Economics Project:

Retirement Planning
&
Credit Card Debt

Chani Miller
Economics 2022
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Chani Miller

Mr. Grossman

Economics

1 June 2022

Economics: Retirement Plans and Credit Cards

Making sure you will have money to support yourself when you retire is a decades-long

process that begins long before you begin to consider quitting your job; in fact, it’s something

you should be thinking about when getting your first job. Before you can go about the process of

considering various kinds of investments, the question to ask is, how much money will I need to

retire? According to Investopia, you’ll need about 80% of your pre-retirement income annually.

So, if I make 100K a year right before I retire, I’ll want 80K every year after I retire. But I’ll

need to have a lot more than one year’s income saved by the time I retire. The rule of thumb is

the 4% rule: to know how much total savings you need to have before retirement, take your

annual retirement income divided by .04. So if I want 80K a year, I’ll need to have saved $2

million before retirement (Probasco).

Now, how do I save that money? In general, there are two ways to save, with retirement

plans and with other investment opportunities. Usually, a combination of both is necessary to

save the desired sum. First, let’s look at retirement plans. There are several types of retirement

plans, including a 401K plan and an IRA (individual retirement account), as well as annuities. A

401K is an investment plan that many companies offer, in which an employee puts a percentage

of his paycheck into an investment fund, and the employer matches that amount, partially or
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fully. It’s a defined contribution plan, meaning that employees contribute a fixed amount of

money from their paycheck. These contributions are tax deductible, meaning that they’re

subtracted from your gross income before taxes are calculated, and depending on your plan, the

money may or may not be taxed when you withdraw it by retirement (Fernando). It sounds pretty

good, and indeed, 401Ks are pretty popular. However, 401Ks offer limited investment options,

meaning you can only invest in what’s included in the plan, there are fees to invest, and

providers are often less than helpful in terms of financial advice and guidance (meetbeagle.com).

IRAs, on the other hand, are savings accounts opened through a bank or other financial

institution to save for retirement, and can be opened by anyone with savings, not limited to what

your company offers (Silver). You control what type of investments you want to make and how

much money to contribute, and your contributions as well as the growth accumulated are tax

deductible. However, the money is taxed upon withdrawal, there is a low annual maximum

contribution, and there are heavy penalties for early withdrawal, before age 59½ (Mann).

An annuity is a contract between you and a financial institution that ensures that you will

have a steady income in the future, and is often used as a retirement plan. The annuitant (you)

pays a lump sum or monthly payments, which the institution invests and will pay out to you in

the future with a fixed sum at fixed intervals. This is helpful because your savings are managed,

making sure you avoid the risk of outliving your savings, and income is guaranteed. However,

there are high fees involved, and even more so if the money is withdrawn within a certain time of

investing (Cussen).

Aside from retirement plans, it’s rarely a bad idea to make other investments, including

certificates of deposit, stocks and bonds. As a general rule, the earlier you invest the better, so

you have time for interest to accumulate. Buying a certificate of deposit (CD) is like putting
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money in an ordinary savings account, only with slightly higher interest rate, because the money

is committed, meaning it can’t be withdrawn within a certain period of time. It’s a risk free way

to make a little interest on money that’s just sitting there anyway, but only if you don’t anticipate

needing the money, because early removal penalties are high (Fernando). Stocks are a partial

ownership in a company, and the value of the stock rises and falls depending on how the

company is doing. The shareholder benefits from the company’s gains and loses money when it’s

doing badly. Stocks are the riskiest type of investment but have very high potential gains, and

you can put away a lot of money for retirement if you know how to play the stock market.

Bonds, on the other hand, are far less risky but also have a lower investment return. When you

buy a bond, you are loaning money to a company or the government which they use to fund

themselves, and they pay you back with interest. It’s a safer way to save up money for retirement

than some other forms of investing (Davis).

There are many different ways to save for retirement, including the retirement plans and

investment opportunities mentioned above, as well as many others. To someone not financially

savvy like myself, all these options seem equally appealing when the pros and cons of each are

evened out. However, it is obviously not that simple, and therefore, I think it is advisable to pay a

financial planner to help you understand your options and come up with a plan, rather than lose

money by trying to figure it out yourself.

Related to the topic of losing money due to a lack of knowledge and effective planning is

the topic of the credit card situation in America. Credit cards are popular for several reasons, but

one of the biggest is convenience. A credit card is like a short term loan from a credit card

company with varying rates of interest, so you can buy whatever you want, whenever you want.

