It’s the end of the financial year, but more importantly it’s the start of a new one and for those now in the pre-retirement stage of life which is around 50 years+, it’s an excellent time to start making plans. While there are a number of financial planning considerations, amongst the most important is debt elimination.
If, to date you’ve engaged a ‘robbing Peter to pay Paul’ strategy, now is the time to make a commitment to put an effective debt management and repayment plan in place. Here are 5 things you can do to retire debt free.
But first, let’s summarise what it means to have debt in retirement:
Your retirement savings should support you, not the Banks
In retirement, your income is usually reduced to a fixed level derived from superannuation or government pensions, and other retirement savings that have been amassed by you over the years. There will be no extra money to pay down debt.
With less income, your mortgage becomes a greater burden
While your debt that may have been manageable while you were still employed, it will become a proportionally larger cost in retirement. It may even become unmanageable, particularly if it includes high-interest debt, such as credit cards or negative amortization loans.
What happens when interest rates rise?
When retired and living on a fixed income, retirees are often adversely affected by sudden interest rate increases. Falling behind on servicing debt payments can bring additional debt burdens as fees and penalties are applied.
The key is to take action now and implement effective debt management strategies that will eliminate, alter or reduce your debt. Here’s what you need to do:
1. Get advice and implement a plan
As you’ll see here there are options, but it’s likely you’ll need advice to tailor the solution most appropriate for your specific needs. For example, if you are still working, you may need help in creating or altering your budget to pay off debt or you may need to calculate how long you’ll need to delay your retirement to be debt free. If you have already retired, there are a number of options available that may mean the difference between a secure retirement and one that’s under the shadow of unmanageable debt.
2. Pay Off Debt with Existing Savings
By far the simplest and cheapest way to eliminate debt is to pay it down directly with existing savings. It may not be an option available to all pre-retirees, but if you have the means to eliminate or even reduce your debt, most financial professionals would suggest that you do so.
3. Consolidate your debts
Broadly speaking, debt consolidation is the process of replacing any high interest rate debts into one lower interest cost facility. You may, for instance, be able to roll your credit card debt, which typically has an interest rate of around 21% into a home loan which currently has an interest rate of around 5% to 6%. This can potentially save substantial money spent on interest. Further, simply transferring all of your high interest rate credit card balances to a lower rate credit card, or transforming your credit card debt into a more appropriate form of debt (for example, a home equity loan or personal line of credit), can also potentially save a lot of money.
4. Refinance your Mortgage
If you have an existing mortgage, then refinancing may be a solution. Refinancing your mortgage may permit you to access your home’s equity so that you can pay off other and more expensive debts. Refinancing to a lower interest rate, will likely result in a lesser repayment each month. There are dozens of mortgage refinancing options available, and again if you are already retired, some options are available only to seniors or retirees. Refinancing won’t allow you to completely eliminate mortgage debt, but it may allow you to eliminate other debt, reduce your interest rate, your monthly payments, or both.
5. Work in “Retirement”
This may not be a preferred option, but returning to work part-time or even full-time will create income that can be used towards eliminating your debt. In fact, I was listening to ABC radio recently when the hosts were discussing superannuation and a lady of 79 years of age rang in to say she was still working part-time to help make ends reach. If you’d prefer to work in retirement as a matter of choice, rather than as a necessity, then debt elimination strategies need to become your priority.
For a retirement of choice rather than compromise, please contact Collins Mann Wealth Management to discuss your debt elimination options.