You've worked extremely hard to retire on your terms, but you might have one last task to tackle before you make it official. You may want to consider paying off debt before retirement so that you can fully enjoy your post-work years with fewer liabilities — and less stress. If you're not sure why, or where, to start thinking about paying off some of your debt, here's what you should keep in mind.
Why Prioritize a Debt-Free Retirement?
You may have debt repayment on your preretirement checklist to avoid stress about paying off balances on a fixed income. While you're working, you may have more ability to generate extra cash to put toward your debts: You might be able to earn overtime hours, work a part-time side job, take on more responsibility in your current position and earn a raise, or switch jobs and negotiate a higher pay.
You may not have these kinds of options in retirement, or you may simply not want to work once you retire. You may be more limited by the source of your income — namely, Social Security or the money you already saved when you were working. You might prefer to use that money to fund your daily life and hobbies once you're retired, rather than paying off financial obligations.
Going into retirement with debt likely means that less money will be available to spend on what you really want to do, like traveling or engaging in hobbies you love. To enjoy more freedom with your finances in your retired life, paying off debt before retirement is a goal that may be worth considering. Here's what you may want to keep in mind.
Where to Start
Here are a few common debts to consider settling before you retire:
- Mortgage: Housing might be one of your biggest expenses in retirement, so if you can fully own your home before retiring, that helps remove a major line item from your budget. It also might make sense to pay off your mortgage before retirement if you're considering selling your current property and putting the proceeds toward a smaller home that will better suit your lifestyle needs in retirement.
- Credit card debt: Credit card balances can be challenging because their interest rates are often much higher than other types of debt. You may need to revisit your budget and commit to saving up for purchases that you would normally use a credit card for in order to pay off your credit card debt.
- Auto & other loans: Car payments and other smaller loans might be easier to manage, but they can still take up the cash you have available in retirement. Consider making a plan to repay these before you retire, and then think about saving up for future purchases and paying for them in cash instead of financing them.
Finally, consider being careful about what new debts you take on. This may include co-signing for a loan to support one of your loved ones. Keep in mind that if a loan that you co-sign for is defaulted on, you may be responsible for it and that could affect your retirement savings.
How to Help Make It Happen
Paying off debt before retirement will likely require that you start being proactive now while you're still working. Consider ways to boost your income to get there. You can also look at what nonessential expenses you can cut temporarily to free up more money to put toward balances and loans.
An organized debt repayment plan may help, too. Consider making a list of all your loans, debts and money owed. Make sure to include the balance, term, minimum monthly payment and the interest rate on each. You might also consider prioritizing these debts by highest interest rate first in order to slow down your total debt accumulation rate as you approach your goal.
Getting debt off your plate before your retirement could help you enjoy this period of your life even more. By paying down balances while you're still working, you'll help set yourself up for relaxation and the ability to focus on what matters most to you during your retirement years.