Will debt hamper your retirement?

Will debt hamper your retirement?

Retirement finance used to be simple: when you retired, so did your mortgage and the remainder of your debt. That way, you'd have plenty of free cash from your pension and social security to do things like travel to exotic places and eat out.

But the growing cost of nearly everything from education to healthcare has suppressed that widely desired goal for millions of retirees. Now, more than ever, people are dealing with debt in their golden years, and the debt is coming from a variety of sources.

Debt is creeping onto the balance sheets of older households for a number of reasons. For starters, living expenses have climbed faster than incomes for many middle-class families. Households haven’t been able to keep up with increases in medical care, education and home expenses. 

When income lags inflation, people may need to borrow to make up the difference, or put ongoing expenses on credit cards. Higher debt burdens are also why an increasing number of families have not paid off their mortgages by retirement age. 

Here are a few practical things that retirees or pre-retirees with debt on the books can do to reduce the burden in retirement.

Target Your Highest-Cost Debts Aggressively. This usually means drawing a bull's-eye on credit card debt: remember that the more debt you rack up and push into another month, the more this debt compounds. And you also could be nailed with late and over-limit fees. Pay off the highest-interest cards and small balances first. Keep in mind that "plastic" debt is the least desirable debt to have. 

Reduce Spending. Here's where you have to be unabashedly honest. Is your spending level sustainable in retirement on a fixed income? You will have to do a retirement spending inventory and see where you can cut the fat. There may be some surprises, but you can likely find savings. 
When you've identified areas where you can reduce spending, you can divert those savings toward paying off debt and create either a spreadsheet or worksheet that details your spending. 
Look at the whole picture of your spending, including taxes, insurance, healthcare, entertainment, food, household expenses, maintenance and travel. 

Refinance Your Mortgage. 
You can make additional payments to principal to pay off the loan sooner. When you simply add extra money to your monthly principal payment, it's a matter of simple arithmetic to create your own "accelerated" payoff schedule. That will ease your debt burden. 
A paid-off home is a "safety net" for most retirees. Home equity can also be used in obtaining reverse mortgages if the cash is needed. The bottom line with mortgage debt is to find the best way to pay it off in the shortest period of time. 

Work Longer. 
Working longer allows you to not only have more disposable income for a longer period of time, but you can stock away more money in your retirement accounts.
You'll need to ask some important questions to plot the best debt-reduction strategy. How much will debt repayments eat into your retirement income? Will your post-retirement income support your current spending and lifestyle? If not, you'll need to make some changes. 

The best way to avoid problems if you're eyeing retirement? Run the numbers. It's better to plan ahead than to fall behind when you're not working anymore.

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