Save For Retirement or Pay Off Debt?

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It’s the age-old question: Are you better off eliminating your debt or saving up for your future? Ah, if only there was a simple answer! Unfortunately, there’s no obvious choice between the two. However, you can decide which is better for you and come up with financial goals to further your fiscal future.

Why Not Just Pay Off Debt?

If you’re facing super-high interest rates, it’s only logical that you should knock that out before worrying about your savings. After all, you might earn a bit of interest in a savings account, but your debt could be racking up crazy interest every month you don’t pay it off in full.

However, simply focusing on paying off your debt leaves you unprepared to face an emergency. If you’re unable to work or just need to have some cash on hand for an emergency situation, you could be in big trouble without a savings safety net. Without some money saved up, you’ll only have credit cards, putting you further in debt. See the problem?

Why Not Just Save for Retirement?

Your credit cards come with minimum payments for a reason, and the rest of your cash should go into your savings, right? Wrong! Paying only the minimum balance and chucking the rest into savings can seem like a good idea, especially if you’re approaching retirement, but if you’re not careful, you’ll retire with debts.

Sticking with the minimum payment amount on your debts means you’re throwing away money at interest. You’ll never see that cash again. Here’s a fun factoid: Banks want you to pay interest. That’s where they make their money. By paying simply the minimum payment, you’ll wind up paying far more in interest than if you paid just a little extra each month.

Find Your Balance

Debt, much like juggling, is all about balance and manipulation. You’ll need to manipulate your finances to find the right combination of debt repayment and savings. What you do with your cash depends on what your debts are, how old you are and what your retirement savings goals are.

Remember, for most retirement accounts, you can only withdraw about 4% each year after retirement safely. If you go above that, you risk running out of money. That means that a retirement savings of $1 million only gives you about $40,000 a year to work with once you’ve retired. If you retire with debts, you’ll have to repay them from your hard-earned retirement fund.

The easiest and best route for most people is to balance between paying off debts with high interest rates and saving a moderate amount each month. Figure out your debt with the highest interest rate. Put as much money as you can toward that debt until it’s gone. Then, pick your next-highest interest rate and pay that off. Rinse and repeat until you’re debt free. While you’re doing that, make sure you’ve a) built up a short term emergency savings and b) contributed to your retirement account. Remember, even if you can only afford to set aside a little bit of money each month, that’s still better than nothing.

It’s also important to stop accumulating debt at some point. For many people, debt comes as a result of emergency spending. If you don’t have a short-term, easily accessible backup savings account, you’ll have no choice but to put any emergency expenditures on a credit card. This puts you further in the hole and can make it harder to dig back out.

If you’re serious about retiring with a decent chunk of change without debt, you need to focus on both sides of the equation. Come up with a financial plan, perhaps with the help of an adviser, and stick with it. It may seem challenging, but when you’re enjoying a debt-free retirement, you’ll be glad you did.

Carly Lance loves to blog about personal finances whenever she can. She also is employed as the blog and marketing manager at Personal Bankruptcy Canada, a company that deals with people going through bankruptcy in Canada.

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  1. December 10, 2012 at 11:29 am — Reply

    Good post. I think it does come down to a personal choice, though I’d tend to say that it’s important to get that debt paid off so you can throw more money at investing.

    • December 10, 2012 at 11:31 am — Reply

      I agree John. I went with a 50/50 type of method where I funded retirement along with paying off debt at the same time. It worked for me, but might not for everyone!

  2. December 10, 2012 at 11:41 am — Reply

    I think it ultimately depends on what type of debt you have. If you have a ton of high interest credit cards, then you should focus on those and hold off on saving for retirement. However, if you’re going to be in debt a long time (primarily due to student loans), then I think finding a balance is suitable.

    • December 10, 2012 at 11:43 am — Reply

      I agree. You have to find the right balance in order to make it work. If you don’t find the right balance, then you will be behind on something down the road.

    • Veronica @ Pelican on Money
      December 11, 2012 at 1:16 pm — Reply

      I’m with Jason on this one. If I had credit card debt I’d be worrying about paying it off right away. But with student loans it’s a “set it and forget it” type of deal with me. Good post Carly!

      • December 11, 2012 at 1:23 pm — Reply

        Thanks for the feedback Veronica. I appreciate you stopping by!

    • December 11, 2012 at 2:43 pm — Reply

      I was going to write almost exactly the same thing… I agree!

      • December 11, 2012 at 2:48 pm — Reply

        Thanks for stopping by Savvy. I appreciate it!

  3. December 10, 2012 at 12:44 pm — Reply

    I think it would be better to pay off your debts first. I agree to the other comments since you must avoid the high interest rates because after a year your debts will be a lot bigger. You can start saving after paying most of your debts.

    • December 10, 2012 at 1:11 pm — Reply

      You should definitely pay off your debts if you have a high interest rate. If you have a low one, then it might be better to fund both goals.

