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After decades in the workforce, retirement is finally in sight. But as you look forward to a leisurely future, does debt threaten to darken your sunny horizon? In 2020, the average baby boomer had $97,290 in debt, according to Experian data. Starting retirement with debt can be worrisome, but by following these tips, you'll have a better chance of paying off your debt and getting more enjoyment out of your golden years.
How to Pay Off Debt in Retirement
You can get out of debt by following these steps and holding yourself accountable.
- Know what you owe
- Create a budget and earn extra money if necessary
- Decide on a debt repayment strategy
- Get help through credit counseling if necessary
Read on to get started on the path to debt repayment.
Calculate Your Total Debt
Start by getting a clear understanding of how much debt you have. Review all your accounts and add up any balances to calculate your total debt. This might include:
- Mortgage loan
- Auto loan
- Personal loans
- Home equity loans or lines of credit
- Credit cards
Paying down your highest-interest debt first will reduce the amount you spend on interest. For example, if you have a credit card balance with an 18.99% annual percentage rate (APR) and a car loan with a 3% APR, paying off the credit card should be your priority. This way you can save more money to put toward your other debts.
Create a Budget
Your income and expenses may change significantly in retirement. Creating a budget for retirement can help you better manage your money once you're no longer bringing home a paycheck.
To make a budget, add up all your sources of income for the month. Then subtract your fixed monthly expenses—things you must pay every month, such as a mortgage, insurance premiums or a car payment. Finally, estimate your discretionary spending—expenses that vary each month, such as groceries or dining out.
Next, look for places to cut spending so you can pay down debt faster. Could you eat out less often? Stop buying new clothes? Shop around for insurance to lower your premiums? Taking steps to reduce spending in your budget categories gives you more money to put toward paying down your debt.
Also look for ways to bring in more money, such as:
- Freelance or consulting work: Offer to consult for former employers or similar businesses, or seek freelance work on sites such as Fiverr, Upwork and Freelancer.com.
- Teaching: Do you have a skill people will pay to learn? Charge for music or art lessons, for example, or tutor local students.
- Driving for a rideshare service: If you like driving and meeting people, driving for Uber or Lyft could be both fun and lucrative.
- Selling products: You may be downsizing anyway—why not make money selling your castoff furniture, clothing, books and other items on eBay or Craigslist? You could also buy and resell new items or sell crafts on Etsy or at local craft fairs.
Review Debt Pay-Off Options
Once you've calculated how much you owe, you can decide on a method to attack your debts. Two strategic approaches to paying off debt are the avalanche method and the snowball method. With the debt avalanche plan, you make minimum monthly payments on all debts except the one with the highest interest rate. Each month, pay as much as you can toward that debt until it's paid off. Then focus on the debt with the second-highest interest rate, and so on.
The debt snowball plan prioritizes the debt with the smallest balance. Make the minimum monthly payments on all other debts, and put as much as possible toward your smallest debt until it's gone. Then move to the debt with the second-smallest balance, and so on.
The avalanche plan typically saves you more money on interest, but the snowball plan gets faster results, which can motivate you to keep paying down your debt.
Here are two other ways to pay off debt.
Consolidate Debt With a Personal Loan
If you have several different debts to pay off, you might save on interest by consolidating them into one personal loan. Personal loans generally charge lower interest rates than credit cards, making them a good way to pay off high-interest credit card debt.
With a personal loan, you borrow a lump sum and make fixed monthly payments over time until the debt is paid off. Unlike secured loans such as mortgages and car loans, personal loans generally require no collateral, so your assets aren't at risk. Because these loans are unsecured, however, it's easier to qualify (and get better rates and terms) if you have good credit.
You can get personal loans from banks, credit unions and online lenders. Before applying for a loan, check your credit report and credit score. This will help you identify personal loans for which you're likely to be approved.
Shop around for a personal loan to find the most favorable terms. Because each personal loan application generates a hard inquiry into your credit report, aim to keep your loan applications within the span of a couple weeks. Hard inquiries can temporarily cause your credit score to dip slightly, but applications for the same type of credit in a short time period are generally treated as one hard inquiry, minimizing their impact on your credit score.
Transfer Credit Card Balances
A balance transfer credit card with an introductory 0% APR is another way to pay off high-interest debt. Balance transfer cards are most often used to transfer high balances from one or more credit cards to the new card. When you are approved for the card, the card issuer will pay off the debt you wish to transfer and move it to the new card. Some may send you a check to put toward other debt, such as a loan.
A balance transfer card works best if you have good to excellent credit and a relatively small amount of debt that you can pay off before the intro 0% APR period expires. The transfer amount can't exceed your card's credit limit, and you can't transfer a balance from one card to another from the same issuer.
When considering a balance transfer card, weigh potential savings against costs. Balance transfer cards typically charge a fee of 3% or 5% of the amount transferred, and unless you pay off the full balance before the introductory APR ends, any remaining balance will accrue interest. Be sure you understand all the terms and conditions of the card, including any actions that could bring your 0% APR to an early end, such as making a late payment.
Get Help Through Credit Counseling
What if you've considered all your options and still aren't sure how to get out of debt? Nonprofit credit counseling agencies offer free or low-cost services from certified counselors who can help you create a budget and develop a plan to pay down debt. They can even negotiate with creditors on your behalf to reduce interest rates or waive fees as part of a debt management plan.
To find a reputable credit counselor, look for one that belongs to a certification organization such as the National Foundation for Credit Counseling or Financial Counseling Association of America, or check out the U.S. Department of Justice's list of approved credit counselors by state.
Pay Off Debt for Peace of Mind
Paying off debt before retirement can ease your mind—and may also improve your credit score. As you pay down debt, consider free credit monitoring from Experian to track your progress. Once your credit score is where you want it, keep it in shape by using your new budget to manage spending and keep debt to a minimum.