Retiring with debt is generally regarded as a fundamental financial sin: Every amount of money you owe decreases your income in retirement. But on the flip side, blindly categorizing debt reduction before retirement savings, especially for low-interest debt, can decrease your savings.
Hence people nearing retirement need to consider the costs and benefits of settling off debt vs. saving for retirement. The challenge is measuring your debt repayment to be certain it is doing the most for your retirement plan. Foremost, pay down high-interest rate debt, and then move to a combination of debt repayment and investing when your debt interest rates are less than likely stock market returns.
For most people, that means private student loans and liquidating credit card debt, before moving on to balance retirement investing against paying off car loans, federal student loans, and your mortgage.
Here are few ways to reduce your debt for retirement
Review your budget to improve savings and trim debt.
Whenever you establish a budget, include line items for every expense and savings goal, comprising settling off debt and adding to retirement funds. Even if your contributions each month are minimum, you are setting up good habits.
Use a household budget worksheet (PDF) to aid in analyzing where you spend and where you can save over the course of a month or two. Review recent bills, plus bank and credit card statements for saving.
Save in an emergency fund so you can evade unforeseen debt.
It would be difficult for you to cover unexpected expenses such as car repairs that need immediate funds. So, make it a goal to build an emergency savings fund. Take it one step at a time to focus on saving just one month of income as an initial point.
Having an emergency fund can also help minimize bad debt. Bad debts generally are credit cards or things like payday loans. They charge inflated interest rates which can avert you from getting ahead.
Emergency funds can be utilized for unforeseen expenses rather than putting them on a credit card. While debt has a place, utilizing it wisely may serve you better long term.
Save for retirement to get the minimal match from your employer.
Does free money sound like a great way to save? If you work for a company that offers a matching contribution on a 401(k) or 403(b) retirement plan, that is what you are receiving.
If you save 5%, for instance, and your employer matches it, you have immediately doubled your savings. That means $100 saved doubles to $200 saving without any extra budget steering from you.
Work toward improving the percentage you are putting in that retirement fund until you at minimal reach the maximum matching contribution from your employer.
Set some debt-reduction goals that aid you.
How much debt has affected all sorts of decisions you make. For instance, if you are expecting to buy your first home or improve to a larger home, carrying too much debt relative to your income may hamper the loan rate you can get. Sequencing debt repayment may aid in achieving this goal.
However, that does not mean you should put retirement saving on hold until you remove all debt. Most of us have tight deadlines and objectives, so it is not practical to think that you can cease to save for retirement to make your debt go away quickly.
Is It Ever Okay to Retire with Debt?
Carrying your debts into retirement is not ideal. Research has shown that seniors who retire without mortgages, for example, have faced less financial instability than those who do not. Although not being able to settle off all of your debts before you retire will not downfall you to an insolvent second act. The important thing is to categorize your finances in the years leading up to retirement to help you make the most of the money you have. As long as you have a plan to vanquish your debt, carrying some into retirement does not have to hinder your plans. Connect with Credit My Debt for more details.