Cut Debt Now, Save Later

Sometimes whittling down credit-card balances trumps saving for retirement.


Who: Ron Jones, 42

Where: Annapolis, Md.

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Question: Should I focus on paying off debt or saving more money for retirement?

Ron wants to do all he can to make sure he's financially secure after he leaves the military in about eight years. Currently a critical-care nurse at Malcolm Grow Medical Center at Andrews Air Force Base (the home field of Air Force One), he hopes to quit his job entirely or work only part-time once he's a civilian. Understandably, Ron is worried that he isn't socking away enough. He also frets over $40,000 of credit-card debt, which he says mushroomed because of legal expenses involved in a divorce. "I'm torn between saving for retirement and paying off my debt," says Ron.

That's a decision that many people wrestle with in their peak earning years. Some are fortunate enough to be able to save for a lengthy retirement while avoiding debt. But for most people, day-to-day life gets in the way. Ron has remarried and has four boys -- one from his first marriage and two plus a stepson from his second -- so his expenses won't shrink for a long time. He won't be able to ramp up retirement savings anytime soon.

His savings decisions so far have been sensible. He puts 10% of his income into the federal Thrift Savings Plan, which operates like a 401(k) for federal workers. Contributions are pretax. Earnings grow tax-deferred; taxes are due when money is withdrawn from the plan. Ron has roughly $40,000 in his TSP, with about half invested in stocks of large U.S. companies, one-fourth in international stocks, and the rest mainly in shares of small and midsize companies. He also has two Roth IRAs, which hold $20,000 in funds at Vanguard and Dodge & Cox. He contributes $1,000 a year to each Roth.

Trouble is, no matter how well his funds do, Ron won't have enough money in eight years to be set for life. The good news, says Ron, is that he has stopped using his cards and has found favorable, low-rate credit lines via cards from the Pentagon Federal Credit Union and elsewhere. The mission now is to chop off principal. "Debt is like a monkey on your back," says Karen Lee, a financial planner in Atlanta. "The best thing for him to do is pay off his debt." After that, he can focus on saving for retirement.

Where to start. Ron should total his essential monthly expenses, tighten his belt and see how much he can set aside to pay down the debt. He could put pencil to paper or use free online tools at sites such as Or he could use Kiplinger's free budgeting tool.

As for whether Ron should raise his contributions to the retirement plan, the answer is a resounding no. In fact, he should defer less of his pay, not more. "He's not in a situation where he should focus his attention on retirement planning," says Christopher Reilly, a financial planner in Philadelphia. "Siphoning off money that could go toward the interest payments on his debt isn't worth it."

If anyone can afford to put other needs before retirement, it's a career soldier. Ron will get a veteran's pension worth at least 50% of his salary. It's the most ironclad retirement plan remaining in the U.S.

Associate Editor, Kiplinger's Personal Finance