Editors Note – this article is the first in our new series “Best financial advice I’ve ever received.” People frequently ask bankers the best piece of advice they have ever gotten. So for this series, we’re asking MidWestOne employees to share the best money management tips they’ve ever gotten.
The best financial advice I’ve ever gotten was something I heard about 15 years ago:
“Retire your debts before you retire.”
This simple sentence is something that has stuck with me ever since. As a result, my husband and I have worked hard to develop a plan that will allow us to enter retirement with little or no debt.
Credit cards, loans, a mortgage and other debt can become major problem for retirees. After all – living on a fixed income can make it very challenging to reduce debt while also paying other living expenses.
Here are some tips to help you retire your debt before you retire from your job:
Decide when you’re going to retire.
Deciding when to retire is the first step in planning for your retirement. Analyze your spending habits and determine how your retirement income will cover those expenses.
For example, is your mortgage fully paid off? How will you cover insurance costs? Real-estate taxes? What about other expenditures, such as travel, gifts etc? This type of analysis will allow you to figure out the best retirement age for your situation.
Develop a plan.
Take the time to develop a plan that will map out how you will pay off your debt (and your partner’s debt) before you retire. It will take some effort and lots of discipline to do this, but it will be well worth it.
The internet is full of retirement calculators that can help you develop a retirement plan. This retirement calculator from MidWestOne Investment Services will help you create a plan and view your projected retirement savings balance and withdrawals for each year until the end of your retirement.
Diligently pay off your debts.
With a plan in place, make sure you stick to the plan and diligently pay 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.
Pay off your mortgage.
Make it a priority to pay off your mortgage by the time you’ve reached retirement.
Making extra payments on your mortgage – even small amounts – can save years off your mortgage term. While most mortgages let you overpay a certain amount each month, it’s important you check with your lender first.
With low interest rates it might also make sense to refinance your home for lower mortgage payments or a shorter loan. Sit down with a financial advisor to determine if this is the right move for you.
Avoid taking on any new debt.
If you’re nearing retirement, resist the temptation to take on any new debt.
For example, if you need to purchase a new car or make renovations to your home, plan for this in advance 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.
Retiring without any debt will take discipline and planning. But I’m a strong believer that this will be well worth the effort. After all – not having to worry about loans or a mortgage will make retirement much more enjoyable.