You can expect to experience many changes in retirement, and one of the biggest has to do with your finances. Unless you decide to keep earning money on the side, you’ll be living on a fixed monthly income that doesn’t include the normal work raises, bonuses or opportunities to increase your income by switching jobs.
This shift puts a premium on reducing your expenses in retirement to give yourself plenty of financial breathing room. According to an analysis from Fidelity Investments, you can expect to spend between 55% and 80% of your yearly work income throughout your retirement. About 15% of your post-retirement living expenses will go to healthcare costs alone.
One thing you will want to do is pay off as many debts as you can, including mortgages, car loans, student loans, medical bills and credit cards. Entering retirement free of debt can solve a lot of financial problems down the road.
You should also pay off other expenses that could potentially tie you down financially in retirement — including expenses you’ve built up that don’t fall under the normal financial umbrella.
Keep reading to learn about six unusual expenses that are worth paying off before you retire.
Personal Bank Loans
Personal loans provide lines of credit that can be used for everything from home renovations and medical bills to weddings, but they don’t come cheap. The average overall interest rate for personal loans (as of Aug. 8, 2023) is a sky-high 21.4%, Business Insider reported. The average low rate is 10.17%, while the average high rate is 31.91%. Given these rates, paying off personal loans before retiring is one of the best financial moves you can make.
Borrowing money from family members has become more commonplace in recent years due to the effects of the COVID-19 pandemic, high inflation and soaring home and mortgage costs. If you have a family loan, you probably pay much less interest than you would with a commercial loan — though you have to pay some interest in order for it to be considered a loan instead of a gift. Paying off a family loan before you retire serves two purposes. First, it lowers your overall debt load. Second, it will probably ease your personal relationship because the financial element is no longer involved.
Sadly, some married couples find themselves drifting apart once the kids have moved out and family or lifestyle dynamics change. This often happens as you approach retirement age. If you have recently gone through a divorce before retiring, you probably have legal expenses tied to it — and those expenses could be substantial. The median cost of a divorce in the United State is $7,000, Forbes reported, while the average is between $15,000 and $20,000. Regardless of how much you’ve run up in divorce fees, you should pay the expense off before retiring to give yourself a clean break both financially and emotionally.
As the name suggests, employer loans are funds loaned to you by your employer. Workers often ask for employer loans to cover personal expenses such as home purchases or school tuition, according to LendingTree. Even though the loans come from the company you work for, they typically have the usual repayment terms. Because you are retiring and will leave the company, it’s a good idea to pay off the employer loan before your final workday. In some cases, the loan contract might demand payment in full upon leaving the company.
Back taxes are those that haven’t been paid by the tax filing deadline, whether they are income taxes due to the IRS or state tax agencies, or property taxes due to local tax authorities. In some cases you might owe back taxes because you paid less than the full amount, while in other cases you might have skipped the payment entirely. Whether this was intentional or simply a mistake, you are expected to pay what you owe in back taxes.
In addition, you’ll probably be stuck with late penalties and interest charges until the amount is paid in full. In fact, last year the IRS announced plans to raise interest rates on underpayment of income taxes to 6% from 5%. Paying off this expense before retiring will ensure that you aren’t stuck in a cycle of interest payments and penalties.
Financial Planning Fees
One of the best moves you can make before retiring is planning your financial future — including retirement. But now that you are ready to retire, most of the planning phase should be fulfilled. Although you should never stop strategizing financially, you probably don’t want to pay thousands of dollars in financial planning/advisor fees every year once you have retired.
Depending on your total assets under management, you could be paying anywhere from less than $600 a year to more than $10,000 on financial advisor fees. This is the case even if you have less than $1 million in assets under management. If you have $30 million in AUM, your annual fees could exceed $175,000. Paying these fees off before retiring will give you much more financial breathing room.
More From GOBankingRates