One of the most important aspects of preparing for retirement is effectively managing your debt. In fact, most financial professionals will tell you that being debt free during retirement is a critical component to successfully living on a fixed income.
Being a debt-free retiree makes the money you have worked so hard to save and invest last longer. It also means that you can afford to do the things you want to do more easily than if you have debt looming over you.
We’ve put together some tips to help you achieve debt-free life as an empty nester:
Make it a priority to pay off existing debt
Now is the time to prioritize paying off your debts. Focus on paying down your high interest debt first before you turn to your mortgage payments. Remember that home/home equity loans offer you the extra benefit of interest deductibility.
Making extra payments on your mortgage – even small amounts – can save years of your mortgage term. While most mortgages let you overpay a certain amount each month, it’s important you check with your lender first.
Evaluate your living situation
Many empty nesters own their home free and clear, and most retirement advisors will tell you that having a paid-off home in retirement should be a key financial goal. Take the time to talk to your banker or mortgage adviser about developing a plan to pay off your mortgage as quickly as possible.
If you are in a situation where it will not be possible to pay off your mortgage in the near future consider downsizing. Though it may be hard to let go of a home that holds lots of memories, it can be a smart financial move to downsize your home. If you sell your home and use the profit to buy a smaller and less expensive house, you can use the leftover money to bolster your retirement or help you pay down debt.
Be careful when using credit
When it comes to using credit, keep this simple mantra in mind – if you can’t afford to pay it off, don’t charge it. This approach will prevent you from going into debt and allow you to save and invest for your retirement years. After all – the more money you have to use towards paying off debt, the less you can use towards retirement savings.
Avoid taking out new loans
Just like a credit card balance, it can be very challenging to make loan payments when you’re living on a fixed income. If you need to purchase a new car or make costly renovations to your home, you may consider adjusting your budget so you can afford the payment without getting a loan. If this isn’t possible, work with your financial advisor to develop a plan that will allow you to repay the debt before you retire.