How to Plan for Your Retirement While You’re in Debt

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Whether you’re the kind of person who dreams of officially turning in your badge, or someone who loves to work and stay busy, most of us have one dream in common. We’d all like to reach a point in life where our financial needs are met and there is no need to work to earn money.
Planning for that time is smart, but not always easy. In the real world, saving for the future can conflict with meeting today’s financial obligations. It’s hard to decide whether to save money now or use it to pay down your debt.
Here are a few steps you can take to work toward both goals.

Planning for retirement when you have debt

  1. Take the match

First, if your employer offers a retirement savings match, take advantage of it. Otherwise, you’re walking away from free cash that will never be offered again. You can’t get those contributions back once you pass them up, so contribute just enough to get the match.
If you’re younger than 35, you can consider skipping this step and going straight to your debt payoff because your money will have time to grow.

  1. Pay off your debt and build your emergency fund

Second, if you’ve got credit card debt, student loan debt, a car loan, or other debt besides a mortgage, pay it off and then build an emergency fund so that you don’t go back into debt the next time a large expense comes up. You can’t effectively save for your future if you can’t afford to weather an emergency. Financial emergencies happen to everyone, so prepare for yours. Use budgeting tools or professional credit counseling to learn how to trim your expenses so that you can make extra payments and get out of debt faster.
Tackling retirement savings with gusto while paying off debt slows your progress toward both goals. Focus on the debt. One day, you’ll be able to total up your monthly debt payments and put the entire amount toward your retirement.

  1. Maximize retirement savings contributions

Third, save as much as you can for retirement. Get to this step as quickly as you can, because the earlier you save, the better. People who save early in life can reach a higher retirement account balance than people who start late, even if they stop saving decades before they retire. These charts from Vanguard show how it works. If you’re younger and your only debt is your home mortgage, start maximizing your retirement savings and make a commitment to yourself to leave the money alone until it’s time to retire.

Paying off debt is more important than saving for retirement for most people

One big exception to the debt-first rule is that if you’re already retirement age and you have credit card debt, don’t raid your retirement savings to pay it off. Talk to an NFCC-certified credit counselor to find out your options.
At any age, a mortgage, although widely considered to be the friendliest kind of debt, reduces the amount of money you are able to use toward other expenses each month. Don’t be afraid to accelerate your mortgage payments after you’ve paid off your credit cards, student loans, auto loans and other debt. Any interest you don’t have to pay on a loan is money in your pocket.
Planning for retirement means to create a situation in which you receive income without having to work, and that income is more than enough to cover your living expenses. Any debt you bring into retirement diminishes the power of your income to cover those day-to-day costs. Getting rid of debt first should be the highest priority for almost everyone.
Kimberly Rotter is a consumer credit expert and personal finance writer who often focuses on issues affecting people who are underbanked or just late to the financial game. She is a regular contributor to US News & World Report and the blog editor at Credit Sesame. She is a senior editor and fact-checker for many growing companies in the financial world. You can reach Kimberly through her expert writer group.