The Plan for What You Owe (and Own)
1. Start a debt-busting avalanche
Still carrying car loans, credit card bills, lingering Parent PLUS college loans or personal loans? Use these remaining full-employment years to knock down these nondeductible debts.
You'll get the biggest bang for each buck by paying off the highest interest rate debt in your portfolio first, while making minimum payments on the remainder. It's called the avalanche method, and it gets you out of debt cheapest and fastest.
If you have a credit card charging you 19 percent and a college loan at 7.9 percent, throw every extra dollar you have at the higher rate. Once that debt is retired, move on to the next highest rate. (To run your own debt-free calculation, try the Credit Card Avalanche Calculator at JeanChatzky.com.)
2. Make a move on your mortgage
If you've paid off the mortgage, give yourself a hand.
"The happiest clients with the least stress are the ones who go into retirement completely debt free, including the mortgage," says financial planner Bill Losey, author of Retire in a Weekend.
It's easier to deal with the income drop of retirement when the roof over your head isn't going anywhere. Still, the number of 60-somethings with mortgages has grown dramatically since 2000: A third of those 65 and up have housing debt. If you're a long way from paying it off and your interest rate is 4.5 percent or higher, moving to a 10- or 15-year loan can help speed the process (but payments will be higher). Adding an extra payment or two per year might accomplish the same goal without the expense of refinancing.
3. Refi or put in reverse?
Reverse mortgages are marketed heavily to older homeowners, who can obtain them at age 62. Essentially, a reverse mortgage converts part of your home equity into cash.
The payout — tied to life expectancy — can be taken as a lump sum, as a line of credit or in monthly sums that last as long as you or your spouse lives in the house. But reverse mortgages are complex, are laden with fees and won't allow you to tap all of your equity. Plus, the interest rate can be 1 to 1.5 percentage points higher than you'd get by refinancing. Yes, housing debt in retirement isn't ideal (see above), but for many it's unavoidable, and a refi lets you minimize your monthly payments while pulling out cash.
"Refinancing for 30 years could save you $500 a month," says Keith Gumbinger of mortgage information website HSH.com. "That frees up money for a car, if you need one."
Next page: The plan for what you make and save. »