The recommendation of retirement experts is clear and there is consensus. On average, to have a good retirement at the end of those working years, a person should save at least 15% of his gross income. This means that for every $1,000 you earn annually gross, you should contribute about $150 to your retirement.
For some high-income earners, it’s easier to increase savings beyond that 15%, but for the average American, even 15% might be an impossible number. A significant part of the population has problems even reaching half of that recommended amount, which puts them in a predicament because they are not saving enough for retirement.
Now, there is an interesting trick that very few people consider, but that could help you increase your retirement savings: it is the use of credit cards with cash back rewards. These cards offer their cardholders the opportunity to receive a percentage of the money spent as cash back.
For example, if a card offers a 1% cashback and the user spends $100, they receive a refund of $1 for each of those $100 spent. So if you use your card paying about $1000 a month, you will receive about $10 cashback and in 12 months you will have received $120.
Step 1: Use Your Credit Card Wisely
The smartest way to use credit cards, of course, is by using your limit but setting aside the cash to make a full debt payment each month. This way no interest will be generated, because as you already know, these credit card interests are extremely high and late payment default interests are really cruel.
There are thousands of cashback cards in the United States and many are popular, and others are less well-known. Most of them offer a 1:1 conversion rate. What does this mean? In other words, if you have about $120 cashback following the example above, you can transfer it to a bank account without any cost or devaluation.
That means that you would receive $120 usable in your bank account or checking account. It is different in the case of travel cards, which give higher valuations when redeeming miles for trips, but cards with cashback offer this option that is much more profitable and much more efficient for the user.
And what’s the trick to using your cash back card as supplemental retirement savings? Keep reading… you’ll see what an interesting idea.
Step 2: Use Your Cashback Credit Card as Retirement Savings
Let’s imagine a fictional person named Peter. Peter is 35 years old and has a cashback card that offers him a refund of $120 a year. Without the cashback, Peter contributes $5,000 a year to his retirement fund. When he reaches his full retirement age, i.e. 67, which is the standard retirement age in the United States with full retirement, Peter would have about $348,334.16 with a hypothetical annual rate of return of 5%, a reasonable average for long-term investments, using a compound interest calculator formula.
Now, what would happen if Peter added that $120 cashback a year to his retirement fund, i.e. saving $5,120 a year? You will be surprised how much more Peter saved to retire at the age of 67.
Using the same compound interest calculator, Peter’s cumulative contribution amount with the $5000 plus the $120 cashback upon reaching his 67th birthday would be $452,768.57. By adding the cashback, Peter increased his retirement savings by an additional $104,434.41 compared to if he had made the contributions and spent the cashback on anything else superfluous.
Is $452,768.57 Enough to Retire at Age 67?
Maybe $452,768.57 sounds like a significant sum, and well, but if we consider several factors such as the cost of living after retirement, inflation and increasing life expectancy (we are becoming more and more long-lived), it may not be enough to maintain a comfortable and stable standard of living during retirement.
But anyway, that extra $104,434.41 that Peter saved extra just by using his credit card cashback will definitely make a difference when it comes to retirement.
All experts agree that saving for retirement should be one of the priorities when starting to work, even in your twenties or thirties. For those years, everything may seem eternal, and the human body may seem indestructible, but the truth is that aging won’t forgive you, and it’s time to start thinking about how and when to start your savings. Hopefully it will be as soon as possible.
