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What Should I Do About Debt Before Retirement?

April 8, 2014
Credit Cards
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You’ve been workin’ for Da Boss for decades. The day is just around the corner – the day of freedom known as “retirement.” Your fellow employees will throw you a party and hand you gift cards. They won’t tell you, however, how to handle debt going forward, and that’s why we’re here to help.

Tally your income, assets

One of the first considerations you’ll have is how your income situation will change. Calculate what you expect to earn from pensions, Social Security and other sources. Be conservative. It’s nice to expect that your retirement account, IRA or 401(k) will throw off regular fixed income from its investments, and that you’ll begin making regular withdrawals, but you shouldn’t count on this. A market crash could alter that expected income stream.

Once you figure out your monthly income, you also should figure out your current assets. Ideally, if you are carrying credit card debt, you can pay it off in full before your income level drops, and without eating into your retirement assets. If not, see if you can figure out how to pay it off in payments that exceed the monthly minimum. This is where a financial planner can really be useful.

Rising from the depths of debt

If you are in deep trouble with respect to debt, then it’s a good idea to visit a debt counselor and/or management service. They can work with you, and your creditors, to find a payment plan that works for all parties. By taking a holistic look at your financial picture, you can do the same thing that distressed corporations do – restructure your debt. You’ll be surprised at how willing creditors are to work with you. They can see your credit report. If you demonstrate your asset base is weak and income is about to fall, they prefer to get something instead of nothing if you file for bankruptcy.

In the case of credit cards, unless it’s a secured card, it is unsecured debt. If you file for bankruptcy, they go to the back of the line behind secured debt like mortgages and auto loans. They want their principal back at the very least, and may even lower the interest rate if they believe there’s real risk of default.

Pick the right cards

On the other hand, perhaps you are in relatively good financial shape. In that case, I would look to shore up any deficiencies in how much credit you have access to. If you’ve avoided credit cards all your life, or if you’ve used them infrequently, I would apply for those that appeal to you. If you are big on travel, you’ll have a lot of time to enjoy excursions in retirement, so now would be a good time to apply for cards offering travel rewards. Perhaps you want to decrease what you spend. In that case, go for a cash-back credit card.

I advocate for flexibility and having options, so increasing your total credit access while you have elevated income and get approvals easier is a good idea. You have to space out your applications so you don’t ding your credit score, though.

Retirement party image via Shutterstock