Sense & Centsibility Blog

5 Tips to Retire Debt-Free

Older couple on computerNo matter how old you are, you may have found yourself dreaming about retirement...thinking about traveling the world, sipping umbrella drinks on a white sandy beach, or volunteering with your favorite organization. Hopefully retirement will be everything you want it to be. But next time you’re daydreaming, look at your retirement with a new twist. How would retirement look without major debts hanging over your head? When I think of retiring debt-free, it gives me a sense of true financial freedom.

For some people, however, the reality is far different. As a Financial Counselor I see people in all income brackets and ages. When I counsel older adults, I am astounded by how many still owe substantial mortgage debt. Even worse, many are also trapped by huge credit cards bills. This is frightening for anyone on a fixed income… and no way to live out one’s golden years.

Although I don’t know exactly when I’ll retire, my plan is to be debt-free when I do. This is not just an idea, but a priority that shapes the way I live. To me, being debt-free means no more car, mortgage, or credit card payments. The way I look at it, I will either have that much more money to spend in retirement or I will need that much less because my loans will be paid in full. In the interest of full disclosure, I have no outstanding credit card debt right now. When I use my credit cards, I always pay the balance in full. That way, I pay absolutely no interest and I keep my spending under control.

How to retire debt-free

1. Assess your money habits

Are you a frugal saver or spend every chance you get? To move forward, you need to know if you are overspending and living beyond your means. If you are, it’s time to change your lifestyle and your spending habits. If you don’t, you may be facing a future drowning in debt and perhaps unable to retire because you have so many bills. And no one wants that.

2. Develop a plan

Figure out your goals and how long you have to reach them. A timeline will tell you if your goals are realistic. Otherwise, you may have to re-set those timelines by working longer to get where you need to be. (Visit Insured Retirement Institute for a calculator to help you figure that out.)

• Pay down unsecured debt and save for retirement. My best advice is to do both at the same time! The more time you contribute to retirement plans, the longer they can grow to provide a steady source of income after retirement. Think of it this way – right now you live on your paychecks; when you retire, your retirement funds will replace those paychecks. Contributing to your 401k plan is especially important if your employer offers a match. Be sure to contribute the minimum needed to secure the company match…because it’s free money.

erase debt

Paying down debts, especially those with high interest rates, is also crucial. Find a plan that works with your income to reduce the debt level as quickly as possible. This means being disciplined and willing to defer spending until later when you can spend cash. But the trade off will be worth it!

Consider structured debt repayment. The non-profit organization I work for, LSS, offers Debt Management Plans that allows you to consolidate your credit card debt, make one monthly payment, and likely reduce interest rates so you can see real progress more quickly. Contrast this rosy picture against struggling with creditors, juggling several monthly payments, paying a pile of cash in high interest, and taking 15-20 years to repay each debt with minimum payments.

3. Pay off your mortgage and car loans before retiring

If you own your home free and clear, you will have much more financial flexibility in your golden years. For example, my household pays extra toward the mortgage every month. Our hope is to pay it off in 4 more years. On the other hand, if something happens to one of our incomes, our scheduled payment is low enough that either of us could pay it each month. In that case it may take us longer to pay off the mortgage, but we should never get behind.

Like many people, I also have a car loan. Fortunately, I have a zero percent interest rate so there is no real incentive to pay it off early. In 23 months (does it sound like a countdown?) my loan will be paid in full. Meanwhile, I am also saving for needed maintenance and repairs along the way.

Eliminating expensive installment payments like car loans and mortgages will make your retirement years more enjoyable and less stressful. Isn’t that what you really want versus piles of bills that suck the life out of your fixed income?

4. Don’t borrow from your 401k to pay off debts

401kFrom personal experience, I can tell you this is a bad idea! No matter how much you have accumulated in your 401k, taking retirement money may set you back to the point you never recover. Even worse, if you lose your job, you still have to repay those loans. I didn’t borrow a loan but instead cashed out retirement funds to finance some work on our house.

I will never make that mistake again! Besides the 10% tax penalty for early withdrawal, it has been 10 years and I still haven’t recovered the money I cashed out. So don’t undo the good you have done so far by cashing out retirement funds. Find other options like cutting spending and selling assets to pay down debt.

5. Work longer if you still have debt

Think about this: paying off debt on a fixed income is a nightmare when you are trying to cover all your living costs at the same time. When you retire, food costs, gas for your car, utilities, medical expenses and so forth will continue to climb while your income does not. Rather than put yourself in a financial bind, continue working, whether full-time or part-time, until your debts are paid in full. Then you can retire with peace of mind!

To talk with a Financial Counselor about debt repayment options and budgeting with the goal of retirement, contact LSS Financial Counseling at 888.577.2227 or, get started online. Take action today to create a better future!