Having large amounts of debt can be a miserable experience. Sky-high interest rates can make it feel like you’re never making any progress toward paying anything off. An especially difficult time to be in debt is when you’re planning for and heading into retirement. Monthly payments toward your debts will quickly eat up your retirement fund, so it’s essential to have a strategy to chopping your debt and getting rid of it.
1. Stop Accumulating Debt
The first step to eliminating debt is not accumulating any new debt. This means putting away the credit cards, not getting any new ones, and generally living within your financial means.
If you have a hard time not using credit cards, here are a few tips to help:
- Take them out of your wallet
- Lock them in your safe (or another safe place in your home)
- Cut them up
A standard piece of advice that comes with stopping credit card use is simply closing the account. This is an obvious way to keep from using your card because you can’t buy anything if you don’t have the card. However, holding a credit card that has a full credit limit is good for your credit score. The choice is ultimately yours in this area.
2. Increase Monthly Payments
Make more than the minimum payments if you can. Making larger payments on your credit cards and other debt payments can seem like an intimidating thing. However, you don’t have to make large payments on all your debts at once. Make minimum payments on all your debts except the one you want to pay off first. Then take the amount you paid on that debt and apply it to your next debt – and so on and so forth.
Dave Ramsey calls this the “debt snowball” because your monthly debt payments continue to get larger as you eliminate debts. By the time you get to your final debt, you can make large payments and eliminate the debt quickly. You will ultimately save a substantial chunk of change if you can afford to make larger payments on your debts.
3. Take Out A Reverse Mortgage
You’re right; we previously said stop accumulating debt. However, a reverse mortgage doesn’t work like a typical loan. The point to no longer accumulating debt is to minimize your monthly debt payments. A reverse mortgage doesn’t come with a monthly payment. Instead, your reverse mortgage doesn’t require any repayment until after your or your heirs sell your home.
To qualify for a reverse mortgage, you must meet the following requirements:
- Own your home outright or own at least 50% equity
- The home must be your primary residence where you live the majority of the year
- The home must be in good condition
- Must not be delinquent on any federal debt
- Must receive counseling from a HUD-approved reverse mortgage agency
You can learn more about current rates and your eligibility by using this reverse mortgage calculator by All Reverse Mortgage.
4. Cash Out A Life Insurance Policy
Depending on the type of life insurance policy you have, you may be able to cash it out and put the funds to use. Universal life and whole life insurance build cash as you contribute payments in excess to your premiums and your earnings. You can withdraw limited amounts of money from your policy, but there can be tax implications.
If you take cash out of your life insurance, the death benefit payout will be reduced. Although the sooner you reduce your debts, the more cash your heirs will have after your death anyway. If people don’t rely on you financially, it may make sense to close out your life insurance policies entirely. Cash them out and pay down your debt.
5. Downsize Your Home
You can make everything in your life more affordable by moving to a smaller home. If you’re living life as an empty nester, there’s a chance you have more house than you need. If you have a considerable amount of equity in your home, you can sell your house and buy something smaller.
Depending on the amount of equity you’ve built, you could buy your next home outright or make a significant down payment and use the rest to pay off debts. Whether you can pay cash for your home or make a large down payment, you’ll save money each month on your mortgage payment and utilities, which will make it easy to pay down your debts before retirement.
6. Lower Your 401(k) Contributions
If you’re contributing the annual maximum of $19,500 to your 401(k), you’re putting in $1,625 each month. Your 401(k) will continue to grow even if you stop contributing. If you were to take even $1,000 of your contribution each month and allot it toward debt payments, you could pay off a significant amount of debt in a year.
The stock market averages around an 8% return each year, so if you have debt with a higher interest rate, it may make sense to defer some of your retirement purchased to eliminate your debt.
When it comes to interest rates, you are likely paying more in interest on your debts than what you’re getting from your 401(k). This means the amount of money you have allotted for each month during retirement essentially grows without contribution because you’ve eliminated debt.