Retirees seeking to maximize their credit card rewards should choose a single card that offers the best rewards, rather than juggling multiple cards and benefit programs. Image: JJava Designs/Shutterstock.com
Many people count down the days to retirement, dreaming of sitting on the beach or hitting the links daily in a place where golf is possible year-round. Others may just greatly look forward to spending more time with their families.
Whatever one’s retirement dream may be, having a financial plan to fund that dream is crucial. With fixed incomes that often come with retirement and rising costs, some people are turning to credit card rewards not just for occasional splurges, but to supplement their retirement income.
A modern way to boost retirement income
Credit card rewards can be more than just a “nice to have” benefit of credit card spending; they can offer tangible benefits for retirees. When people have disciplined spending habits, they can take full advantage of the rewards programs from their credit cards of choice.
For example, many travel-focused reward programs can garner users discounted or free flights, hotel stays, rental cars, and other perks like dining and entertainment discounts. In addition, cash-back programs can function almost as micro-investment returns, allowing retirees to fund everything from travel to healthcare costs to gifts for their families. For retirees who are disciplined budgeters and credit users, strategically using credit card rewards can make their trips and other fun expenditures that make retirement so worthwhile more affordable — or even free.
While some reward programs are more beneficial than others, cash back bonuses are designed to pay you back for purchases you make on your card. A couple spending $2,500 per month on everyday expenses on their credit card that offers 2% cash back can earn $600 annually, which is enough to cover a few nights in a nice hotel or Christmas gifts for the grandkids.
Shifting reward structures and rising interest rates
Using credit card rewards as supplemental retirement income is not a foolproof plan, however. Recent hikes in credit card APRs have pushed interest rates to levels that have never been seen before. Currently, the average credit card APR hovers between 20 and 22%.
The days of 0% interest cards are waning, and this needs to be a factor in any retirement spending plan. When people carry balances, it can eclipse any savings or benefit from rewards.
Additionally, credit card companies have been quietly shifting reward structures in recent years. Bonus categories and amounts have been reduced, minimum spending thresholds have been raised, and point valuations have been restructured. Airline cards have increased the mileage requirements for certain flights, turning what used to be a free trip into something that requires more spending to achieve. All of this change results in reduced benefits from some cards.
For retirement-age consumers and credit card users, these changes can be unsettling. Many are accustomed to the status quo of generous sign-up bonuses and the ability to fund trips and other purchases with “points.” They must learn the new way of leveraging points and rewards.
Balancing risks and rewards
Rewards and points programs can still play a valuable role in retirement spending plans; retirees simply need to be responsible and strategic in their approach to spending. There are key strategies that retirees should consider before banking on rewards for supplemental retirement income.
By paying their credit card balances in full every month, retirees can guarantee that APR hikes will not negatively impact them. Reward cards should only be used for planned purchases. Repaying one’s credit card balances in full, month to month, can ensure that one gets the full benefits of rewards and points systems.
Retirees should also seek rewards programs that fit their retirement plans and lifestyles. For instance, a retiree planning extensive travel should seek a card offering robust travel rewards and flight points. However, homebodies may want to look for rewards that are tied to groceries, restaurants, or retail shopping. Retirees should avoid pursuing rewards in categories they rarely use, as this can lead to needless spending with little return on investment.
Retirees seeking to maximize their credit card rewards should choose a single card that offers the best rewards, rather than juggling multiple cards and benefit programs. A workable strategy can be to have one card that offers rewards in your top spending categories, and then another for supplemental benefits.
Retirees should assess their benefits quarterly or at least yearly to ensure they are getting maximum benefits. Credit cards can change their reward programs frequently, so it helps to be aware of any shifts to maintain sustained value.
Supplement, not an income substitute
It’s important to remember that credit card rewards are not designed to be a substitute for retirement income. It is unrealistic to believe one can fund a retirement full of trips and shopping on the back of a rewards program. However, for those who can maintain spending and credit use discipline, rewards programs can unlock beneficial rewards that can act as a supplement to retirement funds.
If you have an eye on adventure for your retirement years and a handle on your spending and financial fitness, using credit card rewards can be a great way to have the kind of lifestyle you dream of in retirement.
Aaron Cirksena is a 2011 graduate of the University of Maryland, College Park, where he studied economics. Since then, he has devoted his entire career to financial planning, distribution planning and managing client money. He first worked with multiple $1 billion teams at Morgan Stanley and independent firms, and eventually created his own independent services firm in MDRN Capital.
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