Retiring Your Debt Before You Retire

3 tips that can lighten your debt load

Ah, retirement…Doing what we want, when we want without having to try to achieve the never ending quest for balance between our careers and the rest of our lives. Oh no, retirement…How can I even think about stress free living in my golden years when I’m staring at a mountain of debt. Unfortunately, the latter scenario feels more like a reality for far too many of us.

[Related: Expecting to Work After Retirement? Don’t Count On It]

According to the Employee Benefit Research Institute, families with heads of household aged 55-64 have an average debt level of about $107,000. This also weighs heavily on their psychological and emotional well-being. The study also found that nearly half of workers with a major debt problem are not at all confident that they have enough money for a financially secure retirement.

For African Americans, a debt-burdened retirement may feel inevitable. A study by Demos finds that 42% of our households are relying on credit cards for basic living expenses, making it difficult to even think about things like investing for retirement and financial security.

“If you’re entering your 50s and 60s, your debt should be low in all categories, credit card, mortgage, auto, student loans, you name it,” says Bruce McClary of the National Foundation for Credit Counseling.

“A tell-tale sign that you’re in trouble is if you’re approaching or at 50, and your credit card balances are at or above 50% of your credit limits across the board. If that’s the case, and you’re just making minimum payments, it’s time to wake up and smell the coffee. This is a good opportunity to pull back and reassess what you’re doing,” McClary adds.

McClary shares three tips for reducing your debt burden as you prepare for retirement.

1. Power Pay: Take any extra money that you can find and apply it toward the debt that is charging you the highest rate of interest. Once that’s paid off, put extra cash with the debt that has the next highest rate, and so on. It’s been proven to save the most money over time, because you’re getting the highest interest obligation out of the way first.

2. Debt Snowball: Instead of arranging your debt from highest interest rate to lowest, you’re paying off the lowest balance first. While you may not save as much money over time when you do this versus the ‘power pay,’ you see faster results which can keep you motivated to get to the finish line.

3. Consolidate into a lower interest rate loan: If your interest rates are high and you think you can do better, you can get a consolidation loan. Make sure the interest rate and terms are better than what you’re currently paying on your debt. You can look at online lenders, brick and mortar banks, credit unions, there are a lot of options. It’s a good idea to pull a copy of your credit report and know where you stand before you look.

(You can get a free copy of your credit report each year at www.annualcredit report.com.)

“Don’t assume you won’t qualify for a loan because you think you have bad credit. If you’re looking for the best rates from a prime lender, you need a credit score in the upper 700s or above. If you’re in the lower 700s or 600s, the loan may not be as competitive, but it may still be better than the rate you’re currently getting on your debt,” says McClary.

McClary and other advisers say that regardless of which option you choose, the most important things are to create a debt reduction plan you can stick to, and not to add to your debt levels as you’re paying them off.