Retiring debt-free is obviously ideal, but getting a little debt in retirement isn’t the end of the world. A mortgage payment that you have built into your retirement plan is unlikely to threaten your financial security. But the same cannot be said for the three types of debt listed below. If you have any, develop a debt repayment plan as soon as possible so you can get rid of those bills before retirement.
1. Tax debt
Your retirement savings are generally safe from creditors, with the exception of the IRS. If you owe back taxes, the federal government may take money from your 401(k), IRA or other retirement account and you will have no recourse to stop it. This is a huge problem for seniors who rely on their retirement savings to cover their monthly bills.
Instead of waiting for that to happen, contact the IRS directly to discuss your options. You may be able to set up a payment plan that allows you to pay off your debt slowly over time, rather than in one large lump sum.
These payment plans have one-time setup fees and your balance will accrue penalties and interest until it is paid in full. But once you have one in place, you won’t have to worry about the IRS dipping into your retirement savings, as long as you meet your monthly payments.
2. Payday Loan Debt
Payday loans can have annual percentage rates (APRs) approaching 400%. A single loan of $500 with a repayment term of two weeks and an APR of 400% could grow to $2,500 in a single year if you are unable to repay it. Often people end up deferring or renewing these loans, which basically pushes the problem further. The balance continues to grow, making it nearly impossible to get out of debt on your own.
Debt like this can be dangerous to retire on because there’s virtually no limit to your balance growth. You could end up depleting your savings faster than expected to keep up with it, leaving you without enough for your other expenses.
If you have a payday loan, your best bet to get rid of it is a Personal loan. These loans are available without collateral and although their interest rates can be high, they are nowhere near as high as payday loans. Once you’re approved, your lender will give you a lump sum that you can use to pay off the payday loan. Then you’ll make regular monthly payments until you’ve repaid what you borrowed. You won’t have to worry about your balance ballooning as long as you make your payments on time.
3. Credit card debt
Credit card APRs aren’t as high as payday loan APRs, but they can still exceed 30% in some cases. If you only make the minimum payment on your cards, your balance could grow quickly, especially if you keep making new purchases each month. Before you know it, you could be tens of thousands of dollars in debt.
You can use a personal loan to help you with your credit card debt or you can open a balance transfer card. This allows you to transfer your balances from other credit cards to this card for a small fee. Balance transfer cards have an introductory APR of 0%, usually for at least six months and sometimes much longer. During this period, your balance won’t increase at all, so you can focus on paying off your debt without worrying about interest charges.
What if you can’t pay off your debt before retirement?
If you don’t think you will be able to pay off the above debts before retirement, you can either look for ways to increase your income today, such as working overtime or starting a side hustle, or consider delaying your retirement. Or you can use a combination of these strategies. Think about what makes the most sense to you.
Find a debt repayment strategy that works with your budget, then check in with yourself every month or two to see how you’re doing. If necessary, adjust your pension plan until you find a solution that gives you the best chance of staying financially secure for the rest of your life.
The $18,984 Social Security premium that most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help boost your retirement income. For example: an easy trick could earn you up to $18,984 more…every year! Once you learn how to maximize your Social Security benefits, we believe you can retire confidently with the peace of mind we all seek. Just click here to find out how to learn more about these strategies.
The Motley Fool has a disclosure policy.