The problem arises when consumers make purchases with money they don’t have in the bank to
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back it up. While a little credit card debt is normal, swiping that card without means of paying

may force consumers to pay high interest rates in the future, and occasionally sink them into

serious debt. Currently, Americans collectively owe a whopping $807 billion in credit card debt,

with the average individual debt falling at approximately $6,000. On average, those with the

highest income usually have the highest debt as well, because the more money you make, the

more money you spend (Resendiz).

There are several laws in place to ensure that credit card companies don’t cheat

customers and charge sneaky fees or change their payment agreements without warning. One of

the most famous credit card laws is the Credit Card Accountability, Responsibility and

Disclosure Act of 2009, or Credit CARD Act. It has several provisions that regulate credit card

companies and makes credit card terms more fair for the customers. For example, companies

must give customers a 45 day warning before increasing their interest rates, enough time to

cancel their card if they wish, and the new rate can only be charged on new charges after that

time is up. Another provision says that when different parts of one’s balance have different

interest rates, payments must go to the highest interest segments first, because otherwise, more of

the balance would be charged at the higher rate (Fay). The act also tries to prevent credit card

companies from tricking naive college students into signing up for cards that they can’t afford

through advertising on college campuses, and requires students to prove that they can make

payments before signing up (marketplace.org).

However, as with any law, there are always loopholes that the credit card companies find

to introduce hidden fees and maximize their profit. Although companies must give a 45 day

warning before increasing interest rates, there are plenty of tricks they can use to, in effect,

change your rates anyway. For example, a company with a high interest rate may charge a
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discount initially, but as soon as the customer is late on a payment, it reverts back to the higher

rate. This is legal because technically the company isn’t raising the rate, but rather removing the

discount. Or they’ll have a very low introductory rate that attracts customers, but once that time

expires, the higher rate returns. In terms of applying payments to the balance with the highest

interest rate, this is only true if the customer pays more than the minimum charge. If paying the

minimum charge, the company has the right to do whatever they want with the money. And

while companies cannot advertise on college campuses or at college events, they more than make

up for it through online advertising and mail (marketplace.org).

Credit cards are a convenient way of paying for your purchases without carrying around

wads of cash, and people are attracted to the special gifts and bonuses that credit card companies

offer for spending a certain amount of money. However, unless used responsibly, that little

plastic card can get a customer into a whole lot of trouble if he swipes when he can’t afford it,

landing him deep in debt and ruining his credit score. When making any financial decision, be it

signing up for a credit card, making retirement plans or anything else you do in connection to the

money you earn and spend, it’s important to do research and be educated. If you’re not sure

exactly what you’re doing, hire someone more financially savvy than yourself to help you, to

ensure that what you do with your money today doesn’t ruin your life tomorrow.
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Works Cited

“Credit Cards: Laws and Loopholes.” Marketplace.org, 22 Feb 2010. Accessed 7 June 2022.

Cussen, Mark. “The Pros and Cons of Annuities.” Investopia, 30 Sept. 2021. Accessed 31 May

2022.

Davis, Chris. “Bonds vs Stocks: A Beginner’s Guide.” Nerdwallet.com, 4 Mar. 2022. Accessed

31 May 2022.

Fay, Bill. “Credit Card Act of 2009.” Debt.org, 16 Dec 2021. Accessed 7 June 2022.

Fernando, Jason. “401K Plan: The Complete Guide.” Investopia, 5 Dec. 2021. Accessed 23 May

2022.

–. “Certificate of Deposit Explained.” Investopia, 18 May 2022. Accessed 31 May 2022.

Mann, Baruch. “Traditional IRA Pros and Cons.” The Smart Investor, 6 May 2022. Accessed 31

May 2022.

Probasco, Jim. “How Much Do I Need to Retire.” Investopia, 11 Feb. 2022. Accessed 23 May

2022.

“Pros and Cons of 401Ks.” meetbeagle.com, July 2020. Accessed 30 May 2022.

Resendiz, Joe. “Average Credit Card Debt in America.” ValuePenguin, 24 Feb 2022. Accessed

31 May 2022.

Silver, Caleb et al. “Individual Retirement Account.” Investopia, 3 Jan. 2022. Accessed 23 May

2022.
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