Top 5 Factors That Can Derail a Baby Boomer’s Retirement – Factor #1: Credit Card Debt

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Talk to a typical Baby Boomer and ask them about their retirement plan. Most of the time, they will describe what I refer to as the “A” plan. This is the ideal American dream. Work hard, enjoy life, save a little, retire at age 65 (at the latest), and enjoy the “Life of Riley” in retirement. But, how often does the “A” plan get derailed?

From my experience, there are typically 5 major factors that can affect each individual or couple’s ability to retire comfortably. Over the next 5 newsletters, I will expand on each one.

Credit card debt is one of the most damaging factors for everyone, but especially as you approach retirement. Let me be specific. I am referring to ongoing credit card debt. I am not referring to the use of credit cards for everyday expenses (gasoline, food, restaurants, entertainment, clothing, etc.) where you pay off the balance each month. This is a good use of a credit card. It builds your credit history (valuable when you are trying to get a mortgage or car loan) and also means that you don’t have to walk around with a lot of cash in your pocket.

What I am referring to is carrying a credit card balance. Have you ever looked at the interest rate you are getting charged for carrying this debt? 12%, 14%, 18%, 26% are typical interest rates on many credit cards. This is in spite of the fact that interest rates are at historical lows. For example, if you buy a 10 year U.S. Treasury bond today, you can only expect to get paid around 2% – for the next 10 years!

To help illustrate the effect of this kind of interest rate, consider this example. Bob has $15,000 in savings and $10,000 in credit card debt. He tells me he likes having the $15,000 in savings – it helps him sleep at night. However, when I ask about the credit card debt, he tells me that he knows that he can pay it off at any time, but he likes making the minimum payments. Every once and a while, he makes a bigger payment, so he can eventually pay it off.

My response to Bob’s example is as follows: Place $10,000 in cash on the table in front of you. Drew Carey from the Price is Right is in the room and offers you two choices. Choice #1 is that you can get a guaranteed fixed 12% return on your investment. Choice #2 is that you can get a variable return on your investment, including the possibility of losing the entire investment, but you might be able to double your money. What would you choose?

If you are like 99.9% of Americans, you would probably choose the guaranteed 12% return. Interestingly enough, that choice equates to your paying off the entire credit card balance. Now keep in mind that as an investment professional, it is impossible for me to offer my clients a guaranteed 12% return (actually 15% return if you are in a 20% combined income tax bracket). But that could be the result if you pay off the entire credit card balance, because the savings from not having paid off the balance monthly with that high interest rate works out to be the approximate equivalent of a 12% return.

Recommendation – Pay off your credit card debt as soon as possible. Use credit cards to help establish credit history, but don’t carry a balance. The key is to make sure to use credit cards wisely.

Stay tuned for next quarter’s newsletter for Factor #2 – Expenses.

 

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