When my husband and I got married, we had more than six figures of debt between the two of us. We both had student loans and a bit of credit card debt, and I still had a loan on my car. We’re certainly not alone in this – data shows that about 43.2 million borrowers have federal student loan debt, while many others have private debt.

One of the most common questions among people with significant debt is whether it’s better to pay off debt or save for retirement first. The short answer is you don’t have to choose between the two. Instead, you can save for retirement while you pay off debt. It’s important to understand the most strategic way to do so to help you save money in the long run.

 

Should You Save For Retirement While Paying Off Debt?

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Should you pay off debt or save for retirement?

When ic comes to paying off debt or saving for retirement, you don’t necessarily have to choose. While many people feel an emotional burden from debt and want to pay it off as quickly as possible, it’s not always as simple as that. In most cases, it’s probably in your financial best interests to do both at the same time.

Of course, there’s plenty of caveats to that advice. I’m always hesitant to throw around the word “should” when it comes to personal finance, because it’s just that – personal. The right advice for one person is rarely the right advice for everyone. Because of that, I think it’s important to discuss some different factors and strategies to keep in mind when deciding on a plan for your debt and retirement.

How to pay off debt and save for retirement

Contribute enough to get your employer match

Many employers offer to match up to a particular percentage of your income that you contribute to a company 401(k) plan. For example, your employer might say they’ll match the first 3% or 6% of your salary that you contribute.

This match is free money and could equate to hundreds — or more likely thousands — of dollars per year.

Not only is your employer match essentially a 100% return on your investment, but it’s also a part of your total compensation. Turning this match down is essentially asking your employer to reduce your annual pay.

If your employer offers a 401(k) match, make this your first priority. Depending on the type and interest rate of your debt, contribute just enough to get the employer match. You can always increase it later when your debt situation is different.

Pay off high-interest debt

The interest rate on credit cards is brutal. According to the Federal Reserve, the average credit card interest rate in late 2023 was 21.47%. And it’s likely to be even higher if you’re still working to build your credit. Interest this high makes it incredibly hard to pay off debt. You find that each month, most of your money is going toward interest, and barely any of it is going toward the principal balance.

And it’s not just credit cards with high interest. I’ve seen plenty of student loans, car loans, and personal loans with interest rates above 12%.

If you have high-interest debt (which could be anything above 6 or 7 percent), you may want to prioritize that before increasing your retirement savings. With more money available in your monthly budget, you can pay well above the minimum payment and pay it down a lot faster than you otherwise would have.

The reason to prioritize these debts above saving and investing is that the interest rate on them is higher than the rate of return you’re likely to get in your retirement account. If your retirement account is seeing an 8% return rate and your debt has an interest rate of 20%, you really aren’t making money — you’re losing money.

Read More: How to Pay Off Credit Card Debt Fast

Consider the interest rate of your debt

Once your high-interest debt is gone, you’re probably left with student loans, car loans, or a mortgage. Once you get to this point, it can be a good idea to increase the amount you’re contributing to your retirement accounts.

Why?

Because, at this point, the rate of return you can get on your investments is likely higher than the interest rate you’re paying on your debt. If your retirement account sees an average 8% return and your student loans have a 4% interest rate, you’re making more on your investments than you’re losing on loan interest.

For each individual debt, consider the interest rate. Is it higher or lower than the average stock market return (which has been about 10% annually over the past century)?

Another reason to save for retirement if you can — retirement accounts are tax-advantaged. Depending on the type of account, this means that you either aren’t paying taxes on the money you contribute or you contribute money post-tax and then won’t pay taxes when you withdraw it. 

Read More: Debt Snowball vs. Debt Avalanche: Which Debt Payoff Strategy is Right For You?

I do want to acknowledge that there’s an emotional component to paying off debt. Regardless of the interest rate on your debt, it may be weighing on you too much to prioritize investing, and that’s okay.

Personal finance isn’t always about doing the thing that will get you the best return in the long run. Sometimes it’s about doing the thing that will bring you the most happiness and peace of mind.

Next steps to help you save for retirement while paying off debt

So you’ve decided that you want to contribute to retirement while paying off debt. Great! But where do you start?

First, sit down and look at your monthly budget. After you account for your monthly bills, how much is left? Once you know how much money you have to work with, treat both your retirement savings and your debt payoff as line items in your monthly budget.

Deciding how much to contribute to each is up to you. But there are a few tools I recommend to find some guidance in this area:

  • Undebt.it: This debt payoff tool allows you to add all of your debt accounts, and then it helps to design a debt payoff plan for you. It helps determine which order to prioritize your debts in, and then shows you how quickly you can be debt-free depending on the amount you put toward debt each month.
  • Empower Retirement Planner: There are plenty of retirement calculators out there, but this one is my favorite. You input information such as your annual income, current retirement savings, age, and desired income during retirement. Then it tells you whether you’re on track to reaching your retirement goals and how much you should contribute each month to get there.

Final thoughts

One of the reasons it’s so hard to find the perfect personal finance advice is finances are just that — personal. What works for someone else may not exactly work for you, and vice versa.

That’s why it helps to look for general guidelines, and then you can adapt them to fit your specific situation.

Debt and retirement, in particular, are some of the more stressful financial topics we all face. You want to make sure you’re putting enough money toward each while still having money in your budget to enjoy your life.

Trust me, I understand the struggle!

I talk to so many people who want to know if they should save for retirement or pay off debt. And as you can see, you can do both!