A retirement free of debt sounds like a dream to most of us, and with careful planning it can be your reality. But if you’re making a plan to pay down debts before you retire, it’s important to know that not all debts are created equal. Some are definitely more important and deserve more of your focus than others.
Credit card debt. According to the Employment Benefit Research Institute, 40 percent of retirees between the ages of 62 and 75 are carrying credit card debt. Many bring the debt into retirement, but others find themselves charging up credit card balances after retirement. This can be due to a lack of personal savings to cover emergencies, but can also happen when lifestyle expectations simply outpace budget.
If you’re going to focus on one type of debt to eliminate before you retire, credit card debt should receive your full attention. The debt is revolving, meaning you end up paying interest on interest. Over the years, you can essentially throw away a significant amount of money.
Car loans. Car loans come with a fixed interest rate and term, so they’re not as damaging as credit cards. However, the interest rates can sometimes be a bit too high, and some people find it difficult to manage a car payment once their income drops as they stop working. If you can pay off a car before retirement, it’s a good idea.
Mortgage payments. It would be wonderful to retire and live free of a mortgage payment, but this type of debt is actually the least concerning. With a very low fixed interest rate (currently around 3 percent), your payments remain predictable. And if you need to make repairs or cover emergency expenses, pulling equity out of your home via a mortgage finance is often a better idea than using high-interest credit cards.
Also, keep in mind that interest paid toward a mortgage is tax deductible, whereas other types of debt are not. If you’re going to carry some debt into retirement, strategizing your mortgage payments can actually help you save on income taxes.
To make a plan to pay down debt and enjoy a more carefree retirement lifestyle, keep meeting with us regularly. We can help you decide which debts to focus on, so that you put your money toward the best use for the future.