When one enters retirement, they often are faced with a very important choice. Should you save money/invest or should you pay down debt? This questions is really individual based so we will take a look at what makes the most sense from a financial perspective.
Recently, an article on MarketWatch shows that the average household family in America has over $120,000.00+ in debt. What is more interesting is the average interest rate because they peg the number at $6,600.00 per year in interest! That is $550.00 per month just in sheer interest. Not touching any principal whatsoever.
For those on a fixed income, this can be a free cash flow killer. Eating monthly disposable income to feed the financial institutions will not make your retirement a breeze. Therefore, a logical conclusion would be to pay off any toxic debt. Specifically those with high interest rates. If you are fortunate enough to hold a strong credit history, transfer balances to 0% cards and pay them off each month. Never spend more than you afford.
However, if your introductory 0% offer has not vanished and is a thing of the past, you will want to check your interest rate. Some go to an APR of over 20% per year!
The average returns on safe investments is usually around 1-2% per year. Even if you are making a solid 5% per year and have a 10% interest rate, you are 5% negative each year.
The conclusion: Pay down toxic debt to avoid paying thousands upon thousands in interest each year.
Reverse Mortgage to the Rescue
If you are just making minimum payments even at an APR of 10%, it will take you many, many, years to become debt free. This is why many in retirement are looking to reverse mortgages. They help in two different ways.
First, you eliminate your mortgage payment. This frees up cash to pay down toxic credit card debt.
Second, you will be able to cash out some of your equity without a mortgage payment. Utilize this cash to pay off high interest rate debt.
Be very careful not to fall back into the "debt trap" after you pay off your cards. Only spend what you can afford in cash. This way, you have a permament solution to staying debt free and not having your hard earned money going to financial institutions.