Millions of Americans spend their working days dreaming about retirement. Yet millions of Americans also may not take into consideration the crucial financial steps they should take becoming a retiree.
While many understand it's important to pay down loans, they're often focusing on the wrong ones - prioritizing their mortgages, which have lower interest rates, rather than expensive high-interest accounts.
So here are the three loans Americans must pay off before even considering retirement.
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College and university loans are some of the longest lasting debts Americans deal with. What's more, those loans may increase as you near retirement if you've taken out loans to help children through college too.
While student loans are inexpensive right now, the payment and interest freeze introduced due to the pandemic only lasts until December. The interest rate on those loans could surge to 7.54% in the new year.
And those loans last a long time. A 2019 study from New York Life found it took participants an average 18.5 years to repay student loans.
Unlike a mortgage, many student loans aren't tax deductible, and data from StudentAid.gov showed that 2.3 million borrowers were aged 62 and older. So all those payments take away from your retirement income.
Americans should therefore find a strategy to pay off their student loans that's similar to how they make mortgage payments. This would involve scheduled payments taken out on a regular basis, paying off that debt faster and bringing you closer to your retirement goals.
Personal loans and credit cards
Personal loans and credit cards generally have the highest interest rates. This is especially true with credit cards, which currently have an average interest rate of 21.59% in the United States, according to LendingTree.
Personal expenses can also end up on a credit card, like moving and wedding costs or even medical bills, funeral costs and unexpected expenses. While these credit card balances should be paid down quickly, you shouldn't let them delay saving for your retirement.
Instead, consider lowering your mortgage payments to use those funds to pay down other high interest loans.
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Mortgages have lower interest, which will allow you to hold onto your savings and pay down debt. From there, start putting cash aside in an emergency fund with about three months of wages. That way, if unexpected expenses come your way, you'll be ready.
Finally, auto loans are another area to pay off before retirement. As of August 2022, the average car loan for a buyer with good credit was 7.88%, according to MyAutoloan.
But if you have bad credit, that soars up to 19.87%. That's about as much as the interest rate on a credit card.
What's more, you'll have to take into consideration these payments for your retirement. If $400 goes into a car payment, and $300 to a credit card and more for student loans, suddenly you have far less cash on hand for your retirement.
If you hold off on retirement to pay off these loans, putting aside wages to pay them down, you could be saving yourself thousands in interest and creating a cushion to retire on.
What about my mortgage?
So why not pay down your mortgage too? It's not just lower interest rates, although with the average national mortgage rate for a 30-year fixed rate at about 6.5%, that is an advantage.
There are tax benefits available to you for your mortgage as well. Homeowners can claim a federal and state tax deduction on mortgage and home equity loans that you don't get with most personal loans and credit cards.
So while you may be inclined to clear your home loan, paying off high interest loans or putting extra cash into your retirement fund and letting it grow, is the strategy more likely to bring you closer to retirement and your dream of truly reaching financial freedom.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.