A commonly held assumption is that retirement means being debt free. Your home is paid off, all your credit cards have zero balances, and you only have a car payment because you got amazing financing from the dealership. When you thought of retirement, a mortgage payment was certainly never part of that equation. If there were increased medical expenses or other unforeseen expenses, they could be offset by the fact that your major expenses - housing - was significantly reduced. That line of thinking is simply a myth for may retirees today.
Here are 5 steps to take to become debt free in retirement:
1. Time your mortgage payoff to your retirement date using an amortization
calculator. For example, if you plan on retiring in 17 years and you have a 30
years mortgage of $200,000 at 5% by making an additional principal payment of
385 per month you change the payoff date from 2043 to 2030 - the year you plan
to retire. By keeping the mortgage at a 30 year fixed loan rather than a 15
year fixed loan, you retain the flexibility of not making the extra payment if
there are times when you have other obligations.
2. Downsize now rather than waiting: You often hear of retirees planning on
moving to a smaller place in retirement, but that dream is not always a
reality. Many people weren't able to sell their homes during the housing crisis
because tighter lending standards caused the pool of qualified buyer to dry up.
Since they couldn't sell their homes, they weren't able to purchase new ones.
Why wait? Consider downsizing sooner rather than later so that you don't miss
the opportunity to sell when conditions are favorable, and may be pay off your
mortgage earlier.
3. Get a second job: If you've already reduced spending to a minimum and still
have trouble finding money to pay down debt, find ways to earn income
specifically for debt reduction. Get a second job. Turn a hobby into a
business. Work extra hours or take on new projects at work that will help with
a bonus or promotion, and earmark those dollars for paying off loans, credit
cards and/or your mortgage.
4. Temporarily reduce your retirement contributions: This suggestion comes
with a warning. You have to be careful with this one because you need income in
retirement, and if you don't save the funds, they won't be there in retirement
to provide the income. If you have high rate credit card debt and aren't able
to execute on step #3, your company matches. Take the difference and pay off
your credit cards using a 'debt blaster' strategy. This strategy works by paying
extra on the debt with the highest interest rate while paying the minimum on
everything else. Then as each debt is paid off, take the entire payment and add
it to the next highest-rate debt until all your debt is paid off. Then
immediately your contributions to your retirement plan and cut up your credit
cards.
5. Plan to work a few year longer: Retire when you have your debt paid off,
even if it takes a few years longer. Plus, working longer means you will be
able to save more for retirement, and that can make your retirement income last
longer. For example, If you retire at age 65 with $100,000,000 nest egg earning
6% annually, a $70,000 monthly withdrawal will deplete the account in 22 years.
That means you would run out of money by age 87. However, if you worked just 3
years longer to age 68, and save an additional $ 100,000 per year @6% rate of
return your nest egg would grow to meet your expenses till you are alive.
With so much uncertainty in today's economy, reducing debt is a way to get
some semblance of control over your finances. This control is especially
important in the face of rising health insurance premiums and other education
cost.
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