When we picture retirement, the majority of us imagine care-free lifestyles. We’re talking cocktails on the beach, cruises in the Med, and most definitely no debt. After all, these are your golden years. Finally, you will have paid your dues to settle into a lifestyle that you can actually enjoy. Or will you?
The sad reality is that, for an astounding four in 10 retirees, debt is a very pressing retirement reality. Of those, up to 9% owe over $100,000. As simple as that, the golden years turn dark pretty quickly. You certainly won’t be able to enjoy a cruise because a) you won’t be able to afford it, and b) you’d have too much on your mind even if you could.
It’s hardly how you imagined your retirement looking, and it’s often down to one significant financial setback – interest rates. After all, when it comes to taking out a loan, most financial institutions won’t lend past retirement. Besides, you probably won’t be looking to borrow that far. Yet, pesky interest rates that rise over the years could still see you owing significant money by the time you kiss goodbye to the working world. Suddenly, you’re one of the 39% of retirees who struggle to even get by.
It’s terrible news, but there are steps you can take to ensure interest rates don’t sting during your retirement years. And, we’re going to look at them here.
Consider where you’re borrowing from
It’s first vital to understand where you’re borrowing from/what that means from a retirement perspective. After all, ill-thought or unplanned lending even during your twenties could land you with interest payments that last well past the age of 65. And, that’s when retirement starts to look precarious.
There are a few different ways to consider borrowing from every angle. For one, you’ll want to think about who you’re lending from. Payday loans and other such options are, for instance, terrible from an interest perspective, with annual rates creeping as high as 500% in some instances. In other words, even a short-term loan taken out in your forties could still end up costing you by the time retirement rolls around.
By comparison, banks offer much more favorable rates of around 22.8% on credit cards, etc. But, then, even this isn’t the best you can expect, with amounts soon escalating if you agree to long-term mortgages or even pay minimum rates on credit card bills each time.
When it comes down to it, you might find that you’re better off borrowing from lesser-known credit unions. Credit unions are different than banks in the fact that they are owned by members and typically not-for-profit. As such, interest rates tend to be lower with higher levels of flexibility. Considering these benefits is vital if you’re to stand the best chance at reducing long-term payments.
Always use an interest calculator
Speaking of reducing long-term payments, it’s also vital that you take the time to calculate interest at the moment of borrowing. Too often, we skip this step as we rush to accept loan terms, but this is where our main financial mistakes occur.
In reality, anyone looking to take out a loan with lengthy interest terms needs to work things out with retirement in mind. This is the case whether you’re twenty or forty and ensures that your payments are always cleared by the time your golden years set in.
Bear in mind that this isn’t always a straight-cut issue, as interest rates can fluctuate, especially when you embark on long-term lending such as mortgages. Still, a financial advisor should be able to give you some idea of what rates would look like at their highest according to recent averages. Plus, taking out fixed options should see you with at least some idea of the rates you can realistically pay without breaking that retirement bank later on.
Overpayments are your friend
When we take out large loans, the majority of us intend to overpay at some stage. After all, affordability restrictions are stringent these days, and most of us could afford slightly more if we’re honest with ourselves. Yet, as we adjust to those low repayment terms, splashing more cash on the cause can often fall by the wayside.
This is an issue for the apparent reason that, the longer you owe money, the more you can expect to pay in interest over the years. Even if you’re on repayment restrictions, overpaying as much as you can is guaranteed to help you when you’re reaching retirement.
The good news is that you don’t have to go wild here. Something as simple as overpaying by $1k or less annually, spread over twelve months, should be plenty to tide you over. In cases of restrictions, you may even find that you have to reduce that modest amount in accordance with the overall amount you have left to pay. Before you know it, you’ll be interest-free, and barely even noticing the extra you’re putting towards the cause.
Don’t be afraid to use your assets
Let’s say that you’re already nearing retirement, and high interest rates have led to remaining debts. Do you give up and accept a retirement of repayments? Of course not. As at any time of your life, you should pick up and find a way to make yourself debt-free at last. And, you’ll often find that your assets could well help you do just that.
Most often, people find that downsizing their houses once they reach retirement age works wonders for clearing remaining mortgage payments, etc. What’s more, downsizing like this has the notable benefit of making your retirement lifestyle easier in general. What better excuse to invest in a bungalow rather than that three-floored townhouse?
While it can seem like a bitter pill to swallow at the time, then, turning to your assets to keep finances clear is almost always a good idea. Obviously, you shouldn’t sell everything you own just in the hopes of a debt-free few years. You should, however, consider what you can change, and how you can ensure that doing so helps you reduce debts at last.
Always keep your eye on the debt ball
Lastly, it’s well worth noting that you need to keep an eye on the debt ball at all times to avoid retirement rollovers. Too often, we sign up for loan amounts and then entirely forget to track their progress, raising interest rates, and more. Instead, we let our direct debits do the talking and move onto other things.
The trouble here is that shifting your attention away from repayment amounts puts you at high risk of excessive remaining debts in retirement. By comparison, paying attention to how much you owe and what’s happening with your interest means that you can make plans accordingly, whether that be asset management or overpayments during your remaining work years. This could even allow you to consolidate debts to simplify the repayment process.
Either way, keeping your eye on the debt ball saves you from the unpleasant realization that you still have upwards of $100,000 to repay, and no real idea of how to achieve that goal.
A final word
Debt and retirement are two words that, in an ideal world, should never go together. But, as the stats sadly show, they’re becoming more and more common as a pair, and it’s all thanks to interest rates. So, in the interest of an interest-free retirement, we suggest you put each of these pointers into action sooner rather than later.