Should I Save for Retirement or Pay off My Debt?

Millions of people face a daunting question regarding their financial state: Should I save for retirement or pay off my debt? This post details what a person should do if they are struggling with debt payments and an anorexic retirement savings balance at the same time...

The following post is by MPFJ staff writer, Laurie Blank.  Laurie is a wife, mother to 4 and homesteader who blogs about personal finance, self-sufficiency, and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom and to a simpler, more peaceful life.

Millions of people face a daunting question regarding their financial state: Should I save for retirement or pay off my debt?

With the majority of adults being under prepared with retirement savings (CNBC) and a large number of adults (estimates range between 48% and 76%) living paycheck-to-paycheck (Motley Fool), it’s clear to see why the question isn’t an easy one to answer.

Most view it kind of like the chicken or the egg thing: Their monthly debt payments make an impact on how much money they’ll need in retirement, so they’d like to get rid of them. However, they need to have money in retirement to pay bills in the first place.

So, what’s a person to do if they are struggling with debt payments and an anorexic retirement savings balance?

Which is More Important: Debt Payoff of Retirement Savings?

If you browse online advice about which financial goal is more important, you’ll find a variety of advice. Dave Ramsey, for instance, says pay off all consumer debt before saving for retirement.

Other experts disagree and say saving for retirement should be a priority as well. However, since all financial situations are different, I believe the answer to the question posed above varies based on one’s individual situation.

Here are a couple of questions you can mull over to help you decide whether you should be paying off debt first or prioritizing retirement savings first.

Retirement Savings vs. Debt Payoff Decision Point # 1 - How Much Debt Do I Have?

The first question you should ask yourself is, “How heavy is my debt load compared to my income?” If you’re making $100k a year and have $30k in student loans and no mortgage payment, you should be able to both save for retirement and pay off your debt.

However, if you are in a situation where money is super tight because of your debt and you really do have to choose between the two, the debt should be the priority.

But, I’m talking about people with a super high debt-to-income ratio here, say if you have that same $30k in student loans, some credit card debt, and a $50k income. Add that amount of payments on top of rent or mortgage costs, and things are getting seriously difficult to manage.

A person in that situation would likely be better off going on a super strict budget diet, cutting out all unnecessary expenses, and putting every extra dime toward getting those debts eliminated.

After that, they’ll have freed up a lot of monthly cash which can then be funneled toward retirement savings.

Retirement Savings vs. Debt Payoff Decision Point # 2 - How Old Am I?

Your age makes a difference in the answer to the question too. A 30-year-old struggling to pay off debt can afford to delay retirement contributions for a few years until the debt is paid off, but I only recommend this if you are serious about getting the debt paid off as soon as possible.

However, a 50-year-old with little or no retirement savings and a lot of debt needs to be putting at least something toward retirement – even as they work hard to pay off debt.

A general rule for those, say, over 40 and having to make a decision to put money toward debt or toward retirement would be to contribute up to any available employer match but no more, with all extra monthly cash going toward debt payoff.

Taking advantage of that free money is vitally important if it’s an option. If it’s not, try putting away 2% or 3% each month into an IRA, even while you pay off debt.

After your debt is paid off, take all extra cash and get as close to maxing out your retirement contributions as possible.

Retirement Savings vs. Debt Payoff Decision Point # 3 - Get Real About Your Spending

If you’re in a situation where you are struggling with both retirement savings and debt payoff, the best advice I can give you is to get real about where your money is going.

It’s so easy to nickel and dime yourself into tens of thousands of dollars in debt i​f you’re not facing up to your spending habits.

In fact, my husband and I nickeled and dimed ourselves into over $60k in consumer debt with little, non-epic purchases over a number of years. And believe me, it’s a lot easy getting into debt than it is getting out.

So start spend-tracking and make yourself a budget. Be real with yourself about where your money goes each month and where you could cut expenses for the sake of creating a fantastic financial future.

Learn the difference between a need and a want, cut unnecessary expenses (don’t worry – it’s just for a time) and give your debt a serious beating. Then ramp up your retirement contributions so that you can do retirement on your own terms.​

Conclusions 

Ultimately, the decision between paying off debt and saving for retirement can be a tough choice to make. This perceived difficulty is compounded by the large number of often conflicting opinions available from different people. However, the key is to simply get started by considering a few of the guiding principles discussed in this post. You can always accumulate more momentum and knoweldge along the way.

***Photo courtesy of https://www.flickr.com/photos/shadowsofthesun/522177511/in/