Retire Debt-Free: Friday Q & A

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question

Do I need to have all my debt paid off prior to retirement?
–Mick V., Uniondale N

STRAIGHTFORWARD ANSWER
Not necessarily, especially when it comes to your mortgage. And paying off credit cards prior to retirement is critical, it certainly won’t hurt to have your mortgage paid off too.

More detailed explanation:

Credit Cards

Well, there aren’t too many happy retirees carrying around high credit card balances. Truth is, a comfortable retirement and large credit card balances don’t often go together. High credit card balances alone can sabotage an otherwise completely sound retirement plan.

After all, if you can’t pay off your credit card bills while you’re working, how could you possibly expect to pay them off when you’re no longer receiving a paycheck?

Mortgage

Having the mortgage paid off before you retire is a huge confidence builder to retirement. It’s one of your biggest bills your whole life and now you’re living rent-free for the first time since you were a teenager.

Having it paid off a great goal. Plus the tax advantages of a mortgage decrease as you get older, since you’ll likely have less income and will benefit from a higher standard deduction, it’s probable that less of your interest payment will result in any tax benefit.

Also, keep in mind the following: A house isn’t a substitute for a retirement plan. Many people have recently learned that the hard way now that we are in a down housing market. But even in an up-market, which we will one day have again, it’s unrealistic to think that you will be able to cash-out of your house and fund a sizable part of your retirement. Once you get used to a certain home price, it’s hard to step too far down. Even if you downsize in size, you’ll typically upsize in location or quality and not take out as much money as you might plan on.

Don’t over-rely on your house. There are plenty of other retirement savings opportunities (your 401(k), your IRAs, etc.). Take advantage!