You may not be able to retire completely debt-free — and may not actually benefit from doing so. But having a plan for how to best manage your debt in retirement empowers you to be in better control of your financial life.
Here are a few tips to help you get organized.
KNOW WHAT YOU OWE
The first step to managing debt is knowing exactly what you owe, who you owe and what it costs you in the form of interest rates, finance charges or fees. Create a five-column list to tally all of your debts, including credit card balances; medical bills; personal, auto or home loans; and mortgages.
Column one: Creditor’s name and contact details
Column two: Debt type (such as credit card, auto loan, etc).
Column three: Monthly payment amount
Column four: Total balance owed
Column five: Interest rate
PRIORITIZE WHAT DEBTS TO PAY DOWN QUICKLY
You should always make all the minimum monthly payments on your debts. But, if you can, you should pay off some debts more aggressively.
Start with high-interest debt like credit cards. The higher the interest rate, the more money you’re throwing away to interest each month. If you have a debt with a particularly high rate, you might want to try to refinance it. For instance, you may be able to pay off your high-interest credit card debt by refinancing it with a lower interest personal loan.
As you pay off one high-interest debt, move to the next highest on the list.
FIGURE OUT WHAT DEBTS TO KEEP
You may feel a sense of pride and financial independence when you’re completely debt-free, but there are some instances where even if you could pay off the entire debt today, you shouldn’t. The following are examples of when keeping the debt and making the minimum payments makes sense.
You may feel a sense of pride and financial independence when you’re completely debt-free, but there are some instances where even if you could pay off the entire debt today, you shouldn’t.
You can make more than the interest you’re paying. If you have a 0.9 percent interest rate on a car loan but could earn a 3 percent return on your money in a low-risk investment, you’d come out ahead by investing the money you’d otherwise use to pay the entire debt now.
Debt that reduces your tax liability. If you can deduct some of the interest you pay on a debt (which may be the case with a mortgage) when you file your annual income taxes, you may be better off keeping the debt and using the tax advantage — especially if you have a low interest rate.
Debt that reduces your risk. If you pay off all your debt but then have very little cash in the bank, you may be putting yourself at risk if you ever need the money. Say you spend $50,000 to pay off a low-interest home loan, but leave yourself with very little accessible cash. If there is an emergency, you may be forced to take a high-interest loan. In this case, it would have made more sense to keep your cash on hand while continuing to pay your low-interest loan.