Almost everyone has debt from time to time, and it’s not always a big deal. But as you near retirement, you want to get rid of as much debt as possible. With fewer payments to worry about, you can stretch your existing savings even further.
But getting rid of debt, especially high-interest debt, is easier said than done. If you’ve been having trouble getting control of your finances, these four tips may help.
Keep in mind that everyone’s debt repayment strategy will be a little different, depending on how much they owe and how close they are to retirement. But don’t make the mistake of thinking that it will get easier with time. The sooner you start paying off your debts, the better off you are in the long run.
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1. Focus on high-interest debt first
You should always prioritize debts with the highest interest rates first. If you have payday loans or credit card debt, this is the best place to start. Don’t worry so much about mortgages or other low-interest debt. Continue to make your payments on these, but don’t put extra money into them until your high-interest debt is resolved.
The debt avalanche method is a popular strategy for paying off credit card debt on multiple cards. First, you make the minimum payment on all your cards each month. Then, you put the remaining cash on your debt with the highest interest rate. When you’ve paid off that debt, you’ll move on to the debt with the next highest interest rate, and so on.
You can also try using a balance transfer card or a personal loan. Balance Transfer Cards temporarily stop your balance from growing, so they’re a good option if you feel confident you can pay what you owe within the 0% introductory APR period. Otherwise, a personal loan could be a better option. These give you a predictable monthly payment, so you don’t have to worry about your balance growing even higher.
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2. Look for other ways to get more money
Attracting more money can help you pay off your debt faster. You could work overtime at your current job or start a side job. Or you can use windfalls, such as year-end bonuses, pay raises, and birthday money, to pay off debt.
Again, if you have high-interest debt, focus on this first, and you may even want to put retirement savings on hold for a while. You’ll probably be paying more in credit card interest in a year than you’ll earn from investing your money, so it makes more sense to spend all of your cash on this debt first. Then, when it’s paid off, you can save for retirement and work on your other types of debt at the same time.
3. Don’t touch your retirement savings too soon
You may be tempted to withdraw some of your retirement savings early to pay down debt, but it’s actually counterproductive. For one, he will pay a 10% early withdrawal penalty if he withdraws money from most retirement accounts before age 59 1/2, and that’s in addition to the taxes you’ll owe if the money comes from a tax-deferred account.
It will also significantly reduce your retirement savings. When you start saving again, you’ll need to save a lot more each month to retire on time. It’s best to leave your savings alone so they can grow until retirement.
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4. Delay retirement
When all else fails, you can always delay retirement to give yourself extra time to save and pay off debt. It is not the ideal solution, but it is preferable to running out of money before your time. You could also slowly transition into retirement, perhaps switching to part-time for a while before calling it quits for good.
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