Hello dear readers! Today’s post, How to Achieve a Debt-Free Retirement Lifestyle comes to us from a blogger friend, Bernz JP, the mastermind behind Moneylogue.com. Every once in a while, even us stalwart personal financial geniuses need to remind ourselves of the importance of limiting (and eliminating) debt. Enjoy a fabulous fall Monday, and give it up for Bernz!
Retirement… The word itself evokes a sense of fulfillment. Lazy mornings, fishing in a placid lake with clear blue water, traveling the world, indulging all day in a hobby, volunteering with your favorite cause, or soaking up the sun while sipping margaritas on a sandy beach… The stuff of dreams!
But will your retirement years be graced with the life you want? Or will they be restricted to a life of anxiety, boredom, and quiet frustration?
Now’s the time to sit up and take a serious look at your finances. The surest way to be miserable in your golden years is to retire with debts. There’s no fun in having to channel a substantial part of your limited retirement income or retirement savings towards monthly debt payments. No thank you!
That is not to say that all debts are evil – there are good debts as well as there are bad ones. For instance, a mortgage or home equity loan gets you an asset that appreciates.
And in most cases, they are tax-deductible and have low-interest rates. Contrast those with debts that are used to finance lifestyles with assets that depreciate (cars, boats, toys) and are high-cost and non-tax deductible.
Therefore, an effective strategy to enjoy a debt-free lifestyle to know what debts to eliminate first. The good debts can continue working for you while you work down the bad ones.
That may sound easy in principle. But can you possibly live out your retirement days debt-free? The numbers are discouraging. According to a survey by YouGov, about 70% of people 55 years and older are carrying a form of debt.
Even more worrisome is the fact that a significant part of these debts consists of credit card debts. Other obligations that make up these senior’s debts include home mortgages, medical debts, auto loans, college loans, and personal loans.
While this can be frightening, all hope is not lost. Even if your retirement looms dangerously close like a Monday on a Sunday evening, with discipline and careful planning, you can eliminate your debt or substantially reduce them. After all, you deserve a stress-free retirement after decades of toil.
7 tips for achieving a debt-free retirement lifestyle:
1. Eliminate Credit Card Debt ASAP
Treat this as an emergency. To retire debt-free, your priority should be to pay off your credit card balances. This, according to Bankrate.com, is one of the best investments you can make. Look at it this way. Stocks and bonds have gained 10.4 percent and 5.4 percent respectively every year on average.
Compare that with the 18 percent or more you will have to pay in credit card fees. Even worse, late payment fees may run up to 25 to 30 percent.
You start getting results immediately you concentrate efforts in paying down your credit card balances. Your cash flow will increase, which means you’ll have more funds to tackle your other debts.
An excellent way to start eliminating your credit card debt is, to begin with, the highest interest credit cards first. Reducing the principal means you’ll pay lesser interest.
Consider getting a 0% APR credit card and transferring your credit card balances there. A 0% APR credit card allows you an interest-free period for about 6 to 24 months.
At the end of the interest-free period, you’ll then have to pay interest at a rate based on your credit history. This grace period relieves you of paying interest on your credit card and therefore makes it easier for you to pay off the principal.
Another way of crushing your credit card debt is by way of consolidating them into an unsecured personal loan. A personal loan with a lower interest rate of course. This is known as a consolidation loan and may have a tenor of up to 7 years.
This will help you save money on interest payments and enable you to clear your credit card debts earlier. Knocking out silly credit card debt is paramount to achieve a debt-free retirement lifestyle.
2. Track Your Spending
That sinking feeling of receiving a paycheck and in a week or two, wondering where it all went to is all too familiar. If you want to get out of debt faster, you must understand where your money goes.
You can do this by drawing up a budget and tracking your spending religiously. Knowing where every penny goes makes it possible for you to know the unnecessary expenses to cut down on or eliminate outrightly.
There are many apps to help you with this. You Need A Budget (YNAB), and Mint are two of the most popular software tools. Sign-up right away if you haven’t yet started tracking your expenses. I can’t reemphasize how important this is.
3. Increase Your Income
Getting out of debt is a battle. When you’ve successfully tracked your spending and reduced your expenses to spartan levels, another arrow you can add to the quiver is an increased income. Find additional sources of income which you can dedicate solely to debt reduction.
Now, this is where it gets interesting. There are several ways you can boost your income. You could get a second job, start a side hustle with your favorite hobby, work extra hours or look for a weekend job.
For instance, I blog, run an affiliate marketing business, and do freelance writing on the side (in addition to my regular 9 to 5 gig). Any extra income from side hustles goes straight to reducing debts. Increasing your income with more than annual raises is key if you want to achieve a debt-free retirement lifestyle!
4. Shun Lifestyle Inflation
As the popular hip-hop song goes, “…the more money we come across, the more problems we see...” Those lines, from The Notorious B.I.G., express the dilemma of most people. (Cubert: Although surely “Biggy” wasn’t complaining about having too much money, just observing some nuances…)
Whenever there’s an increase in income, there’s also a corresponding increase in needs that have to be met. This is known as lifestyle inflation, and it destroys any advantage an increased income would have otherwise made in your life.
