How to Save for Retirement When You Have Debt

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If you’re in debt and struggling to save for retirement, you’re not alone. The average American has approximately $38,000 in personal debt—excluding home mortgages. Roughly 25% of this debt is credit card debt, which tends to be higher interest than other types of debt.

In particular, baby-boomers—people born between 1946 and 1964—are not as prepared for retirement as they should be, as 45% of boomers have no retirement savings. Considering the average social security check is $14,000 per year, most boomers should have additional savings for retirement to maintain their current cost of living.

Whether retirement is already on the horizon, or if it’s still a few decades away, the best time to save is now. Here are a few steps that you can take starting today.

Estimate how much you’ll need to retire

Everyone’s retirement needs are different. However, the 4% rule is one that many follow. This model predicts that you should spend no more than 4% of your net worth per year in retirement, assuming a 30-year retirement period. When estimating what you will need to retire, it’s vital to focus on your goals and expectations. Will you own your home? Do you plan on traveling? Do you expect to have ongoing medical expenses? These are just a few of the factors that could change your need in retirement. A Financial Advisor can help you determine the best savings option for you, but this simplified example shows you how the 4% rule can work for you:

In the Portland area, the average cost of living for two people, excluding rent or mortgage, is $1,986 per month, or $23,832 annually. Rent for a 3-bedroom apartment is $1,877.27 monthly or $22,527.24 annually. Combined, that’s roughly $46,359 in living expenses per year. In order to retire and live on 4% of your net worth per year, you will need to save approximately $1,390,770 (not accounting for inflation and economic changes over that 30-year period).

As you near retirement, you may explore opportunities to decrease your cost of living to stretch your retirement savings further. Additionally, your goals and expectations can change over time. If anything changes, you should take the time to revisit your plan to ensure that you’re still on track.

Do you want to lower your retirement need or increase your retirement savings? Take a look at your overall debt.

Establish a debt payoff plan that fits your retirement goals

The average interest rate for U.S. credit cards is between 17.03% and 24.05%. So, if you have a balance of $10,000 on a credit card with a 20% annual percentage rate (APR), and you pay it off over five years, you’ll end up paying about $5,900 in interest. If instead, you can pay off the debt over two years, you’ll end up paying about $2,215 in interest. Finding ways to save on debt payments, then contributing those savings to your retirement plan, can make a positive impact on your overall retirement picture.

If you’re trying to save for retirement, high-interest debts can make it more difficult. In the example, much of the payments go towards interest. Paying down debts can significantly reduce the amount of interest you pay overall.

Deciding on the best debt payoff plan can be difficult. Should you accelerate debt payoff? Or maximize current contributions to your investment portfolio? It can be complicated to determine the value of reducing debt vs. potential investment returns. Considering how much you already have saved and the time you have until your target retirement date are also important in making this calculation. Need help weighing the pros and cons? Speak with a Financial Advisor to determine the best plan of action for your situation.

Learn about Oregon debt management and retirement savings programs

There are many ways to manage your debt responsibly. Depending on your situation, you may need to consider going to budget counseling, negotiating for lower interest rates with your creditors or consolidating your debt.

Debt management services

In Oregon, debt management service companies must register with the state government. Additionally, the government places restrictions on how much these companies can charge you for services. Always check their registration before entering into an agreement with a debt management provider.

Public retirement programs

Did you know that Oregon is the first state to offer a public retirement program? Launched as a pilot program in 2017, and expanded state-wide in 2018, OregonSaves is a public retirement option that allows anyone to save for their future.

Small businesses with 10 or more employees are required to use the program for their employees and employees can opt-out if they wish. Likewise, self-employed and gig-economy workers can join the program. You can contribute as little as $5 per month through automatic contributions or payroll deductions.

In its first two years, the program has helped Oregonians save more than $25 million.

Save for Retirement When You Have Debt_woman using her phone while drinking a cup of coffee

Takeaways

If you’re in debt and not saving for retirement, consider these steps to get on track:

  • Work with a financial advisor to calculate your retirement needs
  • Develop a debt repayment strategy
  • Explore the financial services offered by your local government

Getting out of debt and into a habit of saving for retirement takes hard work and dedication, but you’re not in this alone. First, put together your debt pay off strategy with our financial education resource. To learn more about your savings options, and to allow you to save and pay down debt at the same time, speak with a trusted Financial Advisor with OnPoint Community Credit Union Wealth Management and Investment Services today.

Disclosures

*Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC and are not insured by credit union insurance, the NCUA or any other government agency, are not deposits or obligations of the credit union, are not guaranteed by the credit union, and are subject to risks, including the possible loss of principal. OnPoint Community Credit Union and OnPoint Wealth Management & Investment Services® are not registered broker/dealers and are independent of Raymond James Financial Services, Inc. Raymond James privacy policy. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

You can review the background of Raymond James and each OnPoint registered investment professional on FINRA’s BrokerCheck.

Any opinions are those of OnPoint and not necessarily those of Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Raymond James is not affiliated with and does not endorse the entities mentioned above.

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