3 things to consider
According to a research study conducted by the Employee Benefit Research Institute, families with a head of household between 55-64 are living with more debt than ever before. In 2010, the average debt for families within this demographic was $107,060. The new trend of high debt levels well into adulthood poses an interesting problem. In decades past, it was widely agreed that one should not retire while they were still paying off debt. The theory is based on the idea that retired individuals are on a fixed income, and would find it challenging to juggle existing debt with expanding life and medical expenses. So, can someone retire even if they still find themselves in debt?
Is All Debt Credit Equal?
No, absolutely not. It is essential to look at your debt and place it into buckets. There is debt that is fixed, and debt that is primarily affected by interest rates and your payments. For example, when talking about credit cards, you’ll need to look at how long it will take to pay off your debt with minimum monthly payments, and whether or not you plan to continue using those cards into your retirement. Loans are also a consideration when looking at your debt. A car loan, a mortgage, student loans, and personal loans should all be viewed as individual payments. You, as a soon-to-be retiree, should be honest with yourself regarding whether or not your expected income can cover all of your current expenses, and allow you to enjoy your retirement.
What About the Mortgage?
It is important to remember that not all debt is created equal. While it is advisable to avoid retiring with credit cards that are maxed out, mortgage debt is viewed a bit differently. A mortgage can be considered a fixed expense if it bears a fixed interest rate. What you need to figure out is if your mortgage payment, along with your living expenses, can be covered by your expected retirement income.
Some retirees prefer the idea of paying off their mortgage early, to own their home free and clear, but financial advisors suggest thinking seriously about this decision before cutting a check. As a retiree, you’ll want to consider the tax benefits of holding a mortgage, and the penalties associated with taking money out of retirement or investment accounts if you decided to pay off the sum of your mortgage. Advisors suggest keeping your mortgage if you can afford the payment, and are receiving some benefits from making that monthly payment.
What Should I Pay Off?
Experts agree that mortgage debt is considered good debt, as long as you are dealing with a fixed-rate mortgage. With a fixed-rate mortgage, the amount you owe each month will not change. As long as your budget allows for the payment, this debt shouldn’t be a priority to pay off, that is, if you plan to live out your days in the home.
When you are nearing retirement, you should, however, throw as much money towards your bad debt that you can afford. Paying down, or paying off, any lingering student loans and credit card debt should be a top priority. By focusing on paying down your more volatile debt, you will free up further funds as you head into retirement.
In your ideal scenario, you’ve probably dreamed of retiring utterly free of debt, leaving plenty of money on the table for enjoyable trips and deep immersion into hobbies. Unfortunately, the ideal doesn’t always come to fruition, regardless of how well you’ve planned. You can feel secure retiring with some debt, as long as you’ve worked with a financial planner, and ensured your estimated income can cover your living costs and your debt.
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