Many Americans are approaching their golden years with some level of debt. In 2016, nearly 61% of US citizens were transitioning into retirement while still bearing debt.[1] While one might assume that expenses would naturally decrease after retiring, that isn't always the case.[1] Sometimes, your costs will remain constant, decrease, or they may rise. It varies from situation to situation, and it's impossible to accurately predict your monthly expenditures during retirement. You can make an educated guess based on your current lifestyle and budget, but there isn't any exact calculation that assures complete financial predictability throughout retirement life. Therefore, considering a strategy to reduce your debt might be beneficial when you are establishing plans for retirement.
Credit Card Debt Can Stack Up
For starters, keep tabs on your credit card debt. Credit cards are notorious for their steep interest rates, so if you're burdened with substantial credit card debt, it could help to reduce it, especially on a fixed income. Although each circumstance varies, a significant amount of credit card debt can potentially lead to long-term financial troubles. It might also be worth repaying student loans and assessing your mortgage situation for similar reasons.[1]
With the Right Strategy, Retirement Funds Can Help Address Debt
An alternative approach might be to address your debts using a portion of your retirement savings. However, it's important to note that this method is complex and requires you to understand the tradeoffs of paying off debt in the short term with funds that are meant for your long-term retirement. The complexity does not necessarily mean you shouldn't explore it; it merely means that determining which choice serves you best can be challenging, given that the wrong move for you could be financially costly.[1]
You may also consider your Social Security claiming strategy and timeline as a factor in helping you reduce or eliminate your debt in retirement. The extra income could be the added boost you need to get your debt level trending down and potentially eliminate it.
Regardless of your specific circumstances, vigilance over your debt is crucial as you near retirement. The strategies you employ to deal with your debt should be comprehensively tied into your overall retirement plan.
Handling your personal finances in retirement is not always easy. If you're seeking advice on optimally managing your personal financial affairs, don't hesitate to contact our experts for a no-charge assessment of your circumstances.