Save Now, Then Save Some More!
We all know that saving for retirement is important, and it’s never too early to start. However, it never feels as simple as putting money aside – there’s always something that gets in the way. Whether it’s loans or debt that’s holding you back, is it better to pay off what you owe first or prioritize saving for your retirement account?
The Million Dollar Question
Building your retirement savings account is critical, but at what cost? Most of us enter the working world with some level of student loan, not to mention the possibility of developing more down the road – car loans, credit card debt, etc. – yet we’re being told to start saving for our retirement as soon as possible.
So how do you balance paying off owed money and simultaneously save for the future?
As a financial advisor, I’m a strong advocate for saving for retirement as much as you can as fast as you can. That being said, I firmly believe the priority is to pay off your debt first, particularly the ones with high interest rate.
If you have high interest debt, then the amount you’re losing in interest each month may be more than what you could be earning in compound interest in savings.
I often tell my clients that once they’ve paid off high interest rate debt, then they can start contributing to their retirement savings account. This, of course, will look different case by case, but never rule out saving for retirement just because you owe money! Prioritize paying off your debt now as a way of being proactive about your future. The better you plan, the better you retire – and therein lies the balance.
Don’t Take My Word for It
Forbes weighed in on this topic as well,
“While this question is best put to a financial planner who can look at your entire financial picture, one way to think of it is that, if your student loan interest rate is 6.8%, the payments you make toward those loans give you a guaranteed 6.8% return on your money. Your retirement investments, especially after accounting for inflation, may not do as well. On the other hand, if you’re 50 and are behind on saving for retirement, you’ll still want to get the ball rolling since time is the biggest factor in how much your investments can grow. Bera says that for any debts with interest rates above 6%, she favors paying down debt over saving for retirement, but once you eliminate all those and are left with debts with lower interest rates, the emphasis would swing back to retirement.”
Low interest debt that’s tax deductible, like a mortgage, doesn’t need to be paid off before saving for retirement. However; I recommend you pay off all other high interest debt first, and then you can begin contributing the maximum to your retirement savings account.
If you’d like personalized advice on how much you should be paying/saving, one of our advisors will be happy to sit down with you and strategize how to get you on track for your best retirement.
Please schedule a call with us here if you would like to discuss your options.