Preparing For Retirement: Breaking The Chains Of Debt
BREAK THE CHAINS
You're ten years out from retirement and, if you're like most Americans, you haven't put nearly enough money aside to fund a comfortable lifestyle in your later years. While it is important to set aside as much as possible to supplement social security, there is another step that can have a big impact on your retirement cash-flow: getting out of debt.
Breaking the chains of debt is a powerful tool in making sure that your income can cover necessary living expenses. When your (often fixed) income is claimed by monthly payments, it becomes much more difficult to pay the basic bills. Additionally, when you eliminate or reduce your debt load, you avoid interest expenses and other charges.
How you attack your balances depends on the type of debt that you're facing.
CREDIT CARD AND OTHER UNSECURED DEBT
Most credit counselors will tell you that you should pay off unsecured, high interest rate debt first. These include credit card balances, personal loans and medical bills. You could set up your own accelerated payment plan where you calculate how long you have until retirement and boost your monthly payments to meet a payoff by that date. If your interest rates have skyrocketed, a good way to address these debts is with a debt management plan. You can go to an accredited agency and set up a 5-year payout plan and often get the interest rates greatly reduced.
AUTOMOBILE LOAN DEBT
Unfortunately, once you're wrapped up in a car loan it is difficult to escape or even reduce the payment amounts. My best advice is to be very careful in your car purchases in the years preceding retirement. Buying that $70K blinged-out sports car on your 60th birthday will quickly turn a mid-life crisis into and end-finance crisis. If you purchase a car during this time, limit your loan term to 4 years so that you do not carry car payments deeply into retirement.
MORTGAGE DEBT
If you are in your mid-50s, have enough equity in your home and still have a good credit rating, you should consider accelerating your home loan payments. Interest rates on 15 year fixed rate mortgages are at historic lows and you would be sending substantially more to principal than if you took out a longer term loan. But the best part is that a shorter term loan will provide the discipline to get that debt paid off before you retire. Like Dave Ramsey says, a 15 year loan magically pays off in 15 years...every time. If you are unable to refinance, then paying ahead on your current mortgage can achieve the same results, but without the built-in discipline.
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