June 9, 2020

Edited 10/21/20

How to Pay Off Your Debt for Retirement

Debt is usually something you don’t want to carry over into retirement.

Unless it’s low interest and helping you meet an important goal, debt is rarely a good companion in life, especially in retirement. 

If you’re still holding onto debt in retirement–-or if you’re concerned that new debt will impact your transition out of work–– it’s important to tackle it now before it grows much larger. 

Paying off debt when you’re already retired can be a major challenge, especially if you’re already living on a fixed budget . So it’s important to try to clear your debt well before your retirement party. However, if you’re already retired and are still haunted by old credit card balances or loans, there are still options available to you, even if you’re living on an extra tight budget.

Here’s a closer look at some of your options, depending on what stage of life you’re in:

How to Pay Off Debt Before You Retire

When it comes to paying off your debt, the first thing you need to do is lower your interest rate. By lowering your rate, your accumulated debt will grow slower compared to your current interest rate making it manageable to pay off debt faster.

If you’re still earning a regular paycheck, you’re in a good position to pay off your debt in a reasonable time period, even if your retirement is fast approaching. The best choice for you will depend on your income, budget, credit score and number of years before retirement. 

Transfer your debt to a 0% APR balance transfer card. 

Certain credit cards features can slow down your interest rate and are strategically used to pay off debt. If you have good to excellent credit, you can save a lot of money on interest by transferring your debt to a balance transfer card with a lengthy introductory period. Some lenders, for example, will let you carry a balance interest-free for as long as 18 months to 21 months.

This is the best option if you’re looking to save as much money as possible or if you have a short timeline until retirement. However, you’ll need a large enough income to pay off your debt aggressively to avoid getting hit with the card’s standard APR.

For example, if you transfer $8,000 to a card with a 0% APR with an 18-month balance transfer offer, you’ll need to pay more than $444 a month to clear your debt before the end of the promotion.

Refinance your debt with a low rate personal loan.

You may also be able to lower your interest payments or give yourself more financial breathing room with a low monthly payment by consolidating your debt onto a fixed rate personal loan. Many personal loan lenders offer APRs well below the average credit card APR.

However, this option is best suited for borrowers who don’t plan to retire right away since it can take a while to pay off. A personal loan will slow down your repayment schedule by spreading out your payments by two to three years or more. Many personal loan lenders will let you pay off your loan early without incurring a fee. But, in general, personal loans are intended to last for years.

Refinance other loans, such as your mortgage.

If you’re carrying credit card debt, you may also want to consider refinancing other types of loans, such as your mortgage. Depending on your credit history and banking relationship with your lender, you may be able to refinance your mortgage at a considerably lower interest rate than you’d get with an unsecured personal loan.

You can then use that extra cash to pay down your credit cards more aggressively. Alternatively, you may be able to restructure your loan so that you have a lower monthly payment. However, choosing this option could stretch out your mortgage much longer than you were anticipating.

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How to Pay Off Debt When You’re Already Retired

Once you retire, you still have many of the same options available to you that you had when you were working. However, they may not be as viable for you now that your income is fixed. The first strategy will be to lower your interest rates and determine if you’ll be able to pay off your debt faster. 

Transfer your debt to a lower rate loan.

If you still have good credit, you may be able to transfer your debt to a 0% APR credit card. But if you don’t have a large enough budget to pay a significant amount each month, then the remainder of your debt at the end of the promotion could get charged an APR as high as 15% to 25%, depending on the card.

A low rate personal loan may be a better option for you–especially if you’re looking for an affordable way to minimize your loan payments so that your monthly budget doesn’t feel as tight. However, if you take that option, you may have to put up with your debt for at least two to three more years.

Set up a repayment strategy that works for you.

If transferring your debt to a lower rate loan option isn’t available to you, then your best option is to pay off your highest interest debt as aggressively as you can. For example, the ideal option for many borrowers is to tackle the loan with the highest interest rate first and then move on to the next most expensive loan you owe. This method is sometimes called the Waterfall method or the Avalanche. It’s a favorite of personal finance experts because it saves you the most money.

However, some personal finance experts recommend a more behavioral-based approach, popularly known as the snowball method of debt repayment. In this scenario, you pay off the smallest loan first to help build your motivation and confidence and then move to the next smallest loan until you pay off your debt. Although this method may cost you more in interest, some academic research suggests that it may be a more effective motivator overall.

You may also want to try using a debt payoff planner that helps you visualize how much you owe and how long it will take you to pay it off.

Create Your Debt Pay Off Plan

Call your lender. 

It’s also smart to call your lender and ask if they’d be willing to lower your loan’s interest rate or work with you on a repayment plan. If you’ve built up a strong relationship with that lender and are a good customer, they may be willing to offer you a deal in order to keep your business. If you’re financially struggling, it’s also worth asking your lender if they have a financial hardship plan for borrowers who need some extra flexibility with their payments.

Talk with a credit counselor.

A nonprofit credit counselor can help you look over your budget and credit situation and identify action steps and areas that need improvement. Generally, nonprofit credit counseling is free. But if you decide to enter into a debt management plan with a credit counseling agency, then you may be charged a fee. 

Debt management plans are typically reserved for borrowers who are in really dire straits and need some kind of break from their lender in order to make their payments more affordable. If you agree to enter into one, a credit counselor will negotiate new terms and a revised payment plan with your lender. For example, a lender might agree to lower your interest rate, consolidate your bills or trim your minimum required loan amount. 

There are a number of options available for paying off debt, even if you’re no longer earning a regular income. The best option for you will depend on your individual circumstances and your loan preferences.