It’s obviously preferable to be debt-free when you retire, but taking a small amount of debt into retirement isn’t a terrible thing. A mortgage payment you’ve planned for in your retirement plan is unlikely to endanger your financial stability. However, the three sorts of debt listed below can’t be said that way. If you have any of these debts, develop a debt repayment strategy right now so you may get rid of these obligations before retiring.
1. Tax debt
Your retirement funds are generally secure from creditors, with the exception of the IRS. If you do owe back taxes, the federal government may take your retirement assets and you’ll have no means of appeal. It’s a serious issue for older people who rely on their pension to pay their monthly expenses.
Instead of waiting for the IRS to contact you, contact them immediately. You might be able to develop a payment plan that will let you pay off your debt gradually over time rather than all at once.
The IRS may not take enforcement action against your retirement accounts as soon as you establish them. You must pay the fee for establishing each of these payment plans, and your remaining balance will accrue interest and penalties until it’s paid in full. However, if you keep up with your payments every month, the IRS won’t be able to touch your retirement savings.
2. Payday loan debt
Payday loans have annual percentages rates (APRs) as high as 400%. A $500 loan with a two-week repayment period and a 400% APR might double in value to $2,500 in a single year if you aren’t able to pay it off. Frequently, individuals wind up rolling over or re-borrowing these loans, which effectively postpones the problem. The balance increases along with it, making it virtually impossible to escape from debt on your own.
A large debt like this is a concern to take into retirement because there’s no limit on how much your balance might grow. You could end up going through your savings faster than you had anticipated to keep up with it, leaving you unable to pay for other items.
A personal loan is your best option for getting rid of a payday loan. These loans are accessible with no collateral and have high interest rates, although they are nowhere near as high as cash advance rates. Once you’ve been accepted, your lender will give you a lump sum to use toward the payback of your pay-day loan. Then, until you’ve repaid what you borrowed, you’ll make monthly payments. You won’t have to be concerned about your balance increasing if you pay on time each month.
3. Credit card debt
Credit card APRs aren’t as high as payday loan APRs, but they can still be over 30%. If you just make the minimum payment on your credit cards every month, your balances will grow rapidly. You might find yourself tens of thousands of dollars in debt before you know it if you continue to make new purchases each month.
You can use a personal loan to pay off credit card debt or open up a balance transfer credit card. This allows you to move the balances from your other cards to this credit card for a low fee. Balance transfer cards feature an introductory 0% APR period, which is often at least six months or longer. Your balance will not increase during the introductory period, allowing you to focus on paying your debt down without worrying about any interest charges.