Most of us have dreams of a comfortable retirement, but debt and poor credit can put that dream in jeopardy. High levels of debt in retirement will drain money away from basic living expenses and poor credit can make it expensive to finance health care costs and other financing needs. To prepare yourself for retirement, you need to start today.
Paying Off Debt
Since most retirees live on a fairly fixed monthly budget, every dollar that you’re paying toward debts means a dollar less for living expenses. You can ensure a better retirement by paying off debt as part of your preparation for retirement.
- Spend less than your income: this is pretty obvious, but you should manage your spending well in the years leading up to retirement and in retirement to make sure you have the capacity to pay off debt.
- Build an emergency fund: unexpected events happen to everyone, but when you’re in retirement your ability to absorb these emergencies as part of your regular spending is more limited. This means that an auto accident or major home repair can push retirees into high-cost debt which will further strain their finances. Maintaining an adequate emergency fund is essential to managing these emergencies.
- Pay off consumer debt: start by aggressively paying off credit card and other consumer debts. Ideally you’ve paid off all consumer debt by age 50 or 55. This will free up money for retirement savings and will improve your credit score.
- Pay off auto loans: auto loans can be another large drain in retirement and you should have them paid off by age 60. As you get closer to retirement, drive your cars longer and buy used cars if you need a replacement.
- Pay off mortgage: Paying off your mortgage before retirement used to be standard practice. By paying off your mortgage, you’ve ensured that you’re living expenses will minimized and you’ll only need funds for basic living expenses like food and health care. You’ll also have more home equity to tap should you run out of funds. Target paying off your mortgage by age 60 or 65.
Managing your credit
If you’ve prepared well for retirement, you should have limited need to borrow. However, medical expenses, a reverse mortgage, and even renting a home may involve a credit check, so you need to be sure that you’re managing your credit well heading into and after retirement. Here are a few of the most important things you can do.
- Pay off credit card debt: your credit utilization is 30% of your credit score, so paying off your credit cards will immediately improve your credit score.
- Pay off and close in-store financing or rent-to-own: these types of accounts are a big red flag on your credit report and lower your score. Paying off and closing these accounts will help your score.
Pay on time: making all your payments on time is the biggest factor in your credit score. Even if you can only make minimums, be sure to pay on time.