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Retirement Planning: Cut Your Debt Before You Quit

When it comes to planning for retirement, financial advisers
nearly always focus on how much you need to save. (Hint: It's usually
more than whatever you're putting away.)

But know this, too: You’d also better start
whittling down your pre-retirement debt, especially your credit cards and
mortgage. “If you need to generate income in retirement to cover your
debt payments, it becomes harder to maintain your standard of living,”
says Barbara Camaglia, a financial planner in Beachwood, Ohio. “Do
you want to carry another brick on your back? Unequivocally, the answer is ‘no.’

Yet, pre-retirees today are carrying unprecedented levels
of debt, which could become a big problem for them when they’re ready
to stop working. Unless you are old enough to have watched All in the Family,
you’ve probably never heard of href="">a
mortgage-burning party. Instead of paying off their mortgages, over the
past decade many homeowners in their 50s and 60s took out new loans and opened
home-equity lines, Some 63 percent of people in their late 50s and early 60s
have mortgage and home-equity debt today, up from just 49 percent in 1989,
according to the Joint Center for Housing Studies at Harvard University.

If you’re aiming to retire in the next decade or
so, it’s time for a crash course in slashing your debt.

In retirement, when your income is typically less than
during your working years, cash flow is king. And one of the best ways to boost
your retirement cash flow is to reduce — or eliminate —
interest expense on mortgages, credit cards and even car loans. Since the “ href="">new
normal” era is likely to mean sluggish returns on stocks for the
foreseeable future and fixed-income returns are in the low single digits, you
won’t want pay be paying 6 or 7 percent on a mortgage or car loan or
12 percent on a credit card, year after year, in retirement.

Debt reduction will also improve your family’s
net worth. “Reducing debt is a dollar-for-dollar improvement in your
financial condition,” says Frank Boucher, a financial planner in
Reston, Va.

So, follow this pre-retirement debt-slashing road map:

Your Credit Cards

You’ll want to start the process by taking a
machete to your most expensive debt first. That is almost certainly your
credit-card balances
. Variable-rate
average 11.8 percent and many are much higher — and the
debt isn’t tax-deductible. So, the payoff on lowering your cards’
interest payments will be substantial. If you’re paying interest on multiple
credit cards, consider adopting the “ href="">snowball”
strategy of debt guru Dave Ramsey and begin by paying off the card with the
smallest balance. Ramsey says going this route helps you create momentum so you
can move on to bigger and bigger debt burdens.

The free href="">Credit Card Math calculator at Zilchworks, a handy tool, can show you how to develop a rapid debt reduction
plan to rid yourself of the plastic albatross. The href="">debt
payoff calculator at is also excellent and doesn’t
require downloading.

Your Home

You may like the idea of hanging onto your mortgage for
the interest deduction. But in retirement, you may no longer have enough
deductions to itemize. A married couple filing jointly needs at least $11,400
in deductions to get more tax savings from itemizing than by taking the standard
deduction. And that threshold will almost certainly rise in the future.

Keep in mind, too, that mortgages start out weighted
toward interest and increasingly tilt towards principal over time. So if you’re
20 years into a 30-year mortgage, your monthly payments are now probably more
principal than interest. This MoneyWatch calculator (click on the “Mortgage” tab) can show you how your mortgage payments currently
split. “The interest deductionon a mortgage for a retiree isn’t
an adequate reason to bear the cost,” says Camaglia.

Cash flow aside, href=";col1">paying
off a mortgage offers an intangible psychological benefit. “The
peace of mind that you don’t owe anyone on your house shouldn’t
be ignored,” says Steve Vernon, president of Rest-of-Life
Communications, a retirement education firm in Oxnard, Calif.

Boucher cautions homeowners not to be too aggressive
about paying down their mortgages, though. “You don’t want
to find yourself house poor,” he says. “Don’t
deplete your savings to the extent that when the refrigerator stops working you’ve
got to borrow to buy a new one.”

Another thing you don’t want to do:
refinance your mortgage to get a lower rate by taking out a new 30-year loan.
You don’t want to be facing a mountain of additional interest
payments in retirement; instead, you want to be going in the opposite
direction, with fewer years of payments and interest expenses.

Homeowners on the cusp of retirement might want to sell,
move, and then either buy a home free-and-clear or rent. When Nick and JoAnn
retired in 2006, they put their San Diego condo on the market, headed
to West Babylon, Long Island, and began renting. The condo sold in 2007 and the
Radescas have loved being unencumbered ever since. “My wife and I don’t
own a home and we are proud of it,” says Nick. “We’re
using the money we earned from the sale of our house to help pay the rent. We’ll
never buy another home.”

The downside: You pay rent every month, which means you’re
taking on a new monthly obligation while your income will likely be shrinking
in retirement.

Homeowners whose mortgages are underwater, however, won’t
want to pay off their loans now, since they’d need to bring cash to
the closing. According to the Center for Economic and Policy Research, 30 percent of Americans 45 to 54 are underwater.

Your Car

Car loans generally are far less dangerous to your
financial health than credit cards, since their interest rates are lower and
they expire in five years or less. But if your car loan’s rate is
higher than what you could earn on a CD — now about 3 percent —
try to get rid of that loan as soon as possible. Then, use the money that would’ve
gone to the car loan toward building up your retirement savings.

4 Debt Pay-Off Tips

Reducing your debt before you retire sounds like a great
idea, but finding the cash to do it can be tough — especially in this
economy. Try these four strategies:

  • Chip away. Figure out how much mortgage principal
    you’re paying monthly, and pay an additional amount equivalent to a
    month’s worth at least once a year.

  • Spend smarter. Make a detailed budget of your
    current spending and be merciless about looking for cuts that will let you
    accelerate debt payments.

  • Watch your car payments. When financing your next
    wheels, boost your down payment to keep your monthly nut down. Save yourself a
    hunk of change by looking at gently used cars rather than new ones.

  • Postpone retirement. If you can, work a few years
    longer and accelerate your debt payments in the years just before you quit your
    job. If necessary, get a second job and use that income to pay down debt.

Mark Miller writes the weekly syndicated newspaper
column href="">Retire
Smart, contributes to The Huffington
, and blogs at

More on MoneyWatch:

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  • href="">Are
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  • href="">Income
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  • Rent or Buy? One Couple's Choice

  • href="">Retirement
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  • href="">How
    to Handle Debt This Year

  • href="">The
    Key to Retirement Success
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