How to Manage Debt During Retirement?
The idea of having outstanding credit card debt or mortgage loans during your retirement seems frightening but through some careful budgeting and repayment options, you can successfully pay off these balances. In this article, I’ll be highlighting several steps you can take to overcome this financial burden.
Of course, in an ideal world, all your debt would be paid off before you enter your retirement period, but with the current rising mortgages and student loan balances, this might not always be the reality. Luckily, since you are retired, you can take advantage of all the additional time you have to better your situation.
Reassess Your Debts and Prioritize
Look over all your accounts and how much interest you owe for each. Normally credit cards have the highest interest rates, so take note of that. Additionally, credit cards will generally have the most negative consequence for racking up debt since it can inhibit your ability to make essential purchases, making usually making credit card debt a priority over others.
This doesn’t mean you should quickly pay off loans with little to no interest rate just to get rid of the debt unless you’ve made that well thought out decision. This could make it difficult to pay off other debts. It’s usually advisable to simply maintain a constant payment routine that works with your budget. Speaking of budgeting, that’s our next tip.
Budget Your Finances
Although having a fixed income during your retirement can be difficult financially, it does make it easier to create a budget plan. Factor in all forms of income, including Social Security, pensions, and retirement savings and block a specific amount for all your expenses, including your debt repayment. You can do this on an Excel or Google spreadsheet or even use a digital app, whichever is more convenient for you.
From here, we can take a closer look at the possible repayment strategies you can use.
Avalanche Method: In this method, you make minimum payments on all your debt except the one with the highest interest. Normally, this will be your credit card. Through this method, you would pay off your credit card first, avoiding expensive interest debt as much as possible. For individuals with a great deal of debt, the avalanche method could be the better option as it reduces your repayment time as well.
Snowball Method: Although the avalanche method allows for faster repayment and less interest, the snowball method is better for building motivation since progress is more evident. Essentially, you pay your smallest debts and get them out of the way before addressing bigger ones. Since you’re knocking out one debt at a time, progress is faster and it keeps you motivated to pay off your other balances. The avalanche method may seem ideal but if you miss a month or two and begin losing motivation, it won’t be effective. If you feel you may fall into that rut, the snowball method is a safer option.
Guage Your Retirement Funds
Once you’ve selected a plan and figured out a budget with your retirement income, you may look for other, less immediate sources for funds. You may have an investment account that needs to be liquidated, but that can trigger tax payments. Generally, money taken from a traditional retirement account will almost always lead to an income tax on that amount.
Create an Income
This can be more time consuming and difficult, but if your current retirement income is cutting tight, then it might be smart to look for part-time employment. There are several opportunities for retirees to begin working again since you already have the skills and experiences needed to be employed. You can even look into selling old belongings for a more passive income. Ultimately if all else fails, try re-budgeting and spending less on your expenses.
Debatably, the most important factor in debt repayment is staying motivated. If you’re able to pay off your debt in the first few years of retirement, you can live comfortably in your future decades. Think of each payment as an investment in your future. Not only will you alleviate a burden but you can begin building better financial habits. The sooner you rid yourself of this debt, the sooner you can live the life you envision for yourself.