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American workers rank credit card debt as one of the biggest challenges to their ability to save for retirement.
That’s the conclusion of a new survey conducted over the summer by Goldman Sachs which included more than 1,200 people.
Melinda Opperman, president and chief relations officer for the nonprofit Credit.org, was not surprised by the research.
“Every dollar someone has to spend on paying down their debt is a dollar they can’t put aside for retirement,” she said.
CNBC spoke to experts about how people with debt can still try to build a nest egg.
It’s hard to save money and pay off debt. Should I prioritize?
No; giving up either goal is a bad idea, experts say.
“There are consequences to not paying off credit card debt today, when not saving for retirement makes it a matter of suffering later,” Opperman said.
If you only make the minimum payments while maintaining your average credit card balance of $ 6,300, with an interest rate of around 17%, it will take you almost 18 years to get out of debt.
And by then, you would have paid over $ 7,600 in interest, according to Ted Rossman, senior industry analyst at Creditcards.com.
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Meanwhile, delaying saving for retirement will also have huge costs.
If you started saving $ 200 per month for your retirement years around age 20, you would have $ 570,000 at age 65 (assuming an annual return of 6.5%). If you waited until the 25th to do so, you would have $ 435,000.
What if you waited 37 years? Only $ 180,000.
How can I do both at the same time then?
Because the 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 create any kind of wealth if you pay so much interest every month.”
At the same time, however, you want to save something for retirement.
“It’s hard for people to change their ways, so never stop saving money completely,” Opperman said.
Even if you only have $ 20 deducted per pay period, “it can add up and you probably won’t miss it on your paycheck,” said Carolyn McClanahan, certified financial planner and director of financial planning at Life Planning Partners in Jacksonville. , Florida.
“Thanks to the magic of compound interest, saving a little bit on a regular basis can reach a ton of money to serve as a future nest egg,” said McClanahan.
If your employer offers a 401 (k) match, you should try to contribute enough to get the full benefit, Rossman said.
“It’s a 100% guaranteed return – it’s free money,” Rossman said.
To free up more money to save with, you can apply for a 0% balance transfer credit card, Rossman said. These cards, for a fee, give you up to 21 months interest-free.
“You might be able to pay off your debt without monster interest charges and build up some retirement savings along the way,” he said.
Without paying interest by credit card, you may even be able to increase the percentage you contribute to your 401 (k) or other retirement savings account.
Should You Use Retirement Savings To Pay Off Credit Card Debt?
Opperman says no.
“The penalties for early withdrawal are too high to be worth it,” she said.
Withdrawals from 401 (k) accounts before the age of 59.5 are subject to a 10% penalty and taxes.
This means that if you needed $ 15,000, you would need to withdraw almost $ 24,000, after factoring in that charge, according to Fidelity.
Of course, the money you withdraw 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 don’t like credit card debt, it’s hard for me to argue that you should withdraw from your 401 (k) early,” Rossman said.