Debt and retirement seem like two polar opposites. Everyone knows that you need to start saving for retirement early on in your career so that you can stop working and still have enough funds to get you through your old age. But if you have enough money to save for retirement, can you also be in debt? Shouldn’t you be paying off your debts instead of saving money? Well, the answer isn’t always that simple, but it is true that managing debt while in retirement is a very precarious situation.
Develop a Strategy and Start Now
The most important thing you can do is to develop a strategy and to start implementing it right away, as in today.
Many experts agree that debt reduction should take priority over retirement savings. For a financially secure (and less stressful) future, you don’t want a mortgage hanging over your head. Social security checks only go so far, and you need to be able to feed and care for yourself with that money. You could end up in foreclosure if you can’t afford all of your bills, or you could end up working well into your seventies just to make ends meet.
An aggressive debt reduction strategy can help you eliminate virtually all debt in ten to twenty years, or within an even shorter amount of time. Once you’ve paid of all of your debts, you can continue to make high monthly “payments,” except now your money goes straight into a savings account.
Invest for Retirement
Once your money is in a savings account, you could leave it there and let it sit, or you could invest it to earn interest and accrue more money over time. It depends on how much money you have in savings and how comfortable you are with the risks of investing.
However, there are many low-risk options that can allow you to make the most of your savings. Among them are certificates of deposit, or CDs. The most basic CD is one that locks you into a set interest rate, protecting you from a potentially volatile economy. If things go sour and interest rates decrease, you’ll still earn a higher interest rate.
Funds in a CD cannot be withdrawn for a certain length of time. If you need the funds early, you can face penalty charges. If this worries you, there is such a thing as a “liquid CD” that allows you to withdraw funds early without penalty. However, the interest rate will likely be lower.
There are many more investment options, such as stocks, bonds and even real estate investing, but these may be higher risk. It’s worth talking to a representative at your bank to see what makes sense for your situation.
Liquidate a Structured Settlement
If at any point in time you were involved in a lawsuit and won or settled your case, you probably have settlement funds coming to you on a regular basis. It may be very tempting to liquidate your structured settlement to get all of the funds owed to you at once to help pay your own debts. However, there are some tax implications in this. Be sure to discuss your options with a financial advisor. It may be more sensible to continue to receive your structured settlement payments on a regular basis.
Is It Ever OK to Retire With Debt?
Sometimes it just can’t be helped; debt may follow you into retirement. If you have a co-signer on your loans, however, such as your son or daughter, you have a little more security because your co-signer acts as a safety net. And if you enter retirement with a small amount of debt that you are capable of paying off, experts agree that it’s not a big deal.
The important thing is to be smart and realistic about your available funds and how you will be able to not only survive after retirement, but also enjoy your time off indefinitely.