How to manage debt ahead of retirement

You dream of a comfortable retirement but there may be one roadblock in the way: debt.

Add in a mortgage and a car loan and saving for retirement can be even more challenging. But a secure retirement is still possible with the right plan for managing debt. If you follow some basic financial tips you can meet your financial goals while also saving money.

How to reduce and pay off my debt

Balancing debt repayment with retirement saving may seem overwhelming but it doesn't have to be. These steps can help you get closer to achieving your personal finance goals.

1. Build debt repayment into your budget

"The first tip for reducing or managing debt while also planning for retirement is to have a budget and stay disciplined," said Brian Decker, fiduciary advisor and founder of Decker Retirement Planning in Salt Lake City. "And within that budget, there has to be debt reduction allocation, so that debt can be paid down with the monthly income that comes in."

Take a second look at your spending to see where you may be able to free up more money to apply to debt repayment. Then, use the extra money you find to pay down debt.

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2. Choose the right debt repayment method

The debt snowball method and the debt avalanche are two popular approaches for managing credit card debt. The snowball method advocates paying off debts from lowest balance to highest while the avalanche focuses on repaying debts from highest interest rate to lowest.

Using the debt snowball can give you a quick win and motivation to continue your debt repayment journey as you plan for retirement. But the avalanche method could save you more money on interest.

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3. Consider debt consolidation

Consolidating debts is a natural next step to consider if you're concerned about reducing interest costs. A debt consolidation loan could be used to pay off credit card or other debts at a fixed interest rate with a fixed monthly payment.

Personal loans can be a good option for consolidating credit cards or other types of debt. Qualifying for the lowest rates often hinges on your credit profile, including things like your credit utilization, credit score, and debt-to-income ratio.

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4. Save money with refinancing

Refinancing debt can also yield savings that can allow you to pay off loans in less time. For example, it may be worth exploring a mortgage refinance if you currently own a home.

Student loan refinancing is something else to consider. Private student loan rates dropped significantly as the Federal Reserve slashed interest rates in early 2020. If you have a good credit score, you may be able to save by refinancing private student loans.

How to save for retirement

Once you get a plan in place for paying off debt, consider where retirement planning fits into your financial situation.

Decker said it's important to max out contributions to an employer-sponsored 401(k) or similar plan if you have one. "By contributing to your future, you're putting your money to work with time on your side."

If you don't have a retirement plan at work, an Individual Retirement Account (IRA) is another tax-advantaged way to save for retirement. Even putting money into a high-yield savings account is worth considering if you have nothing saved for retirement so far. The important thing is to commit to setting money aside regularly.

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What to do next

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