Most Americans dream of retirement and, more importantly, of being financially secure in retirement. But for many Americans that is becoming more and more difficult. Even if you’re one of those people who has diligently saved and invested for decades, your retirement income is only one part of the equation that determines your financial security. Expenses are the other. And in a country as debt-addicted as the United States, holding debt into retirement can stress you out both emotionally and financially. Make sure to pay off these debts before you retire.
Mortgages
It’s not surprising that in a country with a homeownership rate over 60% that most debt held by households is in the form of mortgage debt. While the most highly-burdened households are those in their 30s and 40s, Americans nearing retirement age still owe on average over $100,000 on their mortgages. While that’s not a huge sum to owe on a house, owing that much money so close to retirement is risky.
Older workers are at great risk of being forced out of the workplace, as many employers don’t want the extra expense of older workers when they could hire someone 20 or 30 years younger. Even though you may have planned to pay off a mortgage in retirement, what happens if you suddenly get laid off or, even worse, suffer a health crisis? Then you may be forced to retire, and not on your terms.
That’s why it’s vitally important to pay off your debts before you retire, making sure that you own your house free and clear. Your house should be a home that you cherish, perhaps even appreciating in value to benefit you if you choose to sell it and downsize, and not an albatross hanging around your neck.
Student Debt
By the time you retire, you should have paid off all your student debts. There are still some Americans who pay off student loans into their 50s, but very often those are doctors, lawyers, or those who have accumulated as many advanced degrees as they can. But what’s becoming increasingly common is parents taking out loans to pay for their children’s educations or even grandparents taking out loans to pay for their grandchildren’s educations.
While it’s nice to help out your family members, you should only do so if you really can afford it. Affordability isn’t just about looking at your overall savings, looking at the cost of tuition, and seeing if the lump sum of your savings is four, five, or six times higher than the tuition you plan to pay. The term of loan repayment may be much shorter than the amount of time you expect to live after retirement.
You need to sit down and calculate how much income your retirement savings will provide you each month in retirement, how much you expect to spend on food, housing, medical care, and miscellaneous expenses, and then figure out how much you’ll be expected to pay each month towards the loans you took out. Is helping out your offspring still looking affordable?
Especially with grandchildren, if you start helping out one, your other grandchildren will expect some assistance too, or their parents might, which could make for some awkward pressure within the family. Your retirement savings should be earmarked first and foremost for your use, and anything left over after you die can benefit your family.
Auto Loans
Again, older households aren’t those most heavily-indebted by auto loans, but the average household nearing retirement age still holds over $12,000 in auto loans. Since many retirees will end up driving less as they age, no longer having to commute, being visited by children and grandchildren, and eventually not being physically able to drive as much as when they were younger, holding that much debt on a car that you’ll eventually have to get rid of doesn’t make much sense.
In retirement you most likely aren’t going to be getting a new car every few years, so your major concern should be reliability. Since in all likelihood you’ll need to spend money on car repairs, having a reliable car that won’t be in the shop all the time will help minimize your auto expenses. Having to make unnecessary payments on an auto loan will only bleed away precious savings that could be put to better use.
Credit Cards
If you’ve saved up enough money that you’ll be able to retire and live comfortably, you’re probably not the type of person who goes on huge spending binges with a credit card. You probably pay off your cards at the end of each billing period, and you understand how to use credit without letting it control you.
If you do have credit card debt, and households nearing retirement age do on average hold $2,000 to $3,000 worth of it, you’ll want to pay that down before you retire too. You’ll also want to adopt better spending habits with your credit cards, as your ability to make your retirement savings last through retirement is dependent on your ability to manage your finances. Blow through your savings too quickly and live longer than you expected and your final years may find you living hand to mouth. Nobody deserves that.
If you’ve saved up for decades to enable yourself to live comfortably in retirement, don’t put it in jeopardy by leaving outstanding debts to be paid off once you no longer have a regular income. Hopefully you have a well-diversified investment portfolio with a good mix of stocks, bonds, and alternative assets such as gold. But staying in debt can put those assets at risk. Paying off that debt before your retire will make your retirement much less burdensome and much more enjoyable.
Trevor Gerszt is America's Gold IRA Expert, CEO of Goldco Precious Metals, and holds a position on the Los Angeles board of the Better Business Bureau.
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