Clearing Debts Before Retirement
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Clearing debts before retirement would be ideal but the fact is that 50% of retirees will be in debt during retirement. Financial planning for retirement should start as early as possible to help keep debt levels to a minimum.
Common Retirement Debt Problems
According to the Key Retirement Solutions group the average retirement debt is £36,000, and monthly repayments of these debts amount to almost £300. Mortgages, loans and credit card payments are common retirement debt problems. Understandably, mortgages top the list with nearly 27% of retirees owing around £45,602. Loan repayments come in a close second with 20% of retirees owing £10,447. Around 20% of retirees also owe an average £8,967 on their credit cards. Not surprisingly, the combined total of these monthly repayments takes a big chunk from retirement income.
Why Debt Clearance Takes a Back Seat
For many people debt is a necessary evil, and mortgages, loans and credit cards are all financial necessities. Although most people would love to clear their debts before retirement other financial considerations do take priority. Parents with children often have very high school fees to pay, which can mean that clearing debts can be postponed for decades. Mortgages can last for 30 years and are often seen as something to be dealt with further down the line. Financial recessions can also occur and can mean a decrease in income and cutting back on extra debt repayments.
Financial Planning to Clear Debts
Many people start a pension plan early in their lives but forget about the current debts they are amassing. Lumps sums from pension funds can be used to clear debts on retirement. But it will be a better option to have debts already cleared without any help from pension funds. Calculating monthly income, expenditure and debt repayments now will provide an overview of how long it will take to clear debts. For many people it can be a shock when they find out just exactly how long it will take to clear all their debts. It can also be a big shock when the monthly amount required to clear debts before retirement is assessed.
Assessing a Debt Clearance before Retirement Figure
Finding out how much in monthly repayments will be needed to clear debts is a simple process but there are a few issues to consider. The more time left before retirement and the amount of debt amassed will play a part in assessing the extra income needed. Job stability is another factor as are unexpected expenses that cannot be foreseen throughout a person’s life.
The first step will be to set out what has become known as a Statement of Affairs and Personal Balance sheet. Included in this sheet will be:
- Household information; number of adults and children, and the number of cars owned
- Monthly income details of householders including salary, benefits and any other income after tax
- Monthly expense details; every expense from groceries to car parking to daily lunches and utility bills
- Assets; savings, house value if mortgaged and any stocks and shares
- Secured debts and hire purchase debts
- Unsecured debts such as loans, credit cards and overdrafts
- Monthly budget summary, which is the amount of income left after debt repayments
- Personal balance sheet summary, which is the amount of net assets after secured and unsecured debts have been taken off
Assessing the Debt Damage
Once the figures in the personal balance sheet have been obtained it is a matter of working out how debt will have been cleared by retirement age. This is done by calculating how much will have been repaid by the number of years left until retirement. Issues such as borrowing on the equity of a property will alter these figures. The next step will be working out how much will actually be needed in repayments to clear debts by retirement age. An assessment can then be made whether repayments will need to be increased to clear all debts before reaching retirement.
No retirement debt clearance figures can be set in stone, especially over the course of decades. But a retirement debt clearance calculator will give a good indication of how much should be repaid to hopefully clear major debts. Clearing debts before retirement will give retirees a larger amount of financial freedom. Debt clearance will also hopefully help towards making retirement income last longer and lead to an enjoyable retirement.
