Retiring while still in debt is not part of the American Dream that we envisioned when we started working, yet many retirees in the U.S. are faced with that situation. The goal is always to fully own your home and have no credit card or loan debt before you leave the ranks of the employed. Reality, unfortunately, doesn’t always look like that.
The solution, if you’re still a few years from retirement, is to find a way to pay off debt before you reach that long-awaited last day of work. According to Experian, people baby boomers carry average credit card balances of $6,747 and total non-mortgage debt of $25,812. Mortgage debt for this demographic is roughly $191,000.
The youngest baby boomers turn 57 this year, so there’s not a lot of time to turn things around. Paying off all debt by age 65 may not be possible. The priority should be to focus on the type of debt that you owe. Some of it falls in the category of “bad debt.” You’ll want to eliminate that first. “Good debt” still is a burden, but there’s a benefit attached to it.
Bad debt vs. good debt
High interest credit card debt is in the “bad debt” category, as well as loan debt that does not have an asset or investment tied to it. Think of these as liabilities with no benefit. Mortgages offer the benefit of building equity and possibly making a profit if the property value goes up. That’s known as “good debt.”
If you need to prioritize debts because you can’t possibly pay off all your balances before retirement, focus on getting rid of the bad debt first. Credit cards are an obvious choice. The average credit card interest rate is over 15%, so they are just consuming your resources. You don’t want to be burdened with high-interest payments after retirement.
Auto loans could go either way. While you’re working, a car provides you transportation to your job and the ability to make extra money if you need to. In retirement, the job is gone but you may want to work part-time to make ends meet. The car will still be a necessity. On the downside, automobile values depreciate quickly.
Focus on interest rates
Your funds will be limited when you retire so you don’t want to burn them up paying high interest rates. Take care of the credit cards first, then move on to higher-interest personal and auto loans. Mortgage rates are historically low right now, so refinancing your home could be a good move if you haven’t already. It’s an asset that can be sold or borrowed against after you retire.
You could also consider applying for a debt consolidation loan to pay off those high interest credit cards. This will lower your interest rate and monthly payments, not to mention give you extra time to manage your other debts. Talk to your local bank or look for an online lender for this. If you have decent credit, your rate and terms should be reasonable.
The bottom line: Eliminate your bad debt
Carrying good debt, like real estate holdings or business investments, into retirement is OK. Concentrate on eliminating the bad debt, like credit cards, personal loans, and auto loans. Those are the debts that can ruin your retirement. You still have time. Get it done and enjoy your jubilation.