Tackling debt before and during retirement

When anticipating retirement, advanced planning is the common thread that binds your financial future together. Therefore, managing debt during retirement is easier when you have a plan. Approximately 10 years before retirement, reassess your financial position and create a feasible plan to pay down consumer debt — that includes credit cards, student loans and car loans. It’s also advisable to pay off your mortgage as well. But, if necessary, this is a reasonable liability to carry into retirement.

This advice is all well and good, but how do you get there? It comes back to basic budgeting. For example, if a client has a $2 million portfolio and plans to withdraw 4 percent annually, that provides $80,000 in yearly income which can be used in addition to Social Security and any pension income to create a budget. Given these income projections, they must decide if their mortgage obligation (should they decide to maintain) is reasonable during retirement. Other mortgage considerations or options include making additional payments while working to pay off the loan faster or simply continue working longer.

Even with a budget, the best laid plans can get off track. If you must carry some debt into retirement, consider refinancing and or consolidating to create more manageable monthly payments. In addition, we recommend establishing an emergency fund. Ideally, this fund would consist of 9-12 months of living expenses. These dollars are earmarked for unplanned events and expenses that seemingly come out of nowhere. Talk to your advisor about options and consider a combination of savings, a home equity line of credit or reverse mortgage as further financial backups.

It’s important to be thoughtful about spending as you transition into retirement. Avoid overextending which can compromise retirement security and ultimately create unwanted financial pressures down the peaceful road to retirement.