As part of your retirement planning, you should review the state of your family balance sheet. It’s probably time to get serious about the debt you have incurred over the years.

If you have a mix of different types of debt, maybe a mortgage, student loans, auto loans, credit card debt, or a home equity loan, then it’s probably worth consolidating that debt. The preferred way to do this is to refinance the house into a 30-year fixed rate mortgage, which will result in lower monthly payments because the overall interest rate should be lower and the term of the loan will be longer.

The trick is to keep making at least the same total monthly payment as before the refinancing. By doing this, you will be making additional principal payments without any reduction in your lifestyle.

Why do I say “at least”? The new mortgage may have an increased tax deduction for mortgage interest paid – there are limitations to this, but usually you will get a bigger deduction and pay less tax. Instead of giving the money to Uncle Sam, add the tax money saved to your monthly payment to reduce the debt even more quickly. Alternatively, take the tax savings as a bonus for being smart with your debt.

The effect is that you will pay off the mortgage in a much shorter time period and become debt free! Then don’t slack off; keep paying that same monthly payment, but instead of to the mortgage lender, make it to your after-tax retirement savings account. This is a great way to build a sizable nest egg quickly, one that will help you avoid the ‘Tax Torpedo’ in retirement.

Here’s an example of what can be done:

Initial loans:

Mortgage: 30-yr fixed @ 6.75%, $485,862 balance, 18 yrs remaining, payment $3,892

PLUS (student) loans: 25-yr fixed @ 8.25%, $55,300 balance, payment $436

Auto loan: 4-yr fixed @ 7%, $18,000 balance, payment $431

Credit cards: $6,500 balance, @ 10%, payment $165

Total payments: $4,883/month

Refinance to:

30-yr fixed @ 6.5%, $585,662 balance, payment $3,702

(Balance includes a generous $20,000 in fees and other expenses paid to refinance; all other loans paid off)

Total payment: $3,702/month

(Tax savings are not included in this example for simplicity)

The monthly loan payments are reduced from $4,883 to $3,702 per month, a saving of $1,181 each month

If the $1,181 in savings is applied to the mortgage as an extra principal payment, the mortgage term is reduced from 30 yrs to 16 years and 2 months. Continuing to make the monthly payment into an investment account earning 8% for the remaining 1 year and 10 months of the original 18 year remaining mortgage term will add $115,284 to retirement savings.

Net result: seven years of the student loan is wiped out and an extra $115,000 is in the retirement account, all with no change in your living standard.

Alternatively, if you are comfortable with some market risk, you could invest the $1,181 a month at the 8% return for the entire 18 years, then pay off the remaining mortgage balance and potentially have $197,851 in additional retirement savings.

With the current tightening of loan standards due to the ‘credit crunch,’ these techniques might not work for everybody. However, it’s simple to calculate the potential benefits, so why not call and check it out?