Master your debt before you quit

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My grandmother paid off her house after nearly losing it during the Great Depression and lived there, debt free and terrified of owing anyone anything, until she died at 95.

Today, many retirees have a different view of both mortgages and debt. They don’t see them as necessarily bad. Nevertheless, if you’re on the verge of retirement, one of the smartest things you can do is figure out how you will handle paying off the money you owe.

Dan Keady, director of financial planning for TIAA-CREF, suggests you divide your debt into mortgage and “all other.” Start by looking at “all other,” especially credit card debt. Did you run up this debt because you had a true emergency or do you routinely spend more money than you earn?

If you got into debt because you hit a financial stumbling block — a major illness, job loss or some other crisis — then making a plan to pay off that debt is an important step.

Keady suggests you begin by identifying things you can eliminate from your budget, so you can reallocate cash toward rapid repayment. He warns against pulling money out of your retirement fund to pay off debts, especially if your nest egg is in a tax-advantaged IRA or 401(k). “You are going to pay lots of taxes upfront — the numbers almost never make sense,” he says.

You may need a budget

If you got into this jam by routinely spending more than you make, then you not only need a repayment plan, you desperately need a realistic retirement budget. “You have to figure out a plan to avoid doing this again,” Keady says.

In both cases, you also need to accumulate an emergency fund — at least a year’s worth of living expenses in cash that you can access when you need it.

Next, consider your mortgage. “Mortgage debt isn’t necessarily bad,” Keady says. “The value of the property you’re paying on could appreciate and some people get tax benefits from it, but if you can pay off that mortgage and own your home free and clear, you don’t need as much cash in retirement.”

Handling your mortgage

Here are some questions to ask yourself:

  • Can you afford the mortgage on a reduced retirement income?
  • Are you really getting any tax benefits from your mortgage?
  • Is the property likely to appreciate?
  • Would you be happier selling the house and living in a less-expensive property?
  • Can you afford to fully fund your retirement savings and allocate additional money toward paying off the mortgage? “If you are paying mostly principal, accelerating the mortgage may make the most sense,” Keady says.

Don’t hesitate to ask for help. Talking to a financial adviser or even a nonprofit credit counseling service can help you get debt under control.

Here are more dollars and sense reasons to avoid paying off your debts with your retirement nest egg.