There’s a lot of mystery surrounding personal finances in retirement.
Much of this comes from misconceptions about debt and retirement savings. Some of it comes from a lack of financial planning along the way. It hurts someone’s ability to retire or even detract from their financial stability once they do.
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If you’re from the Baby Boomer generation — born between 1946 and 1964 — chances are you’re fast approaching retirement. Before you get there, ensure you’re ready for this next key step in your life.
One way to do that is to ensure you aren’t holding onto any of these myths or misconceptions about debt and money.
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You Must Be Debt-Free
Jacqueline Schadeck is a certified financial planner (CFP), the CEO of Golden Wealth Strategies and host of PBS’s “My Money Mentors.”
According to her, “A lot of pre-retirees think they need to be completely debt-free, including their mortgage, to be able to retire comfortably. That’s led to a large amount of people missing out on investment returns based on paying off low-cost debt.”
Generally speaking, getting rid of your debts while you’re still earning more money is smart. But there are exceptions.
“While debt, yes, is a large blocker to a successful retirement plan, it depends on the type and the interest rate associated with it,” she continued. “People looking to retire soon should assess what income sources they will have and if this will be sufficient for retirement. It’s never too late to start planning. “
You Must Wait To Save or Invest Until Becoming Debt-Free
“While it’s important to pay down debt, you don’t want to neglect your retirement savings,” advised Brandon Galici, a CFP at Galici Financial.
“If you wait until all of your debt is paid before investing for retirement, you risk missing out on years of powerful compound growth. This can make reaching your retirement goals much more difficult.”
Rather than wait before saving or investing by default, take a moment to review your existing debts. Prioritize paying off any high-interest debts — like personal loans or credit cards — as the interest itself is likely to make it harder to retire as planned.
But make sure you’re investing, too.
“If you have access to a 401(k) through work, I strongly recommend contributing at least enough to max out the match — it’s essentially free money,” he added.
Try This: 8 Myths About Debt That Boomers Must Stop Believing Before They Retire
All Debt Is Bad
It’s generally wise to avoid debt unless the alternative involves hindering your retirement plans or cutting into your nest egg.
“One of the most pervasive myths among baby boomers is the belief that ‘all debt is bad,’” said Einat Steklov, Co-CEO and co-founder of the financial wellness platform, Kashable.
Steklov continued, “This misconception often leads to avoiding any form of borrowing, even when it could be beneficial, such as taking a low-cost loan to manage unexpected expenses instead of prematurely tapping into retirement savings.”
You Must Pay Off Your Mortgage Beforehand
Since it’s a debt, many boomers think they need to pay off their mortgage before retiring, but that’s not necessarily the case.
“If most of your focus is on paying down your mortgage, you miss out on contributing to long-term investments that you need to retire comfortably,” said Galici. “While there’s plenty of analysis on interest rates and paying the mortgage early, I’ll share a different perspective.
“Typically, you don’t want over 50% of your net worth (assets minus liabilities) tied up in home equity,” he continued. “If your house makes up most of your net worth, then you likely don’t have enough in higher-growth investments. This could hinder your ability to build wealth and retire on your terms.”
Paying off your mortgage is fine as long as you’re also focusing on other investments and assets that will fund your retirement years.
You Don’t Need a Budget
Some boomers think that generally keeping their spending down is good enough to maintain financial stability, but it often isn’t — and it can lead to more debts and money issues in retirement.
Todd Stearn, founder and CEO of The Money Manual, said, “It’s too easy for costs to sneak into your life unnoticed, [but] you can identify and do something about it if you set a budget. This is even more important when preparing to adjust to a different income level in retirement.”
Carrying a Balance On Your Credit Card Can Build Credit
Having different forms of credit available to you, including credit cards, can help you build credit. But it’s not necessary to keep a balance on them.
“Many boomers believe that carrying a small balance on a credit card can boost their credit score, which isn’t true,” Steklov explained. “The best practice is to use credit responsibly and pay off balances in full each month to avoid interest charges and maintain a healthy credit score.”
Long-Term Debt Isn’t That Bad
Stearn also warned, “A lot of people think that so long as they’re protecting their credit score by making payments on time, then lengthy payment terms aren’t that big a deal, and they like freeing up more money in their budget with smaller payments.
“But the longer you pay on something, the more interest you pay — and it can really add up,” he continued. “This is an even bigger problem for those approaching retirement, as you should ideally be paying off as much as you can before you start living on your retirement funds.”
This goes for that mortgage payment, too. While you don’t want to underfund your retirement accounts or limit your investments, a mortgage payment can also cut into your retirement budget.
You Don’t Need a Personalized Strategy
While you don’t necessarily have to work with a certified financial planner or another financial professional, it’s still vital to have a clear retirement plan that accounts for your debts, goals and overall cost of living. Otherwise, it could hurt your ability to achieve financial stability in retirement.
Ultimately, Galici said, “It’s important that you have a personalized strategy that balances paying off debt while investing for retirement.”
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This article originally appeared on GOBankingRates.com: 8 Myths About Debt That Boomers Must Stop Believing Before They Retire
