Retiring? Ditch These Debt Types Right Away
To ensure you are comfortable when the time comes to retire, it’s important to take necessary financial measures. Feeling secure in retirement with a limited income — amid rising consumer costs and inflation rates — may require tight budgeting.
Factoring in debt when doing your retirement planning, and taking steps to reduce and manage debt ahead of retirement, can lessen the burden. Notably, certain types of debt should be dealt with before others.
There are three main sorts of debt that you should attempt to eliminate before you retire: tax debt, payday loan debt and credit card debt, per The Motley Fool.
It is smart to get rid of any outstanding student loan debt before you retire as well, but hopefully those pesky loans from your university days are long paid off. If not, get rid of them after these three nastier debt types.
1. Tax Debt
The IRS can and will legally garnish funds from your pension, 401(k), IRA or any retirement account if you owe unresolved back taxes. In rare cases, it can also seize property. However, garnishing your retirement accounts is usually a last-ditch effort to recoup taxes owed after a repayment agreement was not reached.
You can alleviate this potentially disastrous situation by contacting the IRS directly and setting up a long-term payment plan. These plans have start-up costs, penalties and interest that will need to be paid until you square your debt completely — but at least your retirement accounts will be on much more solid footing.
2. Payday Loan Debt
Payday loans are meant to serve as short-term avenues to get needed much-needed funds. But if not paid off, they can absolutely decimate your finances.
Last year, CNBC’s “Make It” plotted a map of the typical payday loan interest rates for every state. Although many states have capped rates on such loans (typically at 36% or lower), over 20 states have no protections of this sort concerning payday loans.
This means that payday lenders in states like Idaho, Nevada and Utah can charge the enormous interest rate of 652% — and Texas payday loan issuers can charge even more in interest. Texas has the highest average payday loan rates at 664%, or 40 times the amount of the average credit card interest rate in the state.
Payday loans should be a last resort for quick cash. If you can swing a personal loan to pay off any debt you owe to payday loan companies, do so.
3. Credit Card Debt
Paying off credit card debt should be a top priority, largely due to their lofty rates and revolving balance.
You should be able to call your credit card company and convince it to negotiate a lower rate for your cards, or have certain account fees waived. With so much competition — and with credit card firms forever trying to attract new customers — you should be able to come to an agreement that will ease what you are paying in credit card debt.
Depending on the type and details of your debt, it might make sense to shrewdly use a balance transfer-oriented credit card to pay off debt without paying interest during the introductory offer period.
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