We Do the Math: Save for Retirement or Pay Off Credit Card Debt?

Should you save for retirement or pay off credit card debt? If you’re carrying a card balance, you may be wrestling with whether to put all your resources into attacking the debt, or start building your retirement nest egg while you slowly pay off debt.

Which one will give you a better net worth? There’s no simple answer. For some people the situation may warrant clearing credit card debt first; for others, it’s better to start investing right away. To figure out which scenario is better in a given situation, we’ll need to do some math. Don’t worry, we’ll show you how to do it in a few easy steps.

Step 1: Gather important numbers about your debt and your retirement plan

First, look through your credit card statements and accompanying information to pull up the following numbers:

  • Credit card debt. You’ll find this on the front of your credit card statement.
  • Credit card interest rate, or APR (Annual Percentage Rate). You’ll find this further down on your statement, in a section labeled “Interest Charged” or something similar.
  • Minimum payment. You’ll find this in your card’s terms and conditions, under a discussion about how minimum payments are calculated. It will probably be a percentage, but there may also be a flat sum.

Next, consider any retirement plan you are enrolled in or have available. What is the average annual return? You can identify past returns by reviewing your retirement account statements. For example, your 401(k) plan account may list your annual return. Note that past returns don’t guarantee or predict future returns, but we’ll use the average annual return as a proxy for future returns in this case, knowing that if our portfolio takes a long-term downward turn, our calculations will change.

Finally, how much extra do you have in your monthly budget that you could put toward credit card payments, retirement investments, or both?

Follow along as we consider a hypothetical debt situation and retirement opportunity. Let’s say there’s $500 in our monthly budget, which equals $6,000 annually ($500 x 12 months = $6,000) to put toward debt or retirement.

Currently, the balance on our credit card is $5,000. Our APR is 22%. Our minimum monthly payment is 3% of our outstanding balance or $25, whichever is greater.

Our employer offers a 401(k) plan. For the sake of keeping this illustration simple, we’ll say our employer doesn’t match employee contributions and we choose to make taxable contributions with a Roth designated account within the 401(k).

In reality, you might choose instead to make tax-deductible contributions to a traditional retirement account. With a Roth 401(k) there are no immediate tax benefits, which makes our calculations simpler and therefore better suited for this purpose.

We’ll say the default investment in our 401(k) is a target-date mutual fund with an average annual return of 6.3% since its inception. We know that future performance is unpredictable. But to run the numbers for the retirement vs. debt decision, we’ll apply an annual return of 6% to our retirement account.

We’ll look at the retirement account and credit card balance after five years to compare the two choices: 1) making minimum payments on our card balance so we can start investing right away, or 2) putting all our extra money toward our credit card debt before we consider retirement investing.

In both scenarios, we’ll assume that we won’t make additional charges on our credit card. In addition, we’ll contribute to our retirement account when we have money available to invest.

Step 2: Calculate net worth if you prioritize retirement savings over paying off credit card debt quickly

In this scenario, we’ll see what happens if we only make minimum payments on our credit card so that we can get started investing for retirement right away. Your credit card statement should state very clearly how long it will take to pay off your balance if you make minimum payments.

You can also find an online calculator to help you with these calculations. Here’s the information we’ll enter for our example (you can put in your own numbers from your real-life situation):

  • Current credit card balance: $5,000
  • Annual percentage rate: 22%
  • Proposed additional monthly payment: $0

Looking Forward to a Stress-Free Retirement? Not So Fast Says This New Study.

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Most of us dream of a stress-free retirement. Sure, we might have to put up with some stress now, but it will all be worth it after we can kick back for the rest of our lives. The stress we take on now will surely pay off and disappear later, right?

Well, it seems like this is only partly true if you are a low-level employee.

