Should You Save for Retirement or Pay Off Debt?

January 10, 2014

pay off debtShould you save for retirement, or pay off debt? Tough question.

Living in the shadow of debt can be frustrating and difficult. As a result, many are anxious to get rid of debt as quickly as possible, choosing to tackle the debt before they start saving for retirement.

This might help you feel better, but does it always make sense?

High Interest Debt vs. Low Interest Debt

My mom once asked me why I hadn’t started destroying my student loan debt at a faster pace. My husband had just finished his Ph.D. and was making some money as an adjunct. My freelance business was doing well. Shouldn’t we be on track to be rid of student loan debt in almost no time?

I told her that I was fine with the situation because I was boosting my investments. With my student loan interest rate below 2%, any extra money had better potential earning the greater returns that come with investing. Plus, student loan interest is tax-deductible.

My reason for not being fussed about paying off my mortgage early is similar. Why should I? I’ve got a low rate and a tax deduction, and that money is better put to use with investments.

High-interest debt might be another matter, though. When you’re paying 15.99% APR on credit cards, you aren’t likely to make more with your investments. It can make sense to put a little more effort into paying down your debt in those cases, since there aren’t a lot of advantages to high-rate consumer debt.

Long-Term Retirement Accumulation

Even if you have credit card debt, though, it might still make sense to divert some of your intended debt reduction payment toward your retirement account. This is just so that you can put the power of compound interest to work on your behalf. The longer you put money in, the better off your retirement account is.

This is especially true if you work for a company that offers a matching contribution. That’s free money that you can use to help fund your retirement. Perhaps contribute as much as you can to get the match, and then use the rest to pay down the credit card debt. Once the debt is paid off, you can boost your retirement account contribution, and pick up the pace, partially making up for lost time (although it’s difficult to ever truly make up for the lost time).

Of course, this means that you might be in debt longer, and that you pay more in interest than you would like. It can be a result that you might not be willing to live with.

Over time, you might still benefit from putting a little bit in your retirement account, even though you still have high interest debt – it depends on how much you have, and what it’s costing you.

What do you think? Does it every make sense to contribute to your retirement when you have debt hanging over your head? Leave a comment!


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Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

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One Response to Should You Save for Retirement or Pay Off Debt?

  • krantcents

    No question! Do both. You can make your payments and still contribute to your retirement account even a small amount and add to it later.