Written by Connor MahoneyFinancial Representative at Mahoney Asset Management

Debt can really throw a wrench in the plans of retirees or those who are nearing retirement. Credit card, mortgage, and tuition debt are some of the top reasons people go into debt in the first place. Carefully managing such debt is one of the keys to a secure retirement and determining a plan to eliminate it is crucial.

Credit Card Debt

Consumer debt can be represented by goods and services purchased using a credit card, and that credit card has not been fully paid off since the original purchase. This is not considered ‘good debt’ to be carrying as credit card interest rates can be extraordinarily high if you don’t pay off the full balance each month. There is also no tax write off when spending on credit cards, and with both these factors considered, credit card debt is the first type of debt you want to rid yourself of. By eliminating this debt, instead of paying off a monthly balance with nasty interest rates, the money used can instead be shifted into savings and investments, with the added bonus of improving your credit score.

Mortgage Debt

Being a home owner is many young people’s goal and is very much a part of American life, which comes with a major financial commitment. As we approach retirement, it is important to review the costs associated with living arrangements and determine the best option. While the plan is pretty simple for credit cards – pay them off in full as soon as possible – there are many more factors to consider when deciding whether or not to pay off a mortgage:

  • What is the current monthly payment?
  • Are you paying mortgage insurance?
  • What are the costs to maintain or improve the home?
  • Is the property where you want to continue to live over the long term?
  • Will the property be suitable should there be a decline in health?
  • Will current assets provide enough income after retirement to continue payments?
  • How do school and property taxes impact your budget?

As with any debt, paying it off sooner than later will free up income and those mortgage payments can then be transferred to savings and investments, particularly tax deferred investments. With an older loan, payments tend to be applied to reducing principal with the interest tax deduction less applicable. Depending on the interest rate associated with an existing mortgage, it may be worthwhile looking into refinancing the mortgage.

Tuition Debt

There is no sugar coating the fact that the United States is in a student loan debt crisis. Tuition debt is not limited to the younger generation either, as data from the Consumer Financial Protection Bureau shows. Tuition debt can come from both individuals looking to advance their own careers in higher education or assisting their children obtaining a degree, and in some cases it can come from both. Inability to repay all or part of a student loan may be triggered by career choices that may not provide enough income or unexpected life events such as divorce or illness. It is very difficult to obtain forgiveness on student loans, and failure to repay Parent PLUS Loans (federal student loan program available to parents of dependent undergraduate students), can even result in the government garnishing payment from social security benefits. For those whose income becomes fixed during retirement, this can create a massive financial burden. There are ways to deal with this debt, one of which is an income driven repayment plan which cap monthly payments based on a percentage of your discretionary income for up to 25 years. This provides a more affordable payment over a long period of time. Refinancing through a private company may also be an option that allows you to implement a plan that fits your current budget allowances.

Calculating your current debt, creating and sticking to a budget, maximizing your payments, consolidating debt, and even negotiating with creditors are some ways to manage and create a plan around your specific debt situation. If you have no debt, that’s great, and you should contribute to retirement accounts and savings as much as possible. 

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