Millions of Americans spend their working days dreaming about retirement. Yet millions of Americans also may not take into account important financial steps they should take before becoming a retiree.
While many people understand that it’s important to pay off loans, they often focus on the wrong loans — favoring lower-interest mortgages over expensive high-interest accounts. .
So here are three loans that Americans must pay before consider retirement.
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College and university loans are some longest debt Americans deal with. What’s more, those loans can add up as you near retirement if you also take out a loan to help your kids go to college.
While student loans are currently inexpensive, the payment and interest rate freezes introduced due to the pandemic only last until the end of December. Interest rates on those loans could rise to 7.54 % in New Year.
And those loans last for a long time. A 2019 study from New York Life found that it took participants an average of 18.5 years to pay off student loans.
Unlike mortgages, many student loans are not tax deductible, and data from StudentAid.gov shows 2.3 million borrowers age 62 or older. So all those payments take away from your retirement income.
Therefore, Americans should find a strategy to pay off their student loans that’s similar to how they make mortgage payments. This will involve scheduled payments being made 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 typically have the highest interest rates. This is especially true for credit cards, which currently have an average interest rate of 22.40% in the United States, according to LendingTree.
Personal expenses can also end up on a credit card, such as travel and wedding expenses or even medical bills, funeral expenses, and unexpected expenses. Although this credit card balance should get paid down quicklyYou shouldn’t let them delay saving for retirement.
Instead, consider reducing your mortgage payments to use that money to pay off other high-interest loans.
Mortgages have a lower interest rate, which will allow you to keep your savings and pay off debt. From there, start putting cash aside Emergency Fund with about three months’ salary. 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 auto loan for buyers with good credit was 7.88%, according to MyAutoloan.
But if you have Bad credit, spiked up to 19.87%. That’s roughly equal to the interest rate on a credit card.
Furthermore, you will have to consider these payments for your retirement. If $400 goes into a car payment, and $300 goes to credit cards and more on student loans, suddenly you have a lot less cash to retire on.
If you delay retirement to pay off these loans, setting aside your salary to pay it off, you could save yourself thousands of dollars in interest and create a stepping stone to retirement.
What about my mortgage?
So why not pay your mortgage too? It’s not just lower interest rates, though with national average mortgage rate for a 30-year fixed rate at 6.49%, that’s an advantage.
There are tax benefits available to you for your mortgage as well. Homeowners can claim federal and state tax deductions on mortgages and home equity loans that you don’t get with most personal loans and credit cards.
So while you might be inclined to write off your home loan, pay off high-interest loans, or put more money into your retirement and let it grow, this strategy is more likely to put you in the wrong place. Get closer to your retirement and dreams? really reach financial freedom.
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This article is for information only and should not be construed as advice. It is provided without warranty of any kind.