The Single Best Retirement Savings Strategy for Credit Card Users

Experts recommend saving at least 15% of your gross income for retirement. That means, for every $10,000 you earn annually, the recommended contribution would be $1,500. And while some Americans may breeze past 15% to higher percentages, plenty of others are struggling to contribute even half the recommended amount.

For those who use cash back credit cards, however, there might be another way to contribute to your golden years. You can use your cash back to invest for your retirement. While investing your cash back in this way may not seem substantial, it can grow to a surprisingly large amount over time, as I'll show below.

How to turn your cash back into an investment for retirement

Most credit cards let you transfer your cash back into a checking account for a 1:1 conversion. In other words, if you have $100 in cash back, you can transfer it to a linked bank account without any devaluations. This isn't always true for rewards credit cards, especially travel cards that give higher valuations when you redeem miles for travel, but many cash back cards give this option without much hassle.

If your credit card lets you deposit cash back or rewards into your bank account, you can then transfer the amount to a brokerage account. Depending on your risk tolerance, you could then invest it in different securities, like stocks and ETFs. For example, you could invest it in an index that tracks the S&P 500. Considering that the S&P 500 has had an average annual return of 10% for the last 50 years, you could grow these small contributions into a sizable sum before retirement.

For example, let's say your monthly expenses (excluding rent and mortgage payments) equal $2,000. Let's also assume that you have a credit card that earns 2% back on all expenses. Earning 2% back on $2,000 in monthly expenses would leave you with $40 each month. If you invested $40 monthly into an index that averaged an annual return of 10%, you would have $212,444 after 40 years of investing, according to the compound interest calculator on investor.gov. That breaks down to $19,200 in contributions and $193,244 in interest.

Is $212,444 enough for retirement?

With inflation, probably not.

That said, if you could contribute $60 of your own income -- for a total contribution of $100 -- you would have $531,111 under the same conditions outlined above. That's still not as much as most Americans expect they'll need for retirement ($1.46 million, according to the Northwestern Mutual's 2024 Planning & Progress Study). But you wouldn't be far from the current median.

In fact, in 2022, the median retirement balance for those in or near the age of retirement (65 to 74) was $200,000, according to retirement research by The Motley Fool. If we assume an average annual inflation rate of 2.5%, then 40 years from now $531,111 would be worth about $197,802 in today's dollars.

That said, let's not stray too far from the point, which is that investing your cash back for retirement can help you grow your nest egg. While you probably don't want to rely solely on credit card rewards to save for retirement, using cash back for this purpose can bolster your current contributions. Of course, you'll want to pay your cards in full and on time to avoid paying credit card interest. If that's your current practice, consider investing your rewards for the future. Who knows -- by the time retirement rolls around, you might have grown your rewards tenfold.