Retiring debt-free is obviously ideal, but taking on a little debt in retirement isn’t the end of the world. A mortgage payment that you’ve budgeted for in your retirement plan probably won’t threaten your financial security. But the same cannot be said for the three types of debt listed below. If you have any of these, work out a debt repayment plan as soon as possible so you can get rid of these bills before retirement.
1. Tax debt
Your retirement savings are generally safe from creditors, except the IRS. If you owe back taxes, the federal government could take the money from your 401(k), IRA, or other retirement account, and you won’t have any recourse to stop it. That’s a big problem for seniors who rely on their retirement savings to cover their monthly bills.
Instead of waiting for this to happen, contact the IRS directly to discuss your options. You may be able to set up a payment plan that allows you to pay off your debt slowly over time, rather than in one big lump sum.
These payment plans have one-time setup fees and your balance will accrue penalties and interest until paid in full. But once you have one, you won’t have to worry about the IRS using your retirement savings, as long as you stay current on your monthly payments.
2. Payday loan debt
Payday loans can have annual percentage rates (APRs) close to 400%. A single $500 loan with a two-week payment term and 400% APR could grow to $2,500 in a single year if you can’t pay it off. People often end up rolling over or rolling over these loans, which essentially takes the problem further down the road. The balance keeps growing, making it virtually impossible to get out from under debt on your own.
Debt like this can be dangerous for retirement because there’s virtually no limit to how much your balance can grow. You could end up depleting your savings faster than you expected to keep up, leaving you without enough for your other expenses.
If you have a payday loan, your best option to get rid of it is a personal loan. These loans are available without collateral and although their interest rates may be high, they are not as high as payday loans. Once you’re approved, your lender will give you a lump sum that you can use to pay off the payday loan. Then, you’ll make regular monthly payments until you’ve paid back what you borrowed. You won’t have to worry about your balance increasing as long as you make your payments on time.
3. Credit card debt
Credit card APRs are not as high as payday loan APRs, but can still exceed 30% in some cases. If you only make the minimum payment on your cards, your balance could add up quickly, especially if you continue to make new purchases every month. Before you know it, you could be tens of thousands of dollars in debt.
You can use a personal loan to help with your credit card debt, or you can open a balance transfer card. This allows you to transfer your balances from other credit cards to this card for a small fee. Balance transfer cards have a 0% introductory APR, usually for at least six months and sometimes much longer. During this time, your balance won’t increase at all, so you can focus on paying down your debt without worrying about interest charges.
What happens if you can’t pay off your debt before you retire?
If you don’t think you’ll be able to pay off old debts before retirement, you can look for ways to increase your income today, such as working overtime or starting a side job, or consider delaying retirement. Or you could use a combination of these strategies. Think about what makes the most sense to you.
Find a debt settlement strategy that works with your budget, then check in with yourself every month or two to see how you’re progressing. If necessary, adjust your retirement plan until you find a solution that gives you the best chance of remaining financially secure for the rest of your life.