Preparing for retirement is already a daunting task, especially in addition to the many other financial decisions consumers face throughout their lifetimes. Budgeting is a consistent challenge, not to mention setting aside money for short-term and emergency savings. But there is a definite cost to delaying or derailing your retirement savings strategy—due to the fact interest compounds over time, it’s in consumers’ best interest to save as much as possible starting as early as possible, or risk running out of money post-retirement.
There’s also debt to consider. Not only can debt put a serious strain on day-to-day life, but it can become particularly dangerous to carry significant debt during retirement. In 2016, Americans 60 and older carried $2.84 trillion in household debt, which includes mortgages, auto loans, student loans, credit card balances, etc. This figure increased nearly threefold from 2003, when older Americans had debt to the tune of $1 trillion.
In general, it’s ideal to squash debt before retirement so the money you’ve saved can go toward living expenses, travel and the like. Here are four strategies for proactively eliminating debt.
Consumers may elect to tackle more manageable debt loads on their own. Even if you decide to take matters into your own hands, a strategy can help you pay down debt on a realistic timeline and follow through. There’s some debate in the financial world about debt “snowball versus avalanche” and which method is best.
Debt snowball can be a solid psychological motivator because people pay debts in ascending order, meaning they rack up small victories first before moving onto larger balances. Debt avalanche tends to save consumers money because it involves targeting high interest rates first and working downward from there. Of course, the key here is paying the minimum balance on all debts while prioritizing one balance in particular.
Credit card debt is particularly challenging because it tends to carry high interest rates, oftentimes between 15 and 20 percent. Thus, consumers can end up paying much more than their original balance, depending on how much they’re able to pay down each month. A balance transfer may be a solution here, provided your credit is high enough to earn low- or zero-interest rate on a new card. You can then pay a fee to transfer your balance, eliminating or reducing interest rates for a set period of time.
Some people with higher levels of credit card debt pursue options like debt settlement, often utilizing an agency like Freedom Debt Relief to facilitate the process. The ultimate goal of settlement is to negotiate down the amount owed after building up enough funds in a designated account. This strategy is an option for consumers with credit scores already suffering the effects of debt, as it does entail withholding payments from creditors until it’s time to negotiate. However, creditors are often willing to negotiate because they believe getting some payment is better than getting none at all. If you decide debt settlement is right for you, be sure to do a little research on sites like Trustpilot to read Freedom Debt Relief reviews and customer testimonials.
Taking Out a Personal Loan
Another strategy some consumers pursue to bring down interest rates is taking out a personal loan, using it to repay high-interest rate debts, then repaying the loan slowly over the course of months or years. While debtors are still on the hook for the full amount, the recurring payments tend to be more manageable. If you do choose to consolidate your debt via a personal loan, make sure you have the cash flow to pay it back consistently or you’ll risk disrupting your financial security even further.
These four ways to squash debt before retirement will help you manage your money now and into the future, even after you stop working.