Millions of Americans spend their working days dreaming of retirement. However, millions of Americans too it may overlook the crucial financial steps they would need to take to become a retiree.
While many understand that paying off loans is important, they often focus on the wrong ones, prioritizing their mortgages, which have lower interest rates, over expensive high-interest accounts.
So here are the three loans that Americans have to pay off before they even taking into account retirement
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College and university loans are some of the most enduring debts faced by Americans. Also, these loans can grow as you get closer to retirement if you’ve also taken out loans to help children through college.
While student loans are cheap right now, the payment and interest freeze put in place due to the pandemic only lasts until December. The interest rate on these loans could rise to 7.54% in the new year.
And these loans last a long time. A 2019 study by New York Life found that participants took an average of 18.5 years to pay off their student loans.
Unlike a mortgage, many student loans are not tax-deductible, and StudentAid.gov data showed that 2.3 million borrowers were 62 or older. So all those payments take away from your retirement income.
Therefore, Americans should find a strategy for paying off their student loans that is similar to how they make their mortgage payments. This would involve scheduled payments made regularly, paying off that debt faster and getting you closer to your retirement goals.
Personal loans and credit cards
Personal loans and credit cards tend to have the highest interest rates. That’s especially true with credit cards, which currently have an average interest rate of 21.59% in the U.S., according to LendingTree.
Personal expenses can also end up on a credit card, such as moving and wedding expenses or even medical bills, funeral costs and unexpected expenses. While those credit card balances need to be paid off quickly, you shouldn’t let them delay saving for your retirement.
Instead, consider reducing your mortgage payments to use those funds to pay off other high-interest loans.
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Mortgages have lower interest rates, allowing you to keep your savings and pay down debt. From there, start putting cash away in an emergency fund with about three months’ salary. That way, if unexpected expenses come up, you’ll be prepared.
Loans for cars
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, it goes up to 19.87%. That’s about as much as the interest rate on a credit card.
In addition, you will need to factor these payments into your retirement. If $400 goes toward a car payment and $300 goes toward a credit card and more toward student loans, you suddenly have a lot less cash on hand for your retirement.
If you put off retirement to pay off these loans, putting aside wages to pay them off, you could be saving thousands in interest and building a retirement cushion.
What about my mortgage?
So why not pay off your mortgage too? It’s not just about lower interest rates, though with the national average mortgage rate for a 30-year fixed rate around 6.5%, that’s a plus.
You also have tax benefits available for your mortgage. Homeowners can claim a federal and state tax deduction on home equity and mortgage loans that you don’t get with most personal loans and credit cards.
So whether you include paying off your home loan, paying off high-interest loans, or putting extra money into your retirement fund and letting it grow, it’s the most likely strategy to get you closer to retirement and to your dream of truly achieve financial freedom.
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This article provides information only and should not be construed as advice. It is provided without any warranty.