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Should You Carry Debt into Retirement?


Too much debt at any stage of life can be a problem, but it can be particularly problematic for people who are close to retiring. Carrying a lot of debt into retirement can stress your finances. And for most people, using retirement savings to pay the interest on debt means that there will be less money available to meet their daily needs.

Of course, debt won't be a concern if you have considerable assets available. Or, if you enjoy working and expect to continue doing so, you may feel comfortable about carrying debt into your 60s. Perhaps you have planned ahead and are confident that you will have enough savings to cover your debt payments and still live comfortably throughout your retirement.

However, if you are carrying a lot of debt, you should consider whether it is likely to reduce your options when it comes to doing the things you hoped to do in retirement. It may make more sense in this situation to eliminate or greatly reduce your debt total before retiring.

Tackling Debt the Smart Way

Your first and most important step in reducing your debt burden is to identify the debts that are costing you most in interest payments. Typically, credit cards and consumer loans have the highest interest rates. Focus on paying those down first. While the money you put toward debt payoff would not be available to invest elsewhere, you would essentially earn a return equal to the interest you would otherwise pay.

Look at the Pros and Cons of Paying Off Your Mortgage

Your home mortgage is likely your biggest debt. It may also be the one debt you would most like to pay off before retiring. Before you go any further, check first to determine if there is a penalty for prepayment. Also review the loan amortization schedule so that you can figure out how much interest you'd save by accelerating your payments. Typically, the amount of each monthly payment that goes towards the principal increases -- and the portion that represents interest decreases -- as you get further into the loan term. So paying off the mortgage a few years early may not save as much interest as you would hope. There are times when keeping a mortgage and allocating the cash to other investment opportunities may make more sense. Your financial professional can help you weigh the options and decide on a course of action.

Where Do You Find the Money?

It may seem overwhelming at first to even consider ways to reduce your debt while still saving for your retirement. However, you may have more options than you realize. Are there ways that you can simplify your lifestyle? Could you downsize to a smaller and less expensive home? Can you consider holding on to your vehicles for a little longer than you have in the past? Being proactive now about finding ways to reduce your expenses before you retire might go a long way toward freeing up the cash you need to pay down your debts. Taking action now to beef up your savings can improve your overall financial picture in the years ahead.

And be sure to talk to your financial professional for insights on steps you can take to lay the foundation for a more secure financial future.