A study of stress levels in both high- and low-level workers showed that low-level employees not only endure higher stress levels during their period of employment, but also see lower reductions in stress levels after retirement than their high level counterparts. The study, by Tarani Chandola, was undertaken in Britain by recording the levels of cortisol in the saliva of 1143 civil service workers. The civil service was selected for its hierarchical structure and general standardization of work conditions throughout. Making conclusions about rank and conditions easier to draw than if the study was done in, say, online writing.

Despite expectations, workers at the top showed fewer biological signs of stress than those at the bottom while employed; but the researchers were more shocked to find that stress levels failed to decrease at the same rate after retirement for high- and low-level workers. The differences between the respective stress levels of the workers was higher after retirement than it was while they were working, with high-level workers seeing larger reductions in their already lower stress levels than their counterparts. Why is this a…

Top 5 Financial Moves to Make This Year

With a new year comes the chance to have a fresh start. According to a Fidelity study, more than one-third of Americans set a financial resolution for 2017. Whether or not you set a financial resolution, though, improving your finances is likely still important to you. To help with this, we came up with a list of the top five financial moves to make this year.

5 financial moves

1. Create a Realistic Budget

A budget is simply a plan for your money. It can be as minimal or as comprehensive as you like. What’s important is that you know how much money you bring in versus how much money you spend and save.

A realistic budget is one that you can sensibly stick to over time. To create such a budget, you’ll need to track your expenses for a few months. You can do this by looking at your bank account and credit card statements and seeing how much you’ve spent in previous months. You can also use a tool like Personal Capital or Mint to track your expenses for you.

Learn More: How to Budget If You Hate Budgeting

After you’ve tracked your monthly spending, you’ll need to decide how much you can reasonably save each month. If the amount you want to save each month is doable based on your current spending habits, great! Otherwise, you may have to reduce your spending in order to meet your savings goals.

2. Build an Emergency Fund

An emergency fund is an amount of cash set aside for use in the event of a financial crisis such as job loss or a large expense. If you don’t have an emergency fund already, this is the year to build one. Aside from the obvious financial benefit, an emergency fund also provides a peace of mind that’s priceless.

Resource: How to Decide If an Expense Is Emergency Fund-Worthy

To build your emergency fund, you can set it up like any other savings goal you have. You can decide on an amount to be transferred from your bank account into the savings account on a regular basis – for example, every two weeks or once per month – until you reach your goal. Personal finance experts recommend having three to six months of expenses saved in an emergency fund.

Your emergency fund should…

9 Expensive Mistakes of the Newly Retired

Transitioning to retired life on a fixed income will undoubtedly have a few bumps in the road. This is a brand-new chapter of life for you, and it’s reasonable to expect some challenges ahead. The last thing you want to do, however, is compromise your nest egg with costly, easily avoidable mistakes. After all, you need that money to get you through the rest of your life.

As such, consider these costly mistakes of the newly retired so you don’t follow suit.

1. Not balancing your portfolio

Retiring doesn’t mean you have to stop investing. You can still dabble in the stock market, but perhaps not as aggressively as you once did. Risky bets could cost you your life savings, which means that you’ll either have to go back to work past age 65, or put your hat out on a street corner. Neither of those options sound great in the golden years of life, so it’s important to ensure your retirement portfolio is balanced.

“Annuitizing a significant portion of one’s retirement income can complement a portfolio of stocks and bonds,” says Jim Poolman, executive director of the Indexed Annuity Leadership Council. “Fixed indexed annuities (FIAs) can serve as part of a balanced financial plan because they do not directly participate in any stock or equity investments and [they] protect your principal from fluctuations in the market.”

2. Not changing your lifestyle after retirement

Your spending habits as a retiree will need to change if you’re going to make it for the long haul. This is especially true if you’re not receiving any kind of monthly payments, like Social Security or disability, to help with bills. You can live off what you have in the bank (hopefully; otherwise you shouldn’t be retiring yet), but you may have to downsize and rethink your spending strategy.

This means you need to start learning how to save money on everyday expenses, and re-evaluate your budget to find places for cuts. Don’t expect yourself to suddenly drop 30 percent or more of your spending. Work your way to it by making small cuts at a time before you retire.

