Should I Save for Retirement or Pay Off Loans?
This is one of the 20 tough financial questions posed in the “Do This or That?” cover story in the September 2011 issue of Kiplinger’s Personal Finance.
This is one of the 20 tough financial questions posed in the “Do This or That?” cover story in the September 2011 issue of Kiplinger’s Personal Finance. Use the drop-down menu above to consider other financial conundrums and the right answers for you; share your own experiences and insights in the Discuss field at the bottom of this page.
Pay off the loans if the rate you pay is higher than the rate you can earn on investments—and you are saving enough for retirement to get an employer match. For example, paying off a credit card with an 18% interest rate is like earning an 18% return on your investments—a guaranteed return you can’t match anywhere else. After that, you can direct the money you had been using to pay off your debt toward your short- and long-term savings goals, including your retirement savings goals. Once you retire your debt, it will also be easier to focus on living within your means.
Save for retirement to take advantage of employer matching contributions as well as the magic of compounding. The earlier you start saving, the less money you’ll need to set aside to reach your retirement goals, leaving some room in your budget to chip away at your debts. If you skip saving entirely for a few years while you pay off debt, you could give up free money and valuable tax breaks that you can’t make up later. Say your employer matches your 401(k) contributions 50 cents for every dollar, up to 6% of your pay; that’s a guaranteed 50% return. Investing to get your employer’s full match should be your top priority. You should also take advantage of your options for tax-advantaged savings. You are eligible to put away $5,000 per year in a traditional or Roth IRA ($6,000 if you’re 50 or older) and $16,500 per year in a 401(k) plan ($22,000 if you’re 50 or older).