Should I pay off debt before funding retirement?

Jason Piper |
Debt can be good or bad, as discussed in our post a couple of weeks ago. Even so, it may be a good idea to begin investing in your future while still having some debt. Deciding whether to pay off your debt before funding your retirement depends on several factors.
 
Paying off debt can reduce your monthly expenses and provide more financial flexibility, especially if you think you may carry that debt into retirement. With high-interest loans, you may save money on interest payments over time. Living debt-free is often important for peace of mind and can provide a sense of security.
 
However, the time value of money, or how money grows over time, is important to consider. Your investments into retirement funds may grow beyond your current debt level. Contributions to retirement funds may be tax-deductible. Most employer-sponsored retirement plans include some kind of matching contributions. Not investing at least to the match is like declining free money. 

If your debt is high-interest, paying it off first can be a good thing. As discussed in our good vs bad debt post (LINK), some interest payments are higher than the average return of investments in the stock market. In that case, we recommend paying off the debt first. It may be wise to have an adequate emergency fund in your savings account to cover unexpected expenses or job loss. We recommend having at least six to twelve months of savings that will cover your usual monthly expenses. How many months to save for depends on your work history and whether your industry is in high demand. Some debt, like mortgages, have tax benefits, so consider those benefits before going all-in one way or the other.

In most cases, a balanced approach is the best option. There may be room in your monthly budget to pay down high-interest debt while also contributing to your retirement savings. We recommend consulting with a financial advisor to get personalized advice for your unique circumstances.

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