You’ve put in the time at your business or on your job. You’ve amassed a large investment portfolio that should see you through your retirement years. And you even got your will and final arrangements set up on paper. But there’s one more thing to do before retiring…
Pay off your debt!
There was a time when paying off debt before retiring was self-evident. No one had to tell a retiree to do it, he just did it almost as if doing so on instinct.
But that was a different time, when people in general were more debt adverse than they are today.
Now, millions of people have come to live with debt and see it as a normal part of life.
But it isn’t — especially when you are about to retire.
Pay Off Debt
The sooner you pay off your debts, the more money you’ll have to invest for retirement. This can be especially important in those last few years leading up to retirement. It will be your final opportunity to juice your retirement investment portfolio with a little bit more money — just in case.
In truth, it’s even more important earlier in life when you’re just beginning your retirement savings and investment plan. The less money you pay towards debt every month, the more you will have to stash into retirement savings.
Since the time value of money concept works most efficiently in the early years of investing, your ability to get out of debt and to redirect the money into savings can be a downright revolutionary act!
But let’s say that for whatever reason you were unable to do that earlier in your life — you can still do it now. And you should!
You may not get the investment kick you would have if you’d gotten out of debt much earlier in life, but it will still provide tangible benefits even if you do it at the last minute.
Lower Your Expenses
Paying off debt means lower living expenses in retirement. You may have had a car payment all your life, but you shouldn’t need — or want — one in retirement.
You probably won’t be flipping your car every few years the way you did during your working life, so there’s no need for a continuous car payment.
If you buy a car — and pay cash for it — you’ll have a tangible investment that will last you a decade or longer. And a payment should not be associated with it.
For most people, the single biggest living expense that’s possible to cut is the mortgage payment. Many investment experts have made the point — but it’s worth re-emphasizing — that your primary residence should be owned free and clear when you retire. Eliminating a $1,000 per month mortgage payment will reduce your need for income by the same amount.
And credit cards — which should go without saying — need to go away. Not only do credit cards generally carry the highest rates of interest, but those rates are also variable and could rise at the worst possible times.
If they do, and your debt is substantial, you’ll be looking at an out-sized reduction in your monthly cash-flow from the suddenly higher credit card payments.
Warning: Don’t expect today’s super low interest rates to stick around well into your retirement. Because if they don’t, it could be a game changer for those with too much debt.
Live With More Certainty
During your working years you generally have more flexibility to deal with uncertainty. But once you retire, and you’re living on a fixed income, that flexibility will be gone.
Since debt is one of the biggest “X factors” in life, eliminating it before you retire will also take away that uncertainty. You want to be able to enjoy your retirement years, and that won’t be quite is easy if you’re carrying a significant amount of debt.
Retirement coincides with older age, and that alone can bring a host of variables — including health conditions and adult children returning to the nest.
Dealing with either of those issues — and a few more we haven’t covered — will only be complicated by debt. Being debt-free will help you to be prepared for whatever may happen in your retirement years.
More Control Over Your Assets
Debt has a way of compromising asset ownership. Whether it’s a house that still has a mortgage on it, or a car with an outstanding loan, your assets are never truly yours when you owe money on them.
In an extreme example, owing more on your house than the property is worth could prevent you from moving to a retirement location of your choice.
Even unsecured loans can compromise asset positions. Let’s say you have a $200,000 investment portfolio, but you owe $20,000 in credit card debt. The credit card debt functions almost like a margin loan against your investment portfolio.
If you’re earning 8% on your portfolio, but you’re paying 12% in interest on your credit cards, the entire situation is working against you, slowly draining your income and wealth.
One of the often unspoken goals of retirement planning should be having complete control of your assets. That makes for greater freedom of action, but it also leads to better sleep at night. Having debt of any kind can interfere with that sense of peace.
If it’s the last thing you do before retiring, pay off your debts — all of them.
Is it time you rethink carrying debt into your retirement years?
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