3. Not evaluating risk

When you start saving for retirement, you may have a certain monetary goal in mind — either based on what financial sources have told you, or what you’ve calculated you’ll need based on your lifestyle. But you may not be accounting for the ups and downs of Wall Street and inevitable inflation.

“Revisit your retirement plan to make sure your savings reflect your new needs, and adjust for market conditions,” Poole advises.

4. Spending too much money too soon

When you retire, what you have is what you have. Unless you still have income coming in somehow, you have to…

What You Need to Know About the Easiest Way to Save for Retirement

If you have a 401(k), chances are you’ve been given the option to invest in a “target-date” fund. This is a balanced mutual fund that gradually changes its investment mix depending on how close you are to retirement. It’s designed to hold a higher percentage of riskier, growth-oriented investments like stocks when you’re young, and increase the proportion of more conservative investments, such as cash and bonds, as you age.

Many brokerage firms offer target-date funds, which come with names like Fidelity Freedom 2050 or Lifepath Index 2045. The idea is to pick one associated with the year you expect to retire.

There are advantages to these funds, especially for those who don’t want to spend a lot of time managing their investments. But there are some drawbacks, too.


Let’s start with the upsides.

1. They automatically rebalance

Target-date funds are designed to build wealth while you’re working, and protect it as you approach retirement. They accomplish this by gradually and automatically changing the investment mix over time, which is referred to as rebalancing. Because it’s not particularly easy for the average investor to make these kinds of changes on their own, a target-date fund offers the convenience of “set it and forget it,” saving you time and extra work.

2. They are easy to select

Picking which mutual fund is right for you is tricky, because there are often so many choices. There are funds for specific industries, funds for growth, and others for income — it can be overwhelming. When choosing which target-date fund is right for you, though, all you need to do is pick one that lines up best with the year you expect to retire. So if you are now 30 years old and plan to retire at age 63, you would pick a fund labeled with the year 2050.

3. They offer diversification

Most target-date funds are essentially “funds of funds.” In other words, they are comprised of a mix of mutual funds, which are…

5 Questions to Ask Before You Start Claiming Your Social Security Benefits

According to a 2016 poll conducted by Gallup, 59 percent of retirees rely on Social Security payments as a major source of income. Odds are that you, too, will need Social Security benefits to cover at least some of your living expenses after you retire. Because of this, you’ll want these benefits to be as large as possible when retirement actually arrives.

Here are five key questions to ask before you start taking your Social Security benefits.

1. Are you willing to take a smaller monthly benefit for the rest of your life?

Taking Social Security benefits before your full retirement age will cost you in the form of a lower monthly payout. This payout will remain at this lower level for the rest of your life.

You can determine how much of a hit you’ll take claiming benefits early by visiting the Social Security Administration’s retirement planner site. As the site shows, if you start taking your Social Security payments before you hit your full retirement age, your monthly benefit will be lower.

How much lower? If your full retirement age is 67 and you start taking your benefits at 62, your monthly Social Security payment will be reduced by about 30 percent. If you start taking them at 64, they’ll be lower by about 20 percent. Even if you start taking them one year earlier at 66, they’ll still be lower — by about 6.7 percent a month. And remember, this is for the rest of your life.

As you can see, claiming benefits early can significantly reduce the amount of money you receive each month. Let’s say you are slated to receive $1,000 a month in Social Security benefits and your full retirement age is 67. If you started taking…

Half of Americans Are Wrong About Their Retirement Savings

Some financial mistakes are easier to recover from than others. Failing to properly plan for retirement falls into the not-so-easy camp. And yet, the latest in a long series of retirement preparedness studies indicates that many working age households in the U.S. are making this very mistake.

This new study, prepared by the Center for Retirement Research (CRR) at Boston College, analyzed two key findings. First, it compared people’s objectively measured, actual retirement preparedness with their perceived preparedness. And second, instead of just highlighting how many people are less prepared than they think (a common finding among retirement studies), it also found that some people are actually more prepared than they realize, causing needless worry.

