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Pay Off Debt or Save for Retirement? Making the Case for Each

Nov 16, 2021 3 min read Kate Ashford

Key takeaways

  • Don't delay saving for retirement while paying off student loan debt.
  • Credit card debt is a major drain. Don’t let it keep you from a company match on retirement savings.
  • Paying off a mortgage slowly can help more than it hurts.


When Phil Risher graduated from college, he had $30,000 in student loans. He wanted to get serious about paying them off, which meant putting every extra penny toward the loan balances. But he didn’t forgo savings entirely—he still contributed 3% of his income toward retirement.



“My employer matched me dollar for dollar up to 3%,” says Risher, now 31 and a marketing consultant who lives (and works) while traveling the U.S. in a renovated school bus. That means that if 3% of his income amounted to $2,000, and he put that into his company-sponsored retirement account, his employer also put $2,000 in. “It is a nice perk,” he says. “I would highly recommend that everyone consider at least doing this, at the minimum.”

For Risher, prioritizing student loans over retirement made sense, and he managed to pay off his debt in 12 months, while making $48,000 as a customer service executive. He broke his debt down into payments of $2,500 a month and lived off the rest of his income: $500 a month.

“I moved into my dad’s basement,” Risher says. “I negotiated a ‘contract’ with them, that instead of paying rent, I would make sure the grass was cut, gutters cleaned and [act as] an on-call babysitter for my younger siblings.”

Once he paid off the balance, he bumped his retirement savings to 15% of his pay. But balancing paying down debt and saving for retirement can cause real confusion, especially when debt levels are high. What’s the best approach, and how do you cover all your bases on a limited income? Here are some strategies to consider.


When to pay off debt

Your approach to student loans will depend on a variety of factors such as the type of loans and the interest rates you’re being charged. In general, you may want to put money where you’re most likely to achieve the best results. If you’re paying off a student loan charging you 3.73% in interest (the fixed rate for undergraduate Stafford loans for the 2021–2022 school year Opens in new window once temporary federal loan relief ends in January 2022), you essentially save 3.73% for every dollar you had been putting toward that loan balance.

On the flip side, if you expect to earn around 6% a year on average on retirement savings over the long term—not unreasonable with a well-diversified mix of investments—you might be better off putting as much as you can toward retirement and making minimum payments on your student debt.

If the interest rates on your student debt are 6% or higher, consider that you can get a federal tax deduction for student loan interest, depending on your income level. If you’re in the 22% tax bracket, that means a loan charging you 6% interest is really like 4.7% after the tax break—so it may make sense to focus on retirement first. Once you’re saving at least 10% of your earnings toward retirement, you can start making extra payments on other loans.

If you’re paying higher interest than that—on private student loans, for instance—you may want to look into student loan refinancing, which can consolidate your debt and lower your overall interest rate. But be cautious: Refinancing federal loans removes all the flexible repayment options that come with federal borrowing. Also note that the student loan interest deduction Opens in new window is currently limited to $2,500 per year and phases out at higher income levels.


When to save your money

The same logic applies to credit card debt: The amount you should throw toward this versus retirement savings depends on how much you’re paying in interest. But because the average credit card interest rate is about 16%, it generally makes sense to be aggressive about paying down those balances ahead of retirement savings.

There is an exception to consider: If you’re getting a 401(k) (or similar workplace retirement plan) match from your organization, it’s like achieving a 100% return on the money you contribute. So, think about putting away at least enough to get that full match before shifting your focus to credit card debt.

The caveat: If you’re putting less than about 10% into retirement funds so you can focus on debt, consider attacking that debt with gusto so you can get back to your savings goals. The sooner you start saving, the longer your money has to grow (and thanks to compounding, even a little can add up to a lot over time).


Paying down debt while saving for retirement

With 30-year fixed mortgage rates at about 3% (as of September 2021) and income tax breaks sometimes available for mortgage interest, it often works to your advantage to max out your retirement savings before putting any extra money toward your home debt. Having a mortgage—and making on-time payments over time—is good for your credit, and the money you contribute toward retirement will likely do far more for your financial security than paying off your home early.

That said, you might want to have a plan to pay off your home loan before retirement. Ideally, you should be entering retirement without mortgage debt weighing you down.


What you can do next

There are various strategies for saving for retirement and paying down debt, so think about what will work best for your situation and help you achieve your goals. If you’re playing by the numbers, it often makes sense to save for retirement before getting aggressive about debt. Although credit card debt may be the exception to that rule—high-interest debt can sink your finances and should be avoided entirely—you should still consider saving enough for retirement to get your 401(k) match before putting extra cash toward those other balances. Even though it can be a real mental boost to get debt off your plate, you may find yourself in a tight spot later if you don’t get your retirement savings rolling too.

Please consult your tax and legal advisors regarding your circumstances.


Kate Ashford is a freelance journalist who writes about personal finance, work and consumer trends. She has written for BBC, Forbes, LearnVest, Money, Real Simple and Parents, among others.


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