Saving for Retirement While Paying Down Debt
When faced with two big financial priorities, such as paying
off old debt and saving for retirement, it can be easier to focus on just one.
For people repaying student loans for themselves or their children, for
example, 38% weren't able to put money away for retirement, according to a 2015
survey from the National Foundation for Credit Counseling and NerdWallet. But
there are ways you can contribute to retirement savings even while paying off
student or other debt.
Neglecting either one can be a losing proposition. If you
focus just on repaying debts, you can lose out on potential investment returns
from money placed in a retirement account. On the other hand, you don't want to
pay more interest on debt than you need to. So here are some steps to help you
save while reducing what you owe.
Step 1: Pay at least the minimum on debts consistently
Missing a loan or credit card payment can cost you in extra
interest, fees and a dip in your credit score, so make sure to pay at least the
minimum required amount each month to avoid this. That said, don't go overboard
in paying at this point. If you rush to erase the debt as fast as you can, you
might miss out on potential long-term gains from investing your money now.
Step 2: Save in a 401(k) up to any match, or set up an
alternative
If your employer offers a 401(k) or similar retirementsavings plan and will match part of your contributions, put in at least enough
to gain the maximum matching amount. Also see how you can invest the money. For
example, $10,000 invested to produce an 8% annual return — the average over the
past decade for the Standard & Poor's 500 Index of large U.S. stocks —
would grow to more than $100,000 over 30 years. If you're young enough, you can
let your money compound for decades.
If you don't have access to a 401(k), consider setting up a
Roth IRA. The annual maximum you can put in is $5,500, or $6,500 if you're 50
or older. A Roth IRA lets your money grow tax-free.
Step 3: Focus on paying off debt
Once you have started setting aside some money for
retirement, you can turn your attention back to reducing your loans or credit
card balances. By paying off more than the minimum each month, you eliminate
your debts faster and cut the interest you end up paying.
As you manage these two goals, remember to build an
emergency fund as well, so that you have ready cash to cover unanticipated
expenses. If you don't, you might end up back in debt or draining your savings.
By following these steps, you can avoid having to choose
between your retirement goals and paying off debt. Taking advantage of the
opportunity to save money now and to reduce debt can help you improve your
financial life for years to come.
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