Tips to Settle Debt Before Retirement

As we approach retirement, we should strive to settle all of our debts by devising a specific strategy that is aimed at clearing the debts before reaching 60 years old.

This is crucial because after retirement, our source of finances are often limited, relying mainly on pensions or retirement funds like EPF or ASB. Therefore, it is important to clear debts before retirement so that the money can be fully utilized to cover living expenses.

The 10 years leading up to retirement is a critical period to start organizing your financial strategy to pay off debts.

Without the right strategy, you may have to continue working hard in your golden years or rely on your children for support.

What steps can be taken to restructure debts? Here are some actions you can take 10 years before retirement to ensure you can enjoy your golden years comfortably.

1. Pay Off Credit Card Debt

The proper way to use credit cards is to avoid any outstanding debts.

However, many people only make minimum payments each month to keep their credit card active, leading to outstanding debt.

Since credit card debt has no specific repayment period and remains active as long as minimum payments are made, you may overlook it and continue using it.

Be aware that credit cards impose interest rates between 15% and 18% per year, and the debt will never be settled as long as the card is still in use and only minimum payments are made.

If your credit card debt exceeds RM5,000, it's time to stop using it and focus on paying off existing debts.

If you have extra funds, prioritize settling credit card debt due to its high-interest charges, which will accumulate faster if payments are delayed.

2. Personal Loans

If you have personal loans, focus on paying them off and avoid taking on new personal debt.

Personal loans come with relatively high-interest rates, so it’s better to avoid them, especially if you’re considering taking on a personal loan for wants such as travel, home repairs, or deposits to purchase houses and cars

3. Car Loan

As you approach retirement, review your existing car loan balance.

If you want to pay off this debt more quickly, you can make additional payments to reduce the principal.

These payments should be made directly to the bank with the intention of reducing the principal amount.

The principal is the actual amount of debt you took on.

For example, if you took a loan of RM80,000, that is your principal amount.

Monthly installments typically cover interest first, resulting in little change in the total loan amount.

If you feel your current car is burdensome or may not last after retirement, consider switching to a more affordable vehicle.

A cheaper car can help you manage your finances better due to lower monthly installments and servicing costs.

However, don’t wait until only 3 or 4 years remain before your retirement to change cars, as you will still have to pay off the debt post-retirement if the loan term is 9 years.

4. Home Loan

Re-evaluate your home loan period, as many of us are unaware that our loan terms may extend to age 65, with MRTA/MRTT expiring before the loan ends.

If your loan term will extend into your retirement phase, think about ways to shorten the repayment period.

The best approach is to refinance the loan or start paying any excess funds you receive, like bonuses, to reduce the principal debt.

You can also consider refinancing your loan to shorten the term to 10 years.

You simply need to meet with the bank to discuss suitable terms and conditions.

However, never increase your debt, as some banks offer cashback or rebates that effectively add to your principal loan amount.

If you can manage it, it’s best to settle this debt before retirement.

Conclusion

If you are still young and have a long time before retirement, ensure you manage your finances wisely to settle debts and build a sufficient retirement fund for a comfortable life post-retirement.

Therefore, when taking on new debt or refinancing to shorten loan terms, make sure you also have funds for investment.

Even if you successfully settle your debts, lacking a retirement fund may force you to continue working after retirement.

Planning for retirement is essential and should begin with your first paycheck, with the goal of acquiring assets like a home and a retirement fund so you can enjoy your golden years in style.

Highlights

• You need to start reviewing and restructuring your debts 10 years before retirement.

• List all debts from the highest to the lowest interest rates, then focus on paying off loans with the highest interest first.

• Even while working to settle debts, don’t forget to allocate funds for investments to build your retirement fund.

• Avoid taking on new debt when you have 5-10 years left before retirement.