How to enjoy a debt free retirement

If you want to enjoy a debt-free retirement, here is a step-by-step guide to getting your finances back on track before or during retirement.

Catherine Collins
October 26, 2023

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Retirement should be a dream, but for retirees who carry a debt burden, it can be a nightmare. Luckily, there is a way to pay down debt to and enjoy a debt-free retirement, even if you’ve already stopped working.

How to create a debt free retirement

Assess your debt situation

Take an inventory of your debt

The first step to paying off debt in retirement is to know exactly how much debt you have. This task might seem stressful at first, but it’s also empowering because you’re taking control of your finances.

To complete this task, sit down and list all of your debts.  You can do this on a spreadsheet or on a piece of paper. If you're not sure what your debts are, you can go to AnnualCreditReport.com, a reputable website that gives consumers free copies of their credit reports from each of the three main credit bureaus.

Your credit report will contain a list of your debts,  the lender's name, and the lender's contact information. If you have any adverse accounts, which are accounts in collections, write those down too.

Calculate your total debt, interest rates, and monthly payments

Once you have a list of your debts, add them together. List the interest rate and the minimum monthly payment next to each debt.

Writing down the interest rate for each of your debts is helpful because it can help you plan and prioritize which debt to pay first.

Acknowledge the impact of debt on your retirement plan

When you add your debt together, it might feel overwhelming. The stress of using retirement to pay off debt might seem insurmountable. The good news is by listing your debts, you’re taking the brave first step to improving your finances and enjoying your retirement years once and for all.

When you add up minimum payments and see how much of your income goes towards them, you’ll start to see the benefit of paying off debt. Imagine how much money you can allocate to things you truly enjoy once your debt is gone. 

If you’re motivated and want to be debt-free, the next step is to create a budget.

Create a comprehensive budget

List your retirement income sources

A budget is made up of your income and your expenses. So, the first step is to create a list of your income streams. This includes your retirement account income, pensions, social security, additional investments, and even support from your children, if applicable.

List your retirement expenses

After listing your income, write down your expenses. Include all of your bills and regular expenses on this list. This should include your mortgage payment if you have one or your rent payment, your health insurance costs, other medical costs, utilities, food, discretionary spending, and more.

Put hobbies or shopping on the list too. Again, retirement is about enjoying your time. It’s a good idea to think of your budget as a plan for your spending, more than something to restrict you.

Allocate money to debt repayment

When you look at your expenses compared to your income, and you have space, decide how to allocate your extra money to debt payment. 

If you don’t have extra funds to put towards debt repayment, then it’s a good time to review your spending on nonessential items. It might be necessary to cut back temporarily in order to create space to pay off your debt systematically.

debt-free-retirement

Choose a debt repayment strategy

Build an emergency fund

Before you start debt repayment, it’s important to save an emergency fund first. You can start with a small one of two to five thousand dollars, which can help handle a slew of unexpected expenses.

This is the fund you’ll draw from if you have a car emergency or a medical emergency. The purpose of this fund is to prevent you from falling further into debt while you’re aggressively paying it off. 

Once you’ve established an emergency fund, you can then move to the next step, which is to choose a debt repayment strategy. 

Explore debt payoff methods

There are a few different debt payoff strategies to consider. There is the snowball method, where you pay off debts from smallest to largest, and the avalanche method, where you pay off debt from highest interest rate to lowest interest rate.

The snowball method can build momentum and keep you motivated to achieve your goals. On the other hand, high-interest debt can compound quickly. By focusing on paying off high-interest debt first, you can improve your cash flow during retirement faster.

Accelerate debt repayment

Once you’ve decided on a debt repayment strategy, there are a few things you can do to accelerate your debt repayment.

Negotiate with creditors

If you have high-interest debt or debt in collections, you can call each creditor and negotiate with them. Offer to settle with collections departments. You can also ask credit card companies to lower your interest rates for a specific period of time.

Refinance or consolidate debt

Another option to accelerate your debt payoff is to refinance or consolidate your debt. There are many lenders, including peer-to-peer lenders, that can consolidate multiple different debt payments into one. Refinancing can also lead to a lower interest rate overall, which means more of your payment goes to the principal instead of interest.

Downsize your life

Another way to improve your cash flow is to move into a smaller home, start renting, or look into the option of shared housing.

Tap into home equity

There are also options to pay off your debt using your home equity. You can use a HELOC, reverse mortgage, or a Home Equity Investment (HEI). An HEI is a product that enables you to tap into your home’s equity with no monthly payments and no income requirements.

Leverage retirement accounts

If you have access to retirement accounts, you can always use a portion of your retirement investments to pay off your debt. There are pros and cons to this. The pro is that you can free up your debt payments quickly. The con is that you’ll have less money to support you during your retirement years.

Declare bankruptcy

If you cannot execute a plan to pay off your debt, declaring bankruptcy is an option but should be a last resort.

Committing to long term financial health

Once you’ve created a plan for paying off debt after retirement, it’s important to commit to long term financial health.

Implement strategies to avoid getting into debt again. Create a monthly budget, pay off credit cards in full each month, and monitor your spending.

Ultimately, retirement should be a fun and enjoyable time, not one filled with money stress. By taking the time to develop a debt payoff strategy, you can find a way to tackle your debt head-on and develop the discipline to never go back into it again.

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