Let’s break it down.

Over half are not well prepared

According to the CRR study, over half (52 percent) of working age households are at risk of not being able to maintain their current standard of living in retirement. That’s even if these households work until age 65, annuitize all of their financial assets, and turn their home equity into an income stream via a reverse mortgage.

In 1989, just 30 percent of households were deemed to be at risk. The study’s authors attribute the growth in this number to three main factors:

  • The increased time people are spending in retirement — the result of a fairly static average retirement age (around 63) combined with lengthening life spans.
  • Increases in Medicare premiums.
  • The sweeping change from defined-benefit to defined-contribution retirement plans, such as 401(k) plans. In managing their own retirement accounts, the authors said, “individuals make mistakes at every step along the way,” which has resulted in a woefully inadequate median retirement account balance of just $111,000 for households nearing retirement.

Over half of the unprepared don’t realize it

Of the 52 percent of households that are at risk of…

How Single Parents Can Juggle Retirement Savings, Too

Being a single parent is hard work. It’s also expensive, with the U.S. Department of Agriculture recently reporting that the estimated cost of raising a child from birth through age 17 is $233,610. That comes out to nearly $14,000 a year.

If you’re a single parent with one income, paying for your children’s clothing, food, education, and activities might not only be consuming most of your money, but most of your time, too. At the end of another long day, you might think that it’s simply too difficult to plan or save for your own retirement.

Fortunately, this isn’t true. Yes, saving for retirement will be more challenging for single parents. But it can be done, and the steps to start saving and investing for retirement aren’t overly difficult.

Here are five moves single parents should make today to prepare for their future retirement.

1. Make a budget

Nothing is more important than creating a household budget, and making one is simpler than you think. Once you have a budget, you’ll be able to figure out how much money you can allocate to retirement savings each month.

First, write down how much money you bring into your household every month. Next, list how much you spend. Start with your fixed expenses, which includes everything from your monthly mortgage payment to your insurance costs. Then, calculate an average cost for expenses that fluctuate. These can include utility bills, transportation, clothing, groceries, and entertainment. Don’t forget to include intermittent expenses, such as haircuts and car maintenance bills, which you might think of in annual terms — find the average so you can estimate a monthly amount. Once you have these figures, you’ll know how much wiggle room is left each month to put toward your retirement.

Compiling a budget can also help you make positive changes to your overall spending habits. Maybe you’ll find that you’re spending more money than you’re bringing in. You might then make a few small adjustments — such as eating out less, cutting the cable cord, or dropping a gym membership — that will free up money each month.

2. Start small and build an emergency…

3 Ways Retirees Can Build Credit

You might think that once you reach retirement, your credit score is just one of those things you get to stop worrying about. While it’s true that most retirees won’t be applying for mortgages, it’s not true that you don’t need to maintain a decent credit score. What if you want to apply for a car loan? What about credit cards? You certainly won’t get the lowest interest rates and best rewards programs possible without a good credit score to back you up.

A low credit score can also hurt you if you want to downsize to an apartment, or even move into a senior living facility. You might need a solid credit score to qualify.

Why it’s hard for retirees to build credit

According to FICO, to have a credit score, you must have at least one credit account that is at least six months old. You must also have at least one account that has been updated by a creditor or lender during the last six months.

If you aren’t paying a mortgage, paying off an auto loan, or using credit cards, you might not meet any of these requirements. This might lead to you becoming what FICO calls an “unscorable,” a consumer who has no credit score at all.

Fortunately, there are ways for retirees to continue building credit. They require the same good financial habits you’ve been practicing before retirement.

Use the credit cards you have

You might prefer paying for items in cash. Instead, make small purchases throughout the month with your credit card. If you pay off your entire card balance each month, you’ll continue to boost your credit score. (See also: How…