Leading up to retirement :
• Make a plan . There are lots of ways to pay down debt , from the “ snowball method ” to the “ avalance method ” to contacting lenders directly . Even if retirement is only a few years away , you can make a lot of progress in a short amount of time – but the sooner you get started , the better .
• Pay attention to the percentages . All else being equal , debt with higher interest rates costs you the most in interest . There ’ s no point in paying extra on a mortgage of 3 % if you have credit card debt of 18 %.
• Don ’ t forget about retirement savings . As much as you might want to own your house free and clear , it might make sense contributing more to an IRA earning 7 % than paying down a mortgage on a 3 % interest rate .
Once you ’ re in retirement :
• Account for debt in your retirement budget . Entering retirement debt-free would be nice , but that ’ s not always feasible . Make sure your budget considers both servicing that debt and how to keep your monthly spending from contributing to it . Ideally , you want to be at a point financially where you use credit cards strictly for convenience or to earn reward points , not out of necessity .
• Explore paying it down with retirement savings . Depending on where you find yourself in retirement , it might be worthwhile to pay off debt with your retirement funds . There will likely be tax consequences from the distribution – plus it ’ s essential you don ’ t see an untapped credit limit as an opportunity to spend more – but in some cases it could make sense .
• Try not to leave debt to your heirs . The laws vary by state , but typically your debts don ’ t die with you – your estate would be responsible for prioritizing them ahead of your heirs . That ’ s a legacy most people wouldn ’ t want to be remembered for .
Paying down debt often goes hand-in-hand with managing your spending . In the last section of Understanding Your Wealth , we ’ ll look at your expenses , both now and what to expect when you retire .
According to a 2020 Experian study , baby boomers carry more than $ 6,700 in credit card debt and more than $ 25,000 in non-mortgage debt . 28
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