I am getting close to retirement, how do I clear my debt before my income drops?

Summary: This article discusses the importance of being as debt free as possible during retirement, and gives some tips on ensuring solvency when the time comes.

With all the controversy surrounding pensions, it is important that everyone considers how they are going to afford to live after they retire. However there are still many, especially the younger generations that are not yet planning for their future. Not having enough income to live after retirement is one thing, but still having debt could be catastrophic with no way of generating income to repay it. Therefore it is vital to start planning as early as possible.

Pay into a pension as soon as possible. This is surely the most obvious step, but many still believe they will be able to survive on the state pension. The younger an individual begins to pay into a private pension, no matter how small amount, then the better the pension pot will be at retirement. Furthermore, if there is any tax relief available or pension benefits from an employer, full advantage should be taken.

Repay debts as soon as possible. As a general rule, a mortgage should take priority over smaller debt amount as having somewhere to live is vital. Thereafter, repay remaining debt in order of the most expensive by interest. Obviously it is important to maintain repayments on all debt to avoid defaulting, but any spare income should be paid into the debt with the highest interest rate.

Downsize the property. When retirement comes, it is likely for many that children have grown up and moved away, therefore it may be worth considering a smaller, lower cost property. This could free up additional income should there still be outstanding debt. It is important to consider any fees such as stamp duty, estate agent fees and solicitor’s fees.

Release equity in the property.While this may not be the best option for everyone, equity release could help those struggling to make ends meet in retirement. It effectively means that a small mortgage is taken on the property or a percentage of the property is sold to a lender. This is then repaid only after the individual dies, at which point the loan and interest is taken from the final value of the estate.

For anyone concerned about finances after retirement, it is important to seek advice from a licensed money advisor.