Even for those with a regular salary and few financial obligations, saving six or seven figures for retirement is no small feat. But for those with crippling debts, retirement may seem impossible.
However, this is not always the case. While everyone’s situation is different, some people with debt might still be able to retire comfortably when they originally planned to. But you need a good debt repayment strategy. Here’s what you can do to get started.
How to deal with your debts before you retire
Start by making a list of all your debts. Write down the creditor, annual percentage rate (APR), balance, minimum monthly payment, and payment due date. You should be able to find all of this information on the online portal for your loan or credit account. If you still receive paper invoices, you should be able to find this information there as well.
Now you need to decide how to prioritize them. One of the most effective ways to pay off multiple debts is the debt avalanche method. This is where you make the minimum payment on all your debts, then put any extra money you have on the debt with the highest APR first. When you have paid that, you do the same with the debt with the next highest APR, and so on down the list.
But some people prefer to regain their confidence by paying off some of their small debts first. This is called the debt snowball method. This is essentially the same as the avalanche method above, but you start with the debt that has the smallest balance before moving on to the one with the lowest balance, and so on.
These strategies work well if you have a little extra money that you can put towards paying off the debt. But when that’s not an option, you may need to try another tactic. A balance transfer card is a solid option for credit card debt if you think you can pay off what you owe within the 0% introductory period. You can open one with any credit card company, but you won’t be able to transfer a balance from one card to another card offered by the same issuer.
Or you can try a personal loan. This is an unsecured type of loan, which means you don’t have to post anything as collateral. It’s even possible to get these loans without great credit, but you might pay a higher interest rate if your credit is poor.
The advantage of these types of loans is that they give you a regular monthly payment, so you don’t have to worry about your balance growing like you would with a credit card or payday loan. If you are interested in any of them, you can apply to any bank.
You can also use a combination of the methods mentioned above. If it still doesn’t work, you may need to find a way to increase your income. For example, you can negotiate a raise or start a side hustle to bring in extra cash that you can use for debt repayment.
Should you pay off your debts before saving for your retirement?
The best way to manage debt repayment and save for retirement depends on the type of debt you have. You can tackle debt with lower interest rates, like mortgages, while saving for retirement if you can afford to do both.
But if you have high-interest debt, like a payday loan or credit card debt, it’s usually best to prioritize that over retirement savings. This is because the interest rates on these loans are much higher than what the average person earns on the stock market in a year. You will therefore probably lose more money by carrying this debt than you would gain by investing for your retirement. But once you get your high-interest debt under control, saving for retirement should become a priority again.
Don’t rush into retirement
With the right debt repayment strategy, you may be able to pay off most or all of your debt before retirement. But if that’s not possible, it’s best to rethink your plans. Retiring with a lot of debt can cause you to deplete your savings faster than expected. This could rob you of the money you need to pay for food, housing, and other basic needs as you age. You better take your time. Postpone your retirement a little longer until you feel financially ready.