Retirement presents a challenge for most people, both with regard to their changing lifestyle and their changing budget. In particular, shifting to a lower income and smaller budget can feel quite uncomfortable. While sound financial planning throughout your working years can help you to build as much retirement income as possible, preparing for your future budget is another significant part of retirement planning.
One of the best steps you can take is to pay down debts during your pre-retirement years, so that your living expenses better fit within your budget.
Most retirees report that housing is their number one expense. If it is possible to retire without a house payment, you would probably feel significant relief. In many cases, it is worth the hassle to sell your home and use the equity to downsize into a smaller residence without a payment. But, this is a very personal choice.
To pay down mortgage debt before you retire, investigate switching to a 15-year mortgage rather than a 30-year. Of course, this might only make sense if you currently owe more than 15 years of payments.
If you’re closer to the end of your loan term, making extra payments can get you ahead. This is particularly true since more of your interest was paid in the early years of the mortgage, and now you’re paying heavily toward the principal. Making extra payments can be as easy as rounding up your monthly checks, putting your tax return or annual bonus toward the loan balance.
Of course, we urge you to remember that even if you can pay off your mortgage before retirement, you still need to budget for housing expenses. You will spend money on home repairs occasionally, and sometimes these costs can be significant. Make sure you have a source of liquid assets in the event of an emergency.
Your mortgage is only one form of debt, of course, and in some cases it’s not even the most important one to address before retirement. It is possible that credit cards or other forms of debt should take priority. So before you make any big decisions about how to address your debt load, give us a call. We can discuss that, and other issues that might impact your retirement.