In retirement, cash is king, and every dollar of debt is a direct drain on your cash flow. Nearly 65% of today’s retirees enter their golden years with a debt burden which can only become a hardship while trying to live on a fixed income. But, it’s never too late (nor too early) to take counter measures that will help you get back on track.
Today’s pre-retirees face an uphill battle just trying to save enough and earn enough on their savings to be able to retire on time. And if you're awash in debt, you have probably had to put your savings on the back burner to focus on debt reduction, which, for practical purposes is smart, but it is also the primary reason why more people will need to delay retirement or drastically downsize their retirement lifestyle.
Should I try to pay off my mortgage before retirement?
The days of mortgage-burning parties are nearly a thing of the past. During the home refinancing hey days of the last five to ten years, 63% of homeowners in their 50s and 60s refinanced their mortgages and started home equity lines of equity.
Financial planners are divided on whether it’s a good idea to try to pay down your mortgage as soon as possible. There are those who say that it may be a disadvantage to lose the mortgage interest deduction. The reality is, however, that many retirees don’t have enough personal deductions to be able to use their mortgage deduction with most only qualifying for the standard deduction. Also, if you enter retirement with 10 or 20 years paid on your mortgage, the interest portion has declined to the extent that it’s not generating enough of a deduction for many people.
The answer is, yes, you should try to pay down your mortgage by making extra principal payments when you can. The alternative, which is becoming more of preference for an increasing number of retirees is to simply downsize and sell your home and apply the equity to a more affordable living space.
I know credit card debt is bad, but how do I save for retirement and pay down debt?
Sadly, this is turning into a classic dilemma faced by a majority of Americans. Unquestionably, you should try to pay off all high interest debt before retirement. With most retirement assets earning less than 6% a year, even 9% credit card debt will cost you vital cash flow. This is the time to get deadly serious about your credit card debt. Every penny you are paying towards debt needs to go towards your financial security, so you can’t begin implementing your debt payoff plan soon enough:
- Get on a budget: Set a monthly target for debt payments (and make it a stretch goal) and then budget everything else around that. Eliminate non-essential expenditures. Find ways to stretch your essential expenditures. Downsize your lifestyle now. Your goal should be to pay off your debt completely within a year. Oh, and STOP USING YOUR CREDIT CARD!
- Pay off smaller balances first: It’s easier and more motivating to check off the smaller targets first. It will help you build momentum as you tackle the bigger ones.
- De-clutter: It’s probably time to get rid of a lot of stuff anyway. You can raise more money than you think by getting rid of clothes, appliances, old cell phones, CDs, furniture and half the stuff in your garage by putting it all up for sale on E Bay.
- Save any excess cash flow: If you find ways to generate additional income it should be applied to savings. As soon as you reach your debt pay off goal, apply the budgeted debt payment to savings and don’t look back.
Should I just continue with my employment or should I try to earn an income in retirement?
Recent retirees and Boomer pre-retirees have actually began to forge a new normal for retirement by preparing for a new career well before their retirement date. Some have created a “transitional” relationship with their employer, scaling back hours or changing their status to “consultant.” Such arrangements can sometimes extend the working relationship with an employer. Some are branching out to start a business of their own or monetizing a hobby. Many boomers are already planning their new careers by hitting the books and learning new skills.
The prevailing attitude among a growing number of pre-retirees is why limit yourself by trading a life of work for a life of leisure? Rather, take control and trade in work you no longer want to do, for work you will really like to do.
By taking control of this new working life, many are more likely to be able to find an enjoyable and flexible balance of work and lifestyle that will sustain them financially, mentally, and psychologically.