox 9’s morning news show. Learn more at greatwatersfinancial.com.