Just read an article saying that we should not retire until these three types of loans are fully paid off. They are student loans, car loans and credit card debts/personal line of credits.
We all know that public pension is not enough for retirement. Most people do not have a generous pension from their employers. Many of us move from one job to another these days. We have to save for our own retirement which means we have to invest.
I got a question. If someone have money to invest, why would they keep the credit card debts in the first place? Usually the so-called market – S&P 500 annual return is around 9% to 10% in the past several decades on average. The credit card annual interest rate is around 20% which is double the market return. Many investors can’t get the 10% return annual anyway because they probably have bond in their portfolio which has lower return. It is no brainer that credit card debts should be paid off before investing.
Although student loans, car loans and personal line of credits usually have lower interest rates than credit cards, I would still recommend to pay them off ASAP before investing. We used to have a low interest rate environment. That should be a good opportunity to pay off our debts. Many of us didn’t know that the interests rates would be so high now. How good times of easy money disappear. Now, it is much harder to pay off debts. Economic cycle such as inflation is something out of our control. Therefore, we need to take advantage of the low interest environment when we can because we don’t know how long the good time last. Some might think that recession could bring the interest rates down, but some of us could lose our jobs too due to recession. Therefore, we can never be too optimistic when it comes to debt. Vigilance might be a better approach.
It didn’t mention mortgage in the article. Some experts say it is recommended to pay off mortgage before retirement but not necessary. I think it really needs to look into each person’s specific case. Devils are in the details. It depends how big the retirement investment portfolio is or how much employer pension can provide for this person. A really good financial plan is required to make that decision. I also think that if one has sufficient investment portfolio or savings, would it be safer just to pay the mortgage off before retirement?
I know many people put pay off debts as new year resolution. Hope you can stick to it and be debt free and worry free soon.
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