How to Minimize Debt Before and After Retirement

Posted in Money Tips

debt-senior-years-updated5 Debt No-Go’s in your senior years

Carrying debt into retirement is risky.  An early retirement due to illness or job loss can derail your repayment plans. Making debt payments on a fixed income is difficult.

Here are 5 types of debt you should never carry into retirement:

  1. Credit card debt
  2. Car loans
  3. Payday loans
  4. Student debt
  5. High ratio mortgages

Dealing with debt

The closer you are to retirement, the higher priority towards paying off debt. Here are some tips that can help:

  • Prioritize your debts. Pay off most expensive first – the highest interest rate debts. Eliminate revolving debt (credit cards, lines of credit) – they are difficult to pay off on a fixed income.
  • Be careful of offering financial assistance to adult children. Avoid co-signing loans that will jeopardize your own retirement.

Credit score issues in your senior years

You may not need as much credit in your elder years, so look at your overall financial picture rather than your credit score.

Focus on eliminating your balances and lowering your credit utilization rate. Use less credit and more cash.

Downsizing your budget & your finances

Living on a fixed income, no matter the size, means adjusting your cash outflows to match.  Here are some ways to save:

  • Downsize your home and take advantage of any equity to reduce your mortgage.
  • Cancel extra credit cards, reduce lines of credit to remove the temptation to borrow more as your income decreases.
  • Reduce your car costs. You won’t be driving for work and may only be driving occasionally. Avoid car loans on a fixed income, buy a smaller car for cash instead. Consider dropping down to just one vehicle to save on insurance and maintenance costs.
  • Re-assess your insurance needs versus the cost. If your children are grown and you have savings, you may no longer need the same level or type of life insurance. You may want to switch from income replacement disability insurance to critical illness coverage.
  • Get rid of your land line and cable. Consider new technology if it will save you money and keep you connected.
  • Considering eating out for brunch or lunch. In most cases you get the same food, just at a lower cost.

Earning extra money

  • Take advantage of any employer pension matching (from a young age)
  • Add a year or two at your job after you planned to retire & sock that money away as a buffer.
  • Find a second career option. Add some cushion to your fixed income.
  • Take into consideration employment and pension income, you could increase your personal tax debt.

Saving & being prepared

  • Have a power of attorney for property so someone can handle your finances in case of illness
  • Ensure you have an up-to date will
  • It’s still useful to consider a TFSA as a savings vehicle even in your senior years

The financial preparedness plan

While your cost of living might drop in your senior years, you will still incur much of the same types of expenses you incurred before retirement. Being prepared to live off a fixed income means having money set aside for each of these purpose:

  1. Emergency Savings: This protects you from costs like small home and car repairs.
  2. Retirement Savings: How much you will need depends on your lifestyle expectations and how young you retire. If you carry debt into retirement, you will need more money to keep up with debt payments.
  3. Personal Saving: Consider this your discretionary account and comfort cushion. It’s money you use to replace your car, take a vacation.