The question of how one invests in a retirement account while carrying a debt burden is becoming more common. According to a survey by Fidelity Investments, almost half of all baby boomers will retire with debt. Today, the average American carries $15,000 in credit card debt alone. While saving towards your future does become more complex with debt, knowing what you’re retirement needs are and understanding the nuances of your debt profile can help you to create an optimized savings plan that is right for you.

What is your Retirement Objective?

Without knowing your retirement needs, it will be difficult for you determine if you should pay off existing debt or invest your capital in a retirement plan. One of the biggest risks investors face is running out of money in retirement. To minimize this risk, there are a number of factors that you should consider when developing a retirement plan.

Starting with crucial questions related to life expectancy (how long will your retirement investments need to last?) and minimum cash distributions (how much will you need to withdraw each year during retirement?) is a good place to start.

The more thought and attention you give to your retirement needs, the better prepared you’ll be to plan for the future.

Debt vs Retirement: What Should you Consider?

While you should discuss your individual retirement goals with a financial advisor, there are some fundamental considerations related to the structure and cost of your debt that can further inform your decision to pay off debt vs invest in retirement.

Interest Rates: The cost of carrying debt is an important consideration when determining your ability to contribute towards retirement. If you’re carrying high balance, high-interest rate debt, the monthly cost of that debt will be high and it may be prudent to pay down that debt as soon as possible.

Taxable Income: Contributing towards tax-advantaged retirement accounts such as 401(k)s and IRAs allows you to enjoy tax deferred to tax-free growth on your investments. As a result, it may be more advantageous to contribute towards a retirement account in lieu of paying down debt. To get a sense of what this will look like for you, you’ll need to consider your proposed yearly retirement investment and compare that to your yearly cost of carrying debt.

Priority Debt: Paying down credit card debt and other high-interest revolving debt should take priority over mortgage debt. Paying down credit card debt creates available credit for you to use in the future and lowers your overall interest profile. If your debt is only comprised of a low-interest mortgage, making contributions to a retirement account can take priority over debt reduction.

Age: The closer you are to retirement age, the more crucial it is for you to make contributions to your retirement fund.

Contribution Matching: In addition to the tax advantages of retirement contributions, many employers offer 401(k) matching. If your employer offers a matching program, depending on your income, those matched contributions could make up for the interest you’d otherwise accumulate on your standing debt.

Along with these considerations, it’s important to know that help is available should you need it. Don’t be afraid to reach out to legitimate credit counselors and financial advisors and form a plan before it’s too late.

Actionable Ways to Contribute to Both Debt & Retirement

Bonuses & Unexpected Cash: Next time you unexpectedly receive a bit of additional cash, split it down the middle. Put half of it towards your debt and the other half into a retirement account.

Slash Current Expenses: If you’re in debt, you’re probably very aware of your unnecessary expenditures, but dig even deeper. Even cutting an additional $50 per month can help reduce debt and boost retirement accounts.

Find a Side Job: While working a side job is not glamorous, it can rapidly move the needle on your current debt and allow you to contribute to a retirement fund sooner.

Contributing to retirement when you’re in debt is difficult.  But it is possible. Keep hustling so you can retire and live better well into old age.

Not Sure How to Start Investing?

I opened up my first investment account back in 2012 after paying off a lot of debt. That account was with Betterment. Since then, I haven’t looked back. I love the simplicity and ease of use they provide. I think their system is good for any type of investor. If you want to get into investing, check out Betterment.

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  1. Contribution matching plays such a MASSIVE role in the comparison from a purely financial perspective. Matching pensions contributions can be more profitable that paying down debt, even at insane interest rates (40%+). This doesn’t seem intuitive at first, but we ran some numbers at Pay Down Debt vs Retirement which you might find interesting.

    As with everything in personal finance, the best result option will be personal for each person dependent on their individual situations. To work this out, everyone has to do their own maths (unfortunately for the math haters!!!)…

  2. Solid advice here! I think you make a great point that not all debt is created equal–prioritizing high-interest debt is paramount whereas mortgage debt can usually wait. And, contributing to an employer-matching 401K is almost always the right decision. I’m thankful that we’ve never had any debt other than our mortgage and, since we have such a low interest rate on it, we’re not paying it off ahead of schedule.

  3. We had to stop contributing to our retirement 401K as we paid off our credit card debt….but luckily my employer contributes a certain percentage of my salary even if I contribute nothing. So, at least it was growing a little bit….

  4. The contribution matching is the number one thing to look at. If your employer matches, say 2% for your first 2%, that’s a 100% immediate return on your investment. You can’t beat that on paying down your debts. The overall goal is to improve your net worth, and if you look at it that way, then more often than not, contributing up to a matching contribution point will achieve that.

  5. Deciding to invest when in debt is a tough call. I’d second the other comments to contribute up to any employer match and then it would depend on how long it would take to pay off the debt. If you could do it in less than I year, I might throw everything at it. Any longer, I’d hate to miss years of compound interest.

  6. I think it is important to contribute to a retirement plan when in debt even if you are young. When young you have the biggest benefit of all – time. You can put a little bit into your retirement plan and allow compound interest to work its magic.

    No matter what your age or how much debt you are in, you should still save for your retirement.

  7. Great post! I actually read a book recently which you may find interesting called “Build Wealth and Spend It All” by author Dr. Stanley Riggs. I finished it truly feeling like I have learned invaluable lessons about the future of my families finances. Most people are so hung up on retirement and how much money they will end up with, they don’t take stock of what to do with it along the way. Dr. Riggs offers very down to earth advice and planning for the everyday person to not “get rich quick” but instead to build wealth…which is much more valuable in the long run.

  8. I can’t wait to read your review on “Build Wealth and Spend it All”! Its on my “to read” list as we speak. I better get readin! I just finished ‘The Annuity Stanifesto’ ( by Stan Haithcock and can’t recommend it enough. Lots of information squeezed into a quick read regarding the complex and controversial world of annuities. I finished it feeling motivated to research my options. I even reached out to Stan via his website and hope to get some help in the future. Would love to see a post from you on the topic. This book has my head spinning with the possibilities!

    1. It’s an interesting read for sure. It goes against what many will tell you, but I like the ideas behind it. My review will be coming out in January.

  9. This is such a helpful post because it’s hard to decide what order to tackle financial goals in. Paying off high interest debt is a priority for sure. Also, getting the maximum match out of employer contributions is so important. Sometimes young people especially fail to get this “free money” because investing in retirement feels irrelevant and boring. But that 2-3% match will grow a lot over time!

    Our only debt at this point is the mortgage so we aim for contributing 15% of income to retirement. Sometimes we just want to knock out the mortgage, not so much because it makes the most sense mathematically, but being free of that expense would increase our flexibility and that is very appealing to us.