6 Steps to Retire Debt Free
Wondering how you’ll ever be able to retire with your current retirement savings nest egg? If possible, start making a plan to retire debt free. When you retire with fewer expenses, you may find that retirement is more affordable — and feasible — than you think.
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Here are six simple steps you can take now in order to possibly retire debt free.
1. Keep your housing costs low.
Whether you opt to own your home or rent, Credit.com advises that if possible, you keep monthly housing expenses (which includes the cost of rent/mortgage payment, plus insurance and applicable taxes) to no more than 28% of your monthly income.
Using the average median household income of about $57,617 (based on the latest household income figures reported by the United States Census Bureau), that means a person who makes about $4,801 a month should limit their monthly housing expenses to about $1,344.
While managing your housing expenses may take some planning and personal sacrifice, particularly if you live in an expensive area, the premise is simple: The lower your housing costs relative to your income, the more cash you’ll have to pay down and avoid debt, invest, save and contribute to your retirement account(s).
2. Consider shorter-term loans.
When your goal is to retire debt free, financing major purchases like a home or a car with a shorter term loan (like a 36-month car loan, or a 15-year mortgage) can help you stay honest about what you can truly afford, while reducing how much you to pay to borrow, and for how long.
Though advisors writing at NerdWallet explain that shorter loan terms require the financial discipline and confidence to take on a more significant monthly payment, shorter term loans usually have lower interest rates than their longer term counterparts.
Once the loan is paid off and you no longer have a monthly payment, you’ll have additional cash flow, and will own a valuable asset outright.
3. Eliminate credit card debt as soon as possible.
According to Bankrate.com, paying off your credit card debt is one of the best investments you can make, especially when your goal is to retire debt free. Consider these numbers cited by the The Wall Street Journal: The long-term annual performance of stocks and bonds is historically about 7% and 5% (respectively, after inflation). Credit card interest rates, on the other hand, are typically higher than both of those numbers.
When you focus on paying down credit card balances, you get an instant return on your investment. As you decrease your credit card balances, you’ll have increased cash flow that you can use to aggressively pay off other debts — which may include your home mortgage.
A study by the National Center for Policy Analysis found that retirees who own their homes tend to have greater monthly discretionary income and overall wealth accumulation, compared to those who carry a mortgage.
4. Try not to co-sign.
If your name is listed on any credit account or loan as an official co-signer (including student loans) it’s legally considered your debt — even if you didn’t make the purchases required to create it. If the person for whom you co-signed doesn’t pay the debt as agreed, it could become your responsibility.
If you want to retire debt free, it may be best not to put your name on any debt you don’t have complete ownership over.
5. Set tangible goals.
You may know you want to retire debt free. But how exactly will you get there? For example, consider:
- How much debt you have now
- How much you can afford to pay toward the debt each month
- How many months you’ll need to pay on the debt, until it’s paid in full
- How you will track your progress
Form an action plan for how much you’ll need to save in order to slowly pay down debts each month. Identify what sacrifices you may need to make to get in the habit of paying debt consistently, along with new habits (like automatic bill payments) that can make it easier to work toward (and stick to) your goals.
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6. Resist lifestyle inflation.
As you become debt free, you’ll have more spendable income. Ironically, that can reduce the pressure to budget carefully, and cause you to spend more freely than you did when had less cash. But the goal to retire debt free isn’t just about paying off debt; it requires staying out of it.
As you pay down debt, give your new-found cash flow a new purpose in your budget, including investing, saving and increasing retirement contributions, so you’re not tempted to spend more, just because you can technically afford it.