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Retirement Planning

Should I Save for Retirement Or Pay Off Debt First?

Deciding if you should save for retirement or pay off debt first is a hard question to answer when someone is overwhelmed with debt.

Saving for retirement is a long-term commitment, one that you will absolutely need when you are older and unable to work.

Once upon a time, retirement savings were considered a priority over almost all other financial decisions. However, as most Americans become heavily indebted thanks to student loans, credit cards and whatnot, establishing a retirement savings fund has taken the backseat.

Most people believe that getting rid of debt, of any amount, should take priority over saving money. It certainly makes mathematical sense, but real life is not so clear cut.

A number of financial experts have tackled the issue over the years, and let’s look at their opinions to see which option is best— save for retirement, or pay off debts first and foremost.

Pay Off High Interest Generating Loans First

Debt situations differ from person to person. The indebtedness of one person could be better or worse compared to another.

Financial planner Erik Carter highly recommends people who have loans over a 5% interest rate to pay them off first. He points out that such an amount of interest on a loan cannot match the interest you can earn with a savings account. If your loans are low-interest incurring ones, you better start savings for retirement. Also, don’t forget to open a retirement fund soon as you pay off high-interest debt.

Even a Little Bit is Better than None

You may be nose-deep in debt, but you shouldn’t completely write off saving for retirement, says Chicago-based financial consultant Amy Podzius.

Retirement funds grow over time, and if you wait until you are debt free to start one, you might end up with very little interest earned. Therefore, Podzius strongly recommends setting aside even a little amount as soon as possible.

Ideally, people are encouraged to save at least 6% of their monthly income as needed. But, reaching that number is quite impossible when you receive a pile of loan bills every month. Regardless, most personal finance experts agree that putting aside even a dollar each month towards a retirement fund is better than doing nothing.

Don’t Overlook Your Employer’s Retirement Plan

If you are working for someone else, double check what kind of retirement program the employer is offering. Don’t ever forfeit the 401(k) match the employer offers considering your contribution to the plan. This is basically free money and if you opt out, you are essentially saying no to a load of cash. These guaranteed returns are highly lucrative and form one of the best retirement savings deals that you can get when in debt.

There’s no one size fits all model when it comes to this question. However, the expert consensus is that everyone is better off with a retirement savings fund than not. When you are in debt, the simple rule to follow is to pay off all high-interest incurring loans first, and then open a retirement savings account right away.

What do you think? Should you save for retirement or pay off debt first?

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Erin Thompson

Erin Thompson spent years managing her own blog about budgeting and debt. Because of that, she has great insights not only about managing spending and borrowing but also about running websites profitably. When she's not writing articles for us, she's traveling and looking for new types of wines to try.
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