Should I Pay Off My Debt Before Saving for Retirement?

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Some people will say it's better to pay off debt before saving and investing your money. But it can make sense to do both at the same time.

The reason people advise you to pay off debt before saving and investing your money is a logical one. It's a matter of weighing interest rates. As of 2019, the typical American is paying about a 15% annual percentage rate on credit card debt. Pay the debt off and you've just gained the 15% you had been losing. If you think of paying off debt as an investment, you just got a 15% return on your investment. This is pretty good in any market. So it makes sense to put all your money toward that until the debt is paid off and you can find some real return by investing elsewhere.

A debt payoff calculator can help you see how much you may be able to save on credit card interest payments over time if you make extra payments on your debt obligations.

Why Common Sense Doesn't Always Make Sense

People don't always behave logically. If we did, most of us wouldn't carry so much debt in the first place. If you wait to pay off debt before saving for retirement, but then never manage to pay off the debt, one day you may realize it's time to retire and you are completely unprepared. And, perhaps, still in debt. This is a position many 50-somethings and even 60-somethings find themselves in these days. They are having to plan for retirement at the last minute, 

Also, some years your investments might return a lot more than 15%. Some years will be less, but if you stay invested for the long-term and keep making regular contributions, your money should at least see some growth and outpace inflation. Historically, the stock market has returned around 10% a year on average. Plus, your money compounds in a tax-deferred investment account such as a 401(k) or IRA, so it can grow even more quickly. Missing out on one or two great years could make a big difference in your total savings.

To be sure, debt can grow just as quickly if you shift some money to investing. But realistically, you may be in and out of credit card debt many times throughout your life. If you are paying off the debt and simultaneously saving for retirement, you should end up on stronger footing than you otherwise would be.

When Saving for Retirement First Is the Obvious Choice

Saving for retirement regardless of debt is a no-brainer if your employer matches the contributions or a portion of the contributions that you make to your 401(k). With a 401(k) match you are getting an instant return on your money. Think of it as a bonus or a pay raise. It's easy money. So save at least up to the amount your employer will match, typically anywhere between 3% to 6% of your salary. An exception to the rule is if you plan on leaving your employer prior to being vested in those matching contributions.

Saving for retirement is a no-brainer anyway. Debt and retirement savings are two different things, so why consider debt in your decision to contribute to a 401(k) or IRA retirement plan? Whether you have an employer match or not, you have to take responsibility for your future retirement needs as well as your current financial needs. A retirement plan should be as much a part of the budget as your rent, car, cellphone, and cable. Debt may come or go, but retirement should always be a priority.