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Consumer Debt & Retirement Planning

Consumer Debt & Retirement Planning
Mark Cappel
UpdatedFeb 19, 2015

I'm nearing retirement and selling a property. Should I invest the proceeds or pay-off my debt?

My husband and I are in our late fifties. We have a small Mutual Fund account set aside, which is our retirement. Neither one of us has a future retirement income except SSI. We sold property and we will be getting the balloon payment next month. It is a good amount of cash. Do we use it to pay off our major debt (credit cards, car loan,) or try to work with the creditors to lower interest rates with lower monthly payments, therefore we could invest the money until needed for retirement? Not sure which direction to take. Just know we have to decide soon so that we don't let this money slip through our fingers.

It is difficult to answer your question without knowing the amount of your debt, how much you will realize from the property sale, your aspirations for retirement, your tax situation, and your current income. For those reasons, I urge you to see a financial planner who can look at your entire financial picture and recommend a plan that meets your goals.

With the understanding that you will also seek advice from someone who knows all of your facts, it's always a good idea to eliminate consumer debt as quickly as possible because the interest expense doesn't provide you any benefit. Plus, it's unlikely that the investment results you realize will exceed the interest expense you are paying on your consumer debt, so it may be better for you to retire the debt. On the other hand, if you own your residence, it may be better for you to mortgage your home (or refinance) to convert the consumer debt to mortgage debt where the interest expense is tax deductible. Going this route may allow you to invest the proceeds of your land sale while paying off the consumer debt from your regular income.

Whether you want to consider debt consolidation or debt negotiation and settlement, just pay-off your consumer debt outright, or pursue another option depends on the amount of your debt, how much you expect to pocket from the sale of the property, whether you own your residence, your income, and other variables. Here are some facts to consider:

Debt consolidation is combining your bills to reduce high interest rates and pay off delinquent payments with a loan or low interest credit card. You are not reducing your debt. You're simply rolling over your debt into a loan or credit card that has a lower interest rate. It will ultimately save you money in the long run but in the beginning, you're still stuck with the same amount. Read How to Consolidate All Bills to learn more about debt consolidation.

Debt negotiation and settlement is the process of negotiating with your creditors to either establish a new payment schedule at a reduced interest rate, or a lump sum payment that’s significantly lower than the total balance. If your only other option is bankruptcy, your creditors may be willing to negotiate with you to ensure that they get something rather than nothing. Read Debt Negotiation and Settlement Advice to learn more about debt negotiation and settlement.

Both approaches have implications for your credit report, and that may be an important consideration for you depending on your plans for the next 10 years. The Credit Report Resources page offers an excellent starting point to learn more about Credit Reports.

Finally, congratulations on nearing retirement with a large asset. That indicates you have discipline and common sense. I think you realize the next few years are critical for you financially. Consider slashing your expenses and concentrate on saving as much as you can so that you can boost the size of your retirement nest-egg. Take a look at our free budget guide, which may give you some money management ideas.

I hope this information helps you Find. Learn & Save.