Many people envision their retirement as an easy-going time, finally freed from the worries of their working years. The unfortunate reality, however, is that a large number of older people will enter this period of their lives still shouldering a significant amount of debt.
Even so, if you’re among those retiring with debt, that doesn’t mean you’ll be unable to enjoy these years to the fullest – you’ll just need to take a proactive approach to reduce what you owe so it won’t be a burden at all.
Prioritize Your Debts
Begin by considering which debts should be paid off first. Credit card debit is usually at the top of the list, with other unsecured debts, because these tend to have the highest interest rates.
Since a high interest rate means you’re paying much more money over time, it’s imperative to reduce the total amount owed on these types of loans as quickly as possible. Likewise, debts like a house or car payment should be placed near the bottom of the list of priorities because these loans typically carry a lower interest rate.
In some cases, money one could use to pay off a low-interest loan can be better used by investing. Each case is different, and you’ll be better able to prioritize once you have taken an honest look at your situation and crafted a plan.
Create a Longterm Plan and a Budget
As stated above, the most efficient way to put a collar on debt during retirement is to begin with honestly assessing the situation. This really comes down to the most basic elements of financial planning.
You must know your debt-to-income ratio, including how much money you have coming in each month, whether from pension plans, Social Security, or other sources, and how much you need to spend to live.
Everyone budgets differently, so test out a few different methods to find a way that works for you. Some people prefer tracking their spending on a smartphone app, while others like to put pencil to paper on a more traditional spreadsheet.
Remember it’s all for your benefit, so try whatever method you need to stay on track to complete debt elimination.
Pay Your Bills on Time or Early
If the goal is to eliminate your debt, one great approach to take is paying off loans early, by paying more than you owed, as long as that still allows you to meet the obligations of other loan payments.
That’s because missed payments can create a world of unnecessary problems. Interest rates can skyrocket, and the addition of late fees and charges can be crippling. Your credit score can be affected.
In the end, missing payments will only add to the very burden you’re trying to get rid of.
Downsize Whatever You Can
It’s harder in retirement to consider downsizing aspects of one’s life, but this is a major area where savings can be achieved. This is especially true for the older adult who is entering retirement alone and without a spouse or partner, especially if their loved one has passed away. The large home they once shared, for instance, may no longer be financially feasible. The RV that was used to take trips across the country might need to be sold.
These are hard choices, but if you’re considering these serious options, you can view them as a proactive, even positive step toward becoming debt-free.
Another possibility regarding living arrangements can be to consider a roommate. It is important, of course, to find the right person, but a long-time friend who is facing the same challenges might be a good fit. The upside here is that having a roommate can also ease feelings of loneliness — along with lowering the rent.
Be Careful With Your Retirement Fund
Retirement savings funds can certainly be a source of additional money which can be used to pay off debt, but you must be very careful in how you leverage your retirement plan. If there isn’t a clear plan for using the money, taking it out can create even more debt in the long run.
It is important to know how much money can be withdrawn before the withdrawal affects your tax rate. Using retirement money is one of the most direct alternatives for paying off debt, but it must be done with prudence and serious consideration.
Get a Part-Time Job
Another job might not sound like a fun idea at first, but many people feel that a part-time gig in retirement is a great way to get involved in their local community.
If you pick up a small job, you’ll reap more than just the benefits of your check. You may find you enjoy feeling like you’re still able to make a contribution to the workforce. You can make new friends. And a part-time job can help to build a community and fill any otherwise solitary hours.
And of course, the added money coming in can be used to pay down the debt on a credit card or other high-interest debt, and even a small paycheck adds up to a significant number over the course of a year.
With a little forethought and a strong commitment to reducing debt, it is possible for you to enjoy your retirement as it was meant to be enjoyed.
The key is simply to be proactive and begin addressing issues immediately.
By Maricel Tabalba
Maricel Tabalba is a freelance contributor for Credit.com who is interested in writing about personal finance for millennials and college students. She earned her Bachelor of Arts in English with a minor in Communication from the University of Illinois at Chicago.