Although many people look forward to retirement, it can be a very tricky period of life. In fact, retirement can bring about a host of financial challenges.
Many people see their earnings decline in retirement once they stop collecting a paycheck from work and instead move over to a fixed income that consists largely of Social Security. So it’s best to try to kick off retirement with as clean a financial slate as possible. Here are three types of debt you may want to aim to pay off before your retirement begins.
1. Credit card debt
The problem with credit card debt is multifold. First, credit cards are notorious for charging exorbitant interest rates. But also, unlike installment loans, credit cards don’t guarantee fixed monthly payments — far from it. And it’s difficult to juggle unpredictable monthly payments when money is tight to begin with.
That’s why paying off your credit cards ahead of retirement should generally take priority over all other debts you might have. One option to look at is actually consolidating your debt into a personal loan. Even though borrowing rates aren’t particularly competitive right now, there’s a good chance you’ll pay a lot less interest on a personal loan than on a credit card balance.
Plus, when you’re trying to map out a retirement budget, it’s important to have as many fixed expenses as possible. A personal loan offers that benefit over outstanding credit card balances.
2. Student loan debt
An estimated 3.5 million Americans age 60 and older carry student loan debt. And while your monthly payments may be fixed, that’s still another expense you’ll need to work into your budget.
If you’re able to pay off your student loans ahead of retirement, you’ll have one less expense to worry about. And if you borrowed privately, you can look at refinancing your loans to lower their interest rate and make it easier to pay them off in short order.
However, don’t rush to refinance federal student loans. Chances are, in that case, you’re looking at a pretty competitive interest rate already. And you don’t necessarily want to give up the protections that come with carrying federal loans.
3. Mortgage debt
Many people find that their mortgage is their greatest monthly expense. If you’re able to shake that expense before retiring, you’ll have a lot more financial leeway once your career wraps up. As such, you may want to make paying off your mortgage a priority unless you happen to have a really low interest rate on that loan.
Many homeowners refinanced their mortgages in 2020 and 2021 when rates plunged to record lows. If you did the same and are now paying something like 3% on your mortgage, then it actually doesn’t make sense to try to pay it off early. You can earn more interest than that in a high-yield savings account that’s risk-free (assuming your bank is FDIC-insured).
Retiring debt-free means having fewer bills to worry about at a time in life when money may be tight. While it can work to your benefit to shed all of your debt before starting retirement, at the very least, aim to get rid of whatever credit card balances you’re carrying. That’s the one type of debt that’s bad news at any age, but especially later in life when your options for earning money may be more limited.