Want to live comfortably in retirement? Eliminate debt

cutcreditcardsAn often-repeated rule of thumb is that you’ll need 80 percent of your pre-retirement income after retirement. This rule assumes that some of your expenses will decrease, such as commuting costs to and from work, wardrobe expenses, and, of course, contributions to retirement accounts. But the unstated assumption is that your other expenses will stay the same.

What if they didn’t? Your utility bills will probably not change much, and there’s little you can do to reduce those. Your cell phone, cable, and food expenditures may remain the same too – that’s the idea behind living comfortably in retirement.

But many people carry other expenses too, such as mortgage payments, car payments, and credit card debt. If you eliminated those by the time you retired, you would take a big chunk out of your recurring expenses each month.

Suppose your mortgage was $2,000 per month, car payment was $500, and credit card payment was $200, and all of your other expenses were $1,500 per month. That would mean your total monthly expenses were $4,200.

If you followed the usual guidance and withdrew 4 percent of your savings each year in retirement, you’d need $1.26 million in savings. But if you paid off your mortgage and eliminated your car and credit card debt by the time you retired, your savings requirement is $450,000 – a more attainable goal.

True, paying off debt involves some sacrifice now. But maybe not as much as you think. If you bought a $300,000 house with 20% down and obtained a 30-year mortgage at 4% interest, your monthly payments would be $1,146. Suppose you want to pay that off in 20 years instead of 30. By adding just $310 to your payment each month, you would pay off the mortgage in 20 years – and also save over $60,000 in interest.

So by reducing or eliminating debts you carry into retirement, you can drastically reduce the amount of savings you’ll need, as well as the risk that you’ll have to scale back your lifestyle sometime in the future. Reports are that many seniors are carrying massive mortgage debt and risk foreclosure.

Of course, if you’re confident that you can invest the funds for retirement instead and get a greater return than the 4% interest on your mortgage, then that’s an option. By accumulating more savings, you’ll set yourself up to create a larger stream of income in retirement that can help offset these debts.

A systematic plan for paying down debt can work well if implemented consistently. Such a plan could consist of paying a little extra on your mortgage each month or every other month, applying windfalls like salary bonuses and tax refunds to paying debt, and even limiting major expenses like car purchases and home renovations to those you can afford to pay off quickly.

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