Opinion: Should You Save For Retirement or Pay Off Debt First?

My only thought regarding saving for retirement first would be if your student loans were consolidated at an extremely low rate and you were able to deduct student loan interest on your tax return.

You need to be maxing out your 401k match. That goes without saying. Taking that few percent and throwing to debt is leaving free money on the table. Always save the most you can on your 401k.

Next, your IRA accounts have a definite max you can apply in any one year. At age 49 and below that is only $5k. The younger you are the more powerful money saved is to you. Admittedly, if you pay the 5k you might not have much left over to put towards debt, but you will never be able to contribute that $5k again. And there isn’t much opportunity in later years to “catch up”.

It’s a bit of a juggling act, but you really need to both save and pay down debt. You should max your retirement contributions, and still have a good plan to pay off your debts.

No matter what, I make sure each year that a set percentage of money from my paycheck is invested into our company’s 401k. I don’t even think about that money and don’t consider it part of my paycheck. So ignoring that investment, I think it’s most important to pay down debts, especially credit cards. There’s no point in investing in something that will earn you 5%, when you’re losing 20% each month in credit card interest.

Saving and paying off debt should occur no matter what. Like others, i allocate some of my paycheck to my 401k, and don’t even consider it part of our budget for expenses. What’s left goes into expenses and debt. If you had to choose one over the other, then debt should go first; the interest on debt is so much higher than what you could *potentially* earn from savings that you’d be paying that off for a very long time.

I am currently in the process of doing both. I recently graduated college and finally have a “real job” (Salary and benefits). I owe probably close to 6k in loans(student loans / private). I currently live with family so don’t have that much in the way of expense but I do have to pay for basics (car, phone, insurance).

I’m using the 60/20/20 rule. I save off 20% into an “emergency” / investment fund. Then use the the rest to spend on my “bills” ( I include the loan payments in this category). After I pay off my loan debt I’m going to take the money I’ve been paying in loans and take half of it straight to savings 401k. I’d like to be able to contribute more now but I think that while I’m saving up I’ll be able to turn my emergency / savings money into CD’s and invest into my company’s 401k.

fortunately I stayed away from credit cards and don’t have any credit card debt. It makes me want to cry when I looked at my student loan payment schedule and it has it schedule out for 7 years and I would end up paying another 3k in interest payments. I’d rather keep that 3k and get it locked into a CD where I get to get paid for my money.

I think the choice is not that clear cut since it depends on a lot of different things. For example, if your employer matches your 401k contributions you have to look beyond actual percentage rates. If the employer matches your contributions dollar for dollar, it would even make sense to add to retirement savings rather than to pay off a credit card with an 18% interest rate. Having said that, we need to add the psychological set-up, too. If your credit card balance gives you sleepless nights, it may be better to forgo a 1 for 1 match and pay off the credit card instead. In such a case the objectively “right” thing to do may not really be the right thing for such an individual.

I agree with the general idea- though it depends on your interest rates and whether your retirement is being matched by your employer. I suppose if you’re hard core you should sit down and do projections for your debt and savings calculating over the next x number of years what the net result is and figure out the right balance. Sounds like the word problem from hell. Putting off debt will just cause it to grow on the other hand retirement investments at a younger age will go much further.

I cut back my 401K contributions in the past year to concentrate on debt elimination. Once all non-mortgage debt is paid (12/11 is plan) then I’ll max out retirement savings.

I believe that if your company is matching your 401k, you really have to try to put money into retirement before paying off your debts. That is, unless you have VERY high interest rate debt, or if the debt is so large that you may worry about not being able to pay your bills each month.

The sooner the better. The earlier you start saving, the more money you’ll have for retirement. Don’t put off maxing out your 401k match to pay off debt. You could be debt free with little to no savings and not be able to retire.

Gina, the match is low at my company (10 cents on the dollar up to 8%)that it seemed like I wasn’t losing money compared to paying interest.

It’s only for a couple of years and then big time retirement savings will start.

Why just the “non-mortgage” debt? I’ve been crunching numbers and doing some thinking recently about applying a theory like this to our mortgage (which is our only debt). The amount of money to be saved by making extra principle payments each month is staggering.

Well, it depends on a lot of things. What kinds of debt are we talking about? Student loans? Credit cards? Mortgages? Business loans? What about age? How close you are to retirement? And a lot of people mentioned a very good point about company matching 401 (k) contributions. To me, if the company that I work at offers matching 401(k), then I will put in the max amount. Then I will pay off the debt, of course the ones with the high interests first.