The Top 5 Debts to Prioritize Paying Off Before Retirement (10:31)
If you’re in your 50s or 60s and looking ahead to retirement, you might be wondering how to handle your existing debts
Broadcast Retirement Network’s Jeffrey Snyder discusses prioritizing which debts to pay as you enter retirement with National Foundation for Credit Counseling’s Bruce McClary.
Jeffrey Snyder. Broadcast Retirement Network
This morning on BRN, the top 5 debts to prioritize before heading into retirement. Joining me now is Bruce McCleary of the National Foundation for Credit Counseling. Bruce, so great to see you.
Thanks for joining us this morning.
Bruce McClary, National Foundation for Credit Counseling
Thanks for having me on the show, Jeff.
Jeffrey Snyder. Broadcast Retirement Network
And look, we talk about retirement on this network quite often. It’s not the only thing we talk about, but we talk about retirement. How important is it when you’re checking off the things that you need to do for your retirement that you think about any outstanding debt?
Bruce McClary, National Foundation for Credit Counseling
It’s really critical, and it’s important to think about it early on. I mean, sometimes it’s hard to think about retirement when you’re 30 or 35, but it’s important to keep an eye on your budget, how you’re managing your debt, just as much as it is important to keep an eye on your progress saving towards retirement, your 401K and your other investments. But sometimes people tend to shift their focus a little bit more exclusively on that when they’re in the retirement mindset, and they forget about how debt factors into the equation as they get closer and closer to retirement.
So there’s all kinds of different debt that you can accumulate over a lifetime, mortgages, auto loans, credit card debt, student loans as well. So you have to look at the big picture. And at that point, then you can think about, well, what does the approach to retirement look like?
And how do I strategize to make the most of the situation, to make the most of the retirement income that I’ve worked so hard to save?
Jeffrey Snyder. Broadcast Retirement Network
Yeah, a really great point. Let’s talk about some of the debt, and you outlined some of it. Let’s talk about paying off that credit card debt.
Now, this number has gone up, Bruce, for many Americans, because their wages haven’t gone up, and that’s a whole other show. But credit card debt has gone up. Let’s talk about that.
What do we need to do to get that off the books in retirement, for retirement?
Bruce McClary, National Foundation for Credit Counseling
Well, what do we need to do and why is it important? I mean, the reason it’s important is because it’s probably the highest interest rate debt that you’re carrying. It certainly is in the top tier of interest.
Right now, the average interest rate for new lines of credit is about 24% APR. That’s mind-blowing. When I started in the lending industry back in the 1990s, that rate was considered subprime.
Like, if you had terrible credit, you would get a 24%, 25%, 26% interest rate. But now that’s sort of the average rate, and there’s about $1.1 trillion in outstanding credit card debt right now in the United States. And if the average rate is applied to that total of debt, it’s almost $200 billion in interest that Americans are paying on that debt.
So you can see wheels are spinning. People aren’t making a lot of progress paying down their debt. A lot of people are at the point where they’re just making minimum payments so it can fit their budget, and they don’t fall behind, but that’s not making any progress.
So you have to do better than make minimum payments. You have to look at that debt and think about how you can clear it out of the way affordably within your budget and how you can get out of paying the maximum interest over time on that debt. And there are a number of different strategies you can use to do that.
If you have good or excellent credit, you can consider balance transfers, taking advantage of introductory 0% interest rate offers that allow you to power pay that account and obliterate that balance before interest starts attacking it again. You can also look into consolidation. You can look into consolidation loans if you have equity in your home.
You can certainly bring that interest rate down from 24% if that’s where you are. Mortgages right now are above 6%, which isn’t great, but it’s better than your 24%. So if you’re comfortable putting your home on the line and you’re in a good financial situation and you can make sustainable on-time payments to clear that debt, that might be an option.
And so those are options that you can use if you have good to excellent credit, where you can get better interest rates or better deals on balance transfers or loan consolidations to pay it down. What you want to avoid doing is making matters worse. And some people say, well, why don’t you borrow against your 401k?
Or why don’t you take money out of your retirement and take money out of your 401k to just go ahead and pay off that debt and be done with it? Well, in those cases, I always tell people you’re borrowing against your future. And if you’re far along, if you’re 40 or 50 and you start doing that kind of thing, you don’t have a lot of time before retirement to make up for lost ground and recoup the money that you took out.
And so you have to be very careful about the decisions you’re making to clear that debt. But the main thing is prioritizing the high interest rate credit card debt, to pay that off first, to clear that out of the way as much as you can before retirement.
Jeffrey Snyder. Broadcast Retirement Network
Yeah, really good point. And by the way, those loans in 401k, usually they’re a prime, prime plus one. We know where the federal funds rate is today.
