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Commentary and Opinion Apr 25, 2012 - 11:04 AM

Tackle debt now to build your retirement savings

By Jean C. Setzfand, Vice President, Financial Security, AARP Education and Outreach

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According to a University of California – Berkeley study released in February, poverty rates are twice as high among elderly African-Americans and Latinos compared to the U.S. elder population as a whole.

As a result, those two groups rely on Social Security for a greater share of their income than other ethnic groups.

But even among higher-earning minorities – those earning at least $40,000 a year – studies show they are entering retirement with less money saved for their future. A recent ING-sponsored study found that more African-Americans had contributed money at least once toward their employer-sponsored savings plans, yet Asians and Whites still had higher average account balances than African-Americans.

The culprit? According to the African-Americans in the study, debt was their main obstacle to saving.

When you’re diverting your would-be retirement savings to pay debt, you’ve taken the magic of compound interest and put it to work against you. Instead of earning interest on the interest in your savings account, your debts are accumulating interest, and interest again on top of that.

As a result, even a small difference in contribution rates can result in a very big difference in your account value when it’s time to retire. In ING’s study, Hispanics and African-Americans had the lowest average account balances, with $54,000 and $55,000 saved respectively.

Is $54,000 or $55,000 enough to retire? Not when you consider that you might live 30 years after you stop working. If you haven’t figured out your retirement needs yet – and started saving for them– there’s no time like the present. Here are the steps we suggest taking:

1. Start with Social Security as your baseline, and use our Social Security Benefits Calculator, , to try out different claiming scenarios.
2. Plug your estimated Social Security benefits and other information into our Retirement Calculator, That will help you identify how much more money you’ll need to save. If you can’t save that kind of money, it’s time to tackle your debt and devise a manageable budget – right now.
3. AARP members and their families have access to a free calculator that can help you figure out which debt to pay off first – the one bearing the highest interest rate or the one carrying the highest balance. You should also ask your creditors for a lower interest rate.
4. If you have debt collectors harassing you for a debt that you don’t recognize, ask them to verify the debt. Under federal law, collectors may not attempt to collect until they’ve given you the requested verification.
5. Once you have your debt-reduction plan in place, set up a home budget that includes a line item for retirement and emergency savings. AARP has a free home budgeting tool, or you can use something as simple as an Excel spreadsheet to add up and adjust your budget.
6. Visit to download an archived copy of a cost-cutting seminar by the self-described “ultimate cheapskate,”Jeff Yeager.

Jean C. Setzfand is vice president of the Financial Security team in the Education and Outreach group at AARP. She leads AARP’s educational and outreach efforts aimed at helping Americans achieve financial ‘peace of mind’ in retirement.

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