  4. December 10, 2012 at 2:00 pm — Reply

    I think that it is preferable to work on both at the same time. I definitely didn’t stop saving for retirement while we paid off our debts. Now I am glad because I didn’t miss out on those early years of compounding. Still, it is a personal choice.

    • December 10, 2012 at 3:07 pm — Reply

      I completely agree Holly. Thanks for the comment.

  5. December 10, 2012 at 3:23 pm — Reply

    I would prefer working on both at the same time, provided that the debt isn’t super high interest. If you’re carrying credit card debt at a 20% interest rate, that should be your main focus. If you have debts with interest rates in the single digits, I think you can safely pay off the debt and save at the same time.

    • December 10, 2012 at 3:25 pm — Reply

      Spot On! When I was doing it, I made sure to pay off my high interest cards, then I saved and payed at the same time.

  6. December 10, 2012 at 4:23 pm — Reply

    I have student loan debt, but will NOT forego my 401k match. Mathimatically, I could probably save some money up front on the loans, but with the litle that I am putting away, it’s wouldn’t be much, and I’d rather get a head start on my compounding interest.

    As far as consumer debt goes, I WOULD pay that off first, because things like credit cards usually have HUGE interest rates and ned to be squashed ASAP!

    • December 10, 2012 at 4:49 pm — Reply

      Nice points Jacob. You should employ a balanced approach if you have low-interest debts. Then you won’t be behind when you are done paying them off.

  7. December 10, 2012 at 5:02 pm — Reply

    Yes. So important to figure out how to make it balance in your life. I am putting most of my extra money towards repayment, but have my emergency fund fully padded and keep a bit extra just in case.

    • December 10, 2012 at 6:02 pm — Reply

      The emergency fund is very important. Without, you can be in a lot of trouble.

  8. December 10, 2012 at 7:53 pm — Reply

    I’m probably do a little of both (pay off the debt and save for retirement). Thankfully all my student debt is paid so I don’t have to choose. Now it’s just a matter of deciding how much to save for retirement. Nice post!

    • December 10, 2012 at 11:13 pm — Reply

      Thanks for your feedback KK. I think you are on the right path, so good luck with it all!

  9. December 10, 2012 at 8:44 pm — Reply

    Great Post. If it were me, I’d get rid of the debt as fast as I could then focus on investing. That’s just what would make me sleep better at night.. it’s a personal thing I guess.

    • December 10, 2012 at 11:13 pm — Reply

      Thanks Mr. CBB. I know what you mean in regards to it being a personal choice. You have to choose what will work best for you and what will allow you to “sleep at night”!

  10. December 10, 2012 at 11:42 pm — Reply

    I have always done both, so as not to miss compounding interest. If you have high interest credit card debt, that would be my first priority, though.

    • December 10, 2012 at 11:43 pm — Reply

      Your advice makes complete sense. Sometimes we can have tunnel vision and only think about paying off the debt, but we also have to save.

  11. December 11, 2012 at 5:50 am — Reply

    I hate knowing that I have such a large mountain of debt and so I prefer to pay it down as fast as possible just so I feel like I have a little more freedom in my life.

    • December 11, 2012 at 9:58 am — Reply

      There is nothing wrong with that Glen. If you need to get the debt paid off, then that needs to be your goal.

  12. December 11, 2012 at 3:31 pm — Reply

    Funny. People look at a million dollars and think it’s a ton of money. Once people see your 4% number and realize how little that provides (and in future inflated dollars, too!), they realize just how much savings they’ll really need.

    • December 11, 2012 at 4:15 pm — Reply

      I agree Joe. 1 million is no longer as much as it once was, so we have to start saving for a higher goal.

  13. December 11, 2012 at 8:44 pm — Reply

    I balance debt payoff with retirement savings, although my first priority was paying off the credit card debt. Once I did that, I moved from 100% debt payoff to 50/50 with student loans and retirement. Once the student loans are gone, I’ll definitely be sending more to the retirement accounts!

    • December 11, 2012 at 9:38 pm — Reply

      That sounds like a good system. I wish you luck on clearing out your student loans and then building your retirement.

  14. December 12, 2012 at 12:08 pm — Reply

    If you’re heading towards retirement with debt, it’s not a bad idea to look around and see where you can downsize. If you can do with a smaller home or just one car, downsizing can help you put your extra money towards debt payoff and retirement savings.

    • December 12, 2012 at 12:12 pm — Reply

      I completely agree with this comment. If you are close to retirement, then you need to get the debt off the books.

  15. December 12, 2012 at 2:02 pm — Reply

    My angle on debt has always been to work it down to a fixed interest rate that is below any reasonable rate of return on an investment. By doing so, I know that there is no longer any rush to pay things off as long as I use any extra money to invest in things that can yield me a greater rate of return.

    • December 12, 2012 at 4:06 pm — Reply

      That is an angle that I can appreciate. Thanks for sharing.

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