Don’t take your debts with you into retirement. Your retirement lifestyle must fit the income that you will have once all of your debts are gone.
Many people are not hopeful when it comes to retirement and feel like they are sinking into quicksand with consumer debt. Declaring bankruptcy looks like an option for some folks. The prospect of retirement forces us to think about the debts that remain and how to get rid of them once and for all.
Debt stops a lot of people in their tracks when it comes to retirement planning. Many baby boomers face debt problems in addition to the standard mortgage that needs to get paid off. Now there are other debts that have been acquired. For generations to come, the signs of being able to manage debts are not looking better.
Five types of debt, in particular, must be carefully avoided. But if you cannot avoid them, then your top priority must be dumping these debts before you retire. Here are those five debts and what you can do to get rid of them:
Do not cosign a loan for your grown child
If at all possible, avoid doing this completely.
By cosigning on a loan for your child, you put your credit score at risk and you stand to lose any kind of emergency fund that you may need to draw upon later.
If you have already cosigned for the loan, you might want to consider helping to pay down the balance of the loan to a level where the loan can be refinanced and you will no longer be responsible for it.
Do not borrow from your 401(k) or any other retirement account
Borrowing from your own 401(k) can come back to bite you pretty severely and it is not worth the risk. If you quit your job or lose it, you will have to pay back the full borrowed amount immediately. There is a steady increase in people who are borrowing from their retirement accounts and getting themselves into financial trouble as a result. They often end up drawing from their emergency funds or going into credit card debt, making their situation even worse.
Do not pay off the student loan debt of your child
Let your child take responsibility for their student loans by handling them on their own. You can advise them as they consider how much they can manageably afford to take out, but do not make yourself responsible for their loans. Your children should know what they are getting themselves into when they take out their student loans. They are the ones obligated to pay them back. Your money needs to be going into retirement savings. Paying off other loans is something you cannot afford to do if remaining debts are standing in the way of retirement.
Get a handle on real estate debt
Do not assume that the mortgage on your home can be offset with tax deductions. Factors affecting these deductions are likely to change and may rid you of expected tax breaks you used to rely upon. If you have a house, your first goal should be to own your home completely. Do not delay paying off your home by taking out home equity loans and making home improvements. Get your home paid off as quickly as possible.
Deal with unsecured debts such as credit cards and car loans before it is too late
You should not retire while still owing money. Your retirement lifestyle needs to be compatible with the amount of income you will actually have once all debts are gone. Start to live frugally if you have to. Try to see what it would be like to live on your retirement income for a month or two and get a feel for the adjustments you will have to make. Get an idea of what you will have and what you will actually be able to do. By adjusting your lifestyle and changing some of your habits, you can begin to make your retirement a reality. With the money you save before retirement, you can get rid of those lingering unsecured debts as well.
Dump any loan that you are cosigning right now before you retire. Dump your real estate debt before you retire. Avoid going into more credit card debt. Avoid paying off loans that are not yours. Think about your retirement and give it the priority that it deserves. Take your money and dump it into your retirement accounts and create a storehouse for the future. By living within your means, dumping your debts before you retire, and scaling back to accomplish these things, you can retire with the security of knowing that everything is going to be just fine. The path to retirement may require some hard decisions but the path is relatively simple and straightforward.