An increase in income if well-managed, is sure to improve your finances and help you pay off your debts before retirement. But sadly, in most instances, this isn’t the case. You’ll tend to spend more when you earn more.
Look at the lives of some celebrities and sports personalities for proof that a massive increase in income can set you up for financial catastrophe later on (M.C. Hammer is the de facto example.)
So, how do you keep lifestyle inflation from sneaking up on you, when you’re trying to achieve a debt-free retirement lifestyle?
Firstly, you’ll have to differentiate between wants and needs. Our throw-away culture is one of extreme consumerism.
We are drawn constantly to products that (supposedly) make life easier. Constant ads bombard us from corporations focused on turning a profit. However, once you figure out this little game, and realize that all that crap isn’t required for a fulfilling life, you’ll be financially golden.
Let’s take for instance a $10,000 used Hyundai. This car will take you from point A to B just like a $50,000 Tesla Model 3. Not that there’s anything wrong with enjoying your hard-earned money, but there’s no need to plummet yourself into debt for fancy wheels. (Cubert: A nice bike on the other hand… Okay – but only if you purchase through Craigslist or used from a friend.)
Avoid trying to keep up with the bloody Joneses. Your brother-in-law’s purchase of an 18-room mansion doesn’t justify you splurging on an 8 room McMansion. The mortgage payment will hang over your head like a stalled weather pattern.
Live not only within your means but live less than your means where possible. Use increased income for whittling down debts. Put away extra earnings in tax-advantaged retirement accounts (Cubert says: 401k, HSA investment account, and IRAs are all worthy options.) Not having money sitting around tends to curb excessive spending, and, will provide a nice cushion in case of emergencies.
Choose to spend money on what matters and what’s needed. You may be able to afford trendy luxury items, but what will those things do for you, honestly?
5. Pay Off Your Mortgage
Plan to pay off your mortgage earlier using your retirement date as a guide. Cubert took the advice of Mr. Money Mustache by refinancing to a 5-1 ARM at a super low-interest rate. This served two purposes: 1 – A lower interest to pay during the 5-year pay down period. And 2 – Serious motivation to pay off the mortgage before year 5 eclipsed and all of a sudden the interest rate balloons.
Use any of several online amortization calculators to help you determine how much of a dent additional payments will make in helping you achieve your pay-off target. Or, better yet, consider downsizing to a smaller home. The lower mortgage payments mean you can pay it off sooner. Also, you’ll save time and money in cleaning and maintaining a smaller place.
(Cubert says: Relocation is a close cousin to #5. Examine your property taxes and commuting costs very carefully. Moving from one suburb to another, even within the same metro area can make a difference. If you don’t have kids, and you’re open to taking on a new job, consider moving to a lower cost of living town (e.g., anywhere between California and the Eastern Seaboard).)
6. Reduce Your Retirement Contributions
You didn’t see this one coming, did ya? This is a strategy that should be used only when paying off debts is priority 1. What makes debt pay-down priority #1? Any debts that chew up money with high-interest rates (8% or more) qualify. Also, any debts that hit your cash flow hard. Check out this post about the cash flow index to help you prioritize.
Effectively, you’ve got to balance your need for income in retirement with the absolute MUST of avoiding high-interest credit card debt. You may need to reduce retirement contributions temporarily. (Say, reducing your 401k from 10% to 3% – enough to get the employer match.)
The difference can then be applied to your card balances, starting with those with the highest interest rates. Once you wipe clean those pesky credit card debts, you can then re-up your 401k contributions and then destroy all your cursed credit cards in a bonfire of glory...
7. Conclusion: Work a Few Years Longer(?)
If you reckon that at retirement, your debt profile will still be high, you can elect to work for a few more years. The idea is to work long enough so that you can retire when you have little or no debt to pay (Cubert says: Although in our case, we’ll probably let $60K in 2% interest student loans linger for a few more decades…).
Additionally, working longer means you’ll be able to save more for retirement. And the larger your nest egg, the longer your money will last in retirement. (Cubert’s tip: If working longer in Cubicle Town doesn’t exactly thrill you, consider those side hustles, particularly, real estate and Airbnb hosting. You CAN juggle a career and real estate rentals at the same time!)
As all the current surveys suggest, most retirees will continue to battle debts. And that battle could easily affect the quality of life in retirement. While achieving a debt-free retirement lifestyle isn’t a walk in the park, with these 7 tips and some determination, you can accomplish an idyllic (early?) retirement.
Thanks for sharing these wonderful tips, Bernz! This was soft of an Op-Ed to an earlier guest post by Amy Nickson that struck a chord with me and my readers a few years back. The lesson? Be sure to balance your needs TODAY, while being mindful of what you’ll need tomorrow, in retirement. It can feel like walking a tightrope. But with careful planning, self-learning, and diligence, that balance can be achieved!