Pay Off Debt or Save for Retirement?

Written by , March 2, 2011

Pay Off Debt or Save for RetirementThere’s no doubt that saving for retirement is one of your most important financial concerns. But when you are struggling with debt, finding a way to put money away for something that won’t be happening for years often takes a back seat. This leads to an age-old dilemma: should you pay off your debts before you worry about saving for retirement?

Financial advisors hear this question all the time, and there is no one-size-fits-all answer. When deciding whether you should focus on your debts or your retirement fund, ask yourself these questions. Your best course of action will depend on your individual financial situation, and you should reevaluate your situation periodically to make sure you’re still on track.

Here is some advice to consider about paying off debt or contributing to your retirement:

  • How Much Debt Do You Have? If you have so much debt that you can barely make the minimum payment, or worse, you’re missing payments, then paying it down should certainly be top priority. Making only the minimum payment will ensure that you stay in debt for many years to come, and if you keep incurring late charges and missing payments, you’ll never get ahead.
  • How Much Interest are You Paying? If you have a lot of high-interest debt, you’ll save more by paying it off than you’ll earn by investing money for retirement. But if your only debt is a low-interest mortgage, you would be better off concentrating on building a retirement fund than making extra payments.
  • Are You Doing All You Can to Minimize the Interest on Your Debt? You can get better interest rates by taking out a home equity loan or transferring balances to credit cards that offer an interest-free introductory period and lower interest thereafter. And if you have an unmanageable amount of debt, there are credit counseling programs that might be able to help you get lower interest rates and more manageable payments. By doing what you can to pay less interest, you free up more money to put toward retirement.
  • Does Your Employer Offer a 401K Contribution Match? Most will match all or a portion of your contribution up to a certain percent. That’s basically free money for you to invest in your retirement, so it’s wise to take advantage of it if at all possible. The money will be taken out of your paycheck before taxes, so you’ll probably never miss it.
  • What are the Tax Implications of Paying Down Your Debt Versus Saving for Retirement? The answer to this question varies according to your retirement plan and type of debt. Putting money in a retirement plan usually offers tax advantages. Putting it toward paying off your mortgage reduces your mortgage interest, but it also reduces your tax deduction for that interest. This can be a tricky question, so you might want to discuss it with your accountant.
  • Deciding whether to pay off debt or save for retirement isn’t always easy. But you don’t necessarily have to. If you’re not in debt up to your ears, it is possible to do both at the same time.

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    One Response to “Pay Off Debt or Save for Retirement?”

    1. Peter Paul says:

      True. Depending on how much debt one has, one should decide which is best. You should discuss things clearly and weigh your options carefully.

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