Working Americans rank credit card debt as one of the top
challenges to their ability to save for retirement.
That’s the finding in a new survey conducted over the summer
by Goldman Sachs that included more than 1,200 people.
Melinda Opperman, president and chief relationship officer
for the nonprofit Credit.org, wasn’t surprised by the research.
“Every dollar someone must put toward debt repayment is a
dollar they can’t set aside for retirement,” she said.
CNBC spoke to experts about how those with the debt can
still try to build a nest egg.
It’s hard to save and pay down debt. Should I prioritize?
No; abandoning either goal is a bad idea, experts say.
“There are consequences for not paying off credit card debt
today, while not saving for retirement sets one up for more pain down the
road,” Opperman said.
If you make only the minimum payments while carrying the
average credit card balance of $6,300, with around a 17% interest rate, it’ll
take you close to 18 years to be out of the debt.
And by then, you’d have paid more than $7,600 in interest,
according to calculations by Ted Rossman, senior industry analyst at
Creditcards.com.
Meanwhile, delaying saving for retirement will have huge
costs, too.
If you began saving $200 a month for your older years at
around age 20, you’d have $570,000 at 65 (assuming an annual return of 6.5%).
If you waited until 25 to do this, you’d have $435,000.
And if you waited until 37? Just $180,000.
How can I do both at the same time then?
Because interest rates on credit cards are so high, experts
say you should at least pay more than your required obligations.
“Minimum credit card payments are almost always a bad idea,”
Rossman said. “It’s really hard to build any sort of wealth if you’re paying
that much in interest every month.”
At the same time, though, you want to be saving something
for retirement.
“It’s hard for people to change their habits, so don’t ever
stop saving entirely,” Opperman said.
Even if you have just $20 deducted per pay period, “it can
add up and you likely won’t miss it coming out of your paycheck,” said Carolyn
McClanahan, a certified financial planner and director of financial planning at
Life Planning Partners in Jacksonville, Florida.
“Through the magic of compound interest, saving just a
little on a regular basis can grow to a ton of money to serve as your future
nest egg,” McClanahan said.
If your employer offers a 401(k) match, you should try to
contribute enough to get the full benefit, Rossman said.
“That’s a 100% guaranteed return — it’s free money,” Rossman
said.
To free up more money with which to save, you can apply for
a 0% balance transfer credit card, Rossman said. These cards, for a fee, offer
you up to 21 months of no interest charges.
“You might be able to pay down your debt without monster
interest charges and still carve out some retirement savings along the way,” he
said.
Without credit card interest payments, you may even be able
to up the percentage you contribute to your 401(k) or other retirement savings
account.
Should use retirement savings to pay credit card debt?
Opperman says no.
“The penalties for cashing out early are too steep to make
it worthwhile,” she said.
Withdrawals from 401(k) accounts before age 59½ are subject
to a 10% penalty and taxes.
That means if you needed $15,000, you’d have to take out
close to $24,000, after accounting for those charges, according to Fidelity.
Of course, that cash you pull from the account will also
miss out on future market gains. The S&P 500 Index is up more than 20% this
year.
“As much as I dislike credit card debt, it’s hard for me to
make a case that you should take an early withdrawal from your 401(k),” Rossman
said.
Click here for the
original article.