by Elizabeth Aldrich | Updated July 21, 2021 - First published on Sept. 26, 2020
Many or all of the products here are from our partners. We may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
Too many people are letting credit card debt eat away at their retirement dreams.
Going into retirement debt-free is ideal, but unfortunately, it isn't always possible. According to a study on credit card debt statistics done by The Ascent, the people with the most credit card debt are those aged 50 to 59 -- just years from retirement age.
With the high interest rates on credit cards, carrying that debt into retirement can mean drastically less disposable income when you need it most. It can even mean drawing from your retirement accounts at a faster rate than planned and potentially running out of money. If you're nearing retirement age with credit card debt, here's how to get on top of the situation.
Tips and tricks from the experts delivered straight to your inbox that could help you save thousands of dollars. Sign up now for free access to our Personal Finance Boot Camp.
By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.
Your first priority should be paying off high-interest debt -- an interest rate above 7% -- such as credit card debt.
While it might be tempting to focus on growing your retirement accounts as you get older, paying off high-interest debt will actually provide a better return. The average credit card interest rate is 14.52% as of May 2020, which means paying off credit card debt brings an average return on investment of 14.52%. The average long-term return on stock market investments is 7%.
As you approach retirement with credit card debt, funnel all your disposable income toward paying off that debt. If you can increase your disposable income by cutting costs or making more money, use the extra money to pay off your high-interest debt faster.
If you have multiple credit card balances, focus on paying off the balance with the highest interest rate first. You can also consider a debt consolidation loan to gather all your credit card debt under one loan, but that's only advantageous if you can get a lower interest rate by doing so.
Lowering your credit card interest rate is one of the best ways to pay off debt fast, and you'll save money along the way that can be put toward retirement. Call your credit card company and negotiate a lower interest rate, particularly if you have good credit and have always made on-time payments.
You should also consider using a balance transfer credit card to pay off your debt -- or at least a portion of it -- at a 0% intro APR for up to 18 months. With a year and a half to pay down your debt interest-free, you can make a bigger dent in it. However, be sure you can pay off the balance in full before the card's introductory period ends. If you don't, you'll have to pay interest on the remaining balance at the card's regular APR, which is usually quite high.
Once you've paid off the credit cards, it's time to catch up on savings. Put all the money you were spending on monthly payments into your retirement accounts.
If you're falling behind on your retirement plan because you're paying off debt, building additional sources of retirement income into your life can be smart. Apart from Social Security and retirement and investment accounts, consider whether you can generate additional streams of income.
If you own property, rental income can provide you with additional cash flow through retirement. A vacation rental, if financed responsibly, can provide a stream of income while also giving you a place to retire.
If your professional life left you with sought-after skills and experience -- or an infrastructure of contacts and industry know-how -- consider looking for part-time ways to put those skills to work in retirement. Consulting and teaching as an extension of your former career, for instance, can be lucrative side gigs to pursue if you need additional funds and want to continue part-time work.
If you can't pay off your credit card debt before you retire, you might want to consider working a few more years to get that debt paid off so you're in a better financial position. It's not ideal, but you'll likely feel less stressed in retirement without that credit card balance looming over your head.
Plus, postponing retirement has one other financial benefit. If you wait until you're 70 to draw your Social Security benefits, you'll receive a larger monthly benefit that includes a delayed retirement credit. This higher benefit amount lasts for the rest of your life, so the increase in income from Social Security can be substantial.
In the end, everyone's situation is different, but paying off credit card debt before retiring is universally wise. Whether you're just a few years or more than a decade out, getting your credit card balances down to $0 now will make a comfortable retirement that much more attainable.
If you have credit card debt, transferring it to this top balance transfer card secures you a 0% intro APR into 2023! Plus, you’ll pay no annual fee. Those are just a few reasons why our experts rate this card as a top pick to help get control of your debt. Read The Ascent's full review for free and apply in just 2 minutes.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.