Dear Carrie: I'm turning 55 this year and starting to think more seriously about retirement. I currently have a mortgage, a car loan, some credit card debt and even a small balance on my student loans. Should I try to pay all of this off before I retire? --A Reader
Dear Reader: This is an excellent question, particularly in light of statistics from the 2012 Retirement Confidence Survey sponsored by the Employee Benefits Research Institute. Survey results show that 45 percent of retirees report feeling financially stressed, principally because of their level of debt.
Debt, in itself, isn't necessarily negative. In fact, in the financial world there's a common distinction made between "good debt" and "bad debt." But to keep debt from ruining your retirement plans, you have to know the difference --as well as how much debt you can comfortably handle on your retirement income.
Let's take a closer look.
PUT YOUR DEBT IN PERSPECTIVE
Debt that is low cost and has potential tax advantages can actually work in your favor. For instance, with mortgages or home equity lines of credit, you're borrowing to own a potentially appreciating asset. On top of that, home loans may be tax deductible. Therefore, they fall into the category of good debt. Likewise, student loans can be a positive form of debt because the education they finance can enhance career opportunities and increase earning potential. Also, student loans often have low interest rates and may be tax deductible.
On the other hand, there's not much that's positive about debt that's high cost, isn't tax deductible and is taken out on a potentially depreciating asset. Things like credit card debt and car loans fall into the "bad debt" category.
PRIORITIZE YOUR PAYMENTS
Today, at 11:20 AM PT: Get the Market Movements in Advance; Williams Edge Webinar for July 22nd, 2014 | John Ransom
Today, at 11:20 AM PT: Get the Market Movements in Advance; Williams Edge Webinar for July 21st, 2014 | John Ransom