So, you know, you’re robbing Peter to pay Paul, basically, as you say. That’s an analogy I always wanted to get into the program. In the limited time we have left, we’ve got about three or four minutes, Bruce.
Let’s talk about personal or unsecured loans. Why is this debt important to get off the books? We talked about credit card.
Let’s talk about this. Why is it important?
Bruce McClary, National Foundation for Credit Counseling
Well, first of all, these personal or unsecured loans are also typically higher interest rate loans, depending on where you get the loan. A lot of these are associated with subprime lenders, and those subprime lenders charge rates similar to what I mentioned for the credit cards, the 24 percent, 25 percent, even 36 percent. I mean, if you’ve got signature loans that are issued by a subprime lender and you’re at 36 percent, all the red lights and the warning bells ought to be going off.
You need to clear that out of the way and pay it down or pay it off, refinance it. And for some individuals, it might not be an option to refinance in those situations because you may have damaged credit. That’s another aspect of this that we can talk about.
Your credit impacts some of your choices. If you have poor credit, you’re not going to be able to qualify for the best rates. So you can’t have as many options when it comes to balance transfer or loan consolidation.
But these signature loans can have very high interest rates. And again, it’s not tied to collateral that, you know, that that increases in value where you build equity. There’s just nothing there is you’re pouring money down a hole with interest.
And it’s it’s it’s like a weight around your ankle as you go into retirement. And you need to you need to treat that the same as you would with credit card debt in most cases.
Jeffrey Snyder. Broadcast Retirement Network
Yeah. How about auto loans? A lot of people still buy cars.
They lease cars. It’s not uncommon when you get to retirement to have a new vehicle. You earn the right to buy a car.
Maybe it’s more economical to have a new car. But let’s talk about some of those auto loans and why it’s important to pay that off as well.
Bruce McClary, National Foundation for Credit Counseling
Yeah, you know, it’s that’s a good it’s good to bring up auto loans in the equation, because, yes, that’s probably that could be a debt that you do carry into retirement. So you have to be careful about the type of loan you have, the type of financing, how affordable it may be. It’s best not to carry that into retirement.
So if you do have an auto loan, try to pay it off. Auto loans, you know, there are the typical term for auto loans can be 60 months, sometimes longer. And we all know with with vehicles, especially with a new vehicle, you know, you may be running into maintenance issues as you get towards the end of that repayment track.
And those costs actually are added to what you’re paying monthly for the car payments. And not only are you making the car payments, but you could be stuck with some significant repair costs as the transmission needs more attention or the other issues with the drive train that might be outside of warranty. So, you have to think about the timing of that.
Is your car going to be outside of warranty? Are you going to be on the hook for all the repairs and the repair costs? If so, do you want that and the car payment at the same time?
Probably not. So, you do want to develop a strategy to get that auto loan out of the way. And in the future, as you think about having a vehicle during retirement, it’s also important to think about ways that you can avoid borrowing altogether.
Find a reliable used car, use some cash to pay for that instead of looking at new cars that lose a lot of value the minute you drive them off the lot. And then you’re, of course, saddled with these loans that you have to pay for years and years. So, I just think about my father in that situation.
I mean, he’s a very practical person. And the last car he had before he passed away was a reliable used car. He didn’t pay much for it.
He didn’t owe any money on it. And that was a good transportation option for being in retirement. But if you’re headed for retirement, you got a car loan, start thinking about getting that car loan paid off.
Jeffrey Snyder. Broadcast Retirement Network
Yeah. Bruce, we’ve got about 45 seconds left. What happens when I pass away and I’ve got some of these pieces of debt?
Do they just get wiped away, whether it’s the credit card debt or the unsecured personal loan or some of the other things that we haven’t had a chance really to catch up on, student loans and mortgages? What happens upon my death? Does it transfer to my beneficiary and net it against the transfer of wealth?
Bruce McClary, National Foundation for Credit Counseling
Well, a lot of it depends on the circumstances. If it’s really small dollar amounts, the creditors may just tend to write it off and take it as a loss. But if it’s a large sum of money that you owe and that remains, some lenders may try to come after your estate and recoup some of the money or all of the money by taking out of what’s left in your estate.
Jeffrey Snyder. Broadcast Retirement Network
Yeah. So it doesn’t just go away. It may go away in some cases, but you don’t want to be haunting your beneficiaries from the grave, I guess, is what I’m trying to get to.
Bruce, we’re going to have to leave it there. Thanks so much for joining us. And we look forward to having you back on the program again very soon.
Thanks, Jeff. It was great to be here. And don’t forget to subscribe to our daily newsletter, The Morning Pulse, for all the news in one place.
Until tomorrow, I’m Jeff Snyder. Stay safe, keep on saving and don’t forget, roll with the changes.