Debt Repayment vs. Retirement Contributions : A sustainable, customized strategy that balances both will serve you best
Another common question we hear is, “Should I prioritize paying down debt or focus on saving more for retirement?” It’s a smart question – and the answer is rarely black and white. Today’s financial landscape, shaped by high interest rates, inflationary pressures, and competing demands, makes this balancing act especially challenging.
For many in their 30s, 40s, and early 50s, financial obligations span mortgages, student loans (either personal or for children), and rising consumer debt. Credit card interest rates are now averaging over 20 percent, while nearly half of Americans in this age group are behind on their retirement savings.
Despite this, it’s absolutely possible to make progress on both fronts. Start by contributing enough to your employer-sponsored retirement plan to capture any available match. That match is an immediate return – often 50 to 100 percent – that no investment can reliably outperform.
Next, tackle high-interest debt aggressively. Paying off credit cards and personal loans not only reduces your liabilities but delivers a guaranteed return greater than most traditional investments. At the same time, continue making steady retirement contributions and increase them incrementally as debts are paid down.
Tax advantages also play a significant role. Contributions to traditional retirement accounts reduce taxable income, providing an immediate benefit. A $10,000 contribution could reduce your tax bill by $2,400 if you’re in the 24 percent bracket – making those dollars work harder for you.
Emotions matter, too. For many, the burden of debt creates mental and emotional stress that can affect financial decisions. In these cases, prioritizing debt reduction – even if it’s not the most mathematically optimal route – can improve overall financial well-being.
An Example
Consider the example of a couple in their early 40s, earning a combined $130,000 annually. They have a 3.5 percent mortgage, $18,000 in credit card debt at 22 percent, and student loans at 6 percent. They’re contributing just enough to their 401(k)s to get a 4 percent match.
We might recommended they raise their contributions to 8 percent, pay off the credit cards within 12 months, and gradually increase retirement savings by 1 percent every six months once the high-interest debt was gone. Within three years, they were debt-free (aside from their mortgage), saving 15 percent of their income, and solidifying habits that set them up for lasting success.
The takeaway? Retirement savings and debt repayment aren’t mutually exclusive. A sustainable, customized strategy that balances both priorities will serve you best.
A Cohesive Strategy
The road to retirement will have twists and turns, shaped by market dynamics and personal milestones. A well-designed, flexible plan that adapts to your life and priorities is the best way to stay on track. Whether you’re in your 30s, 40s, or early 50s, now is the time to make strategic choices that will build confidence and resilience in the years ahead.
Let’s continue building your path to retirement – with confidence.
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