It is commonly estimated that you should have about 70 percent to 90 percent of your pre-retirement income to maintain the same living standard after you retire. A secure retirement means planning your finances efficiently, saving for the future, and paying debts.
Though planning your finances and retirement savings is relatively easy while working, doing this while carrying a debt burden is not. It has long been debated whether it is ideal to save for retirement or first pay off one’s debts. Focusing exclusively on paying off debts can reduce your retirement savings, while saving alone will not prove fruitful if your debts have piled up. So what’s the best approach?
Generally, first pay down any high-interest debts you may have, then move on to a combination of debt repayment and saving strategy.
Here are some types of debts and the best ways to get out of them before you retire:
Consolidate your credit card debt
While credit cards are an excellent financial tool, not being able to manage your balances can pose problems. Getting rid of these high-interest debts at the earliest opportunity should be your priority.
Consolidating credit card debts can help you pay off your debt sooner and improve your financial situation. For instance, through a debt consolidation loan, you can merge several debt accounts into one — which can mean not only a reduced interest rate, but also a lower monthly payment than the typical credit card.
Once you have paid your credit card debt, avoid falling back into the red. Instead, target paying off other high-interest debt next.
Explore the repayment plans for student loans
Having student loans is another big hurdle to retirement planning. Or, perhaps you are a co-signer on a student loan for a family member. Co-signing a loan can put you at financial risk and affects your credit score.
The first step to clearing your student loans is to know exactly how much you owe. Then find out what repayment plans and options are available to you. There are several student loan repayment plan options, including standard repayment, income-driven repayment, and extended repayment. Keep in mind that you can pay more than the minimum payment to speed up the process and focus on retirement savings.
Refinance your mortgage and car loans
While mortgage and car loans are relatively low-interest loans, you still need to plan them practically. In the case of car loans, rethink whether you need more than one car. You may consider selling one off and using that money toward the loan and insurance of one car.
With mortgage loans, consider two possibilities: Invest some money and use the returns toward paying off the loan. Or, refinance these loans for a lower interest rate and a shorter payoff term. This can lower your overall payment, which means you have more money on hand.
In addition to the above, it is advisable to avoid taking up any new debt as you near age 50. Once you prioritize your debt, getting out of it shouldn’t be a hurdle for long.
Lyle Solomon is Principal Attorney with the Oak View Law Group in Auburn, California. He frequently writes on debt, credit, consumer laws, and bankruptcy, among other matters, and is the author of Think Different Save More.