Saving for Retirement While Eliminating Debt
Similar to an earlier article about building emergency savings, many people wonder whether or not they should be saving for retirement while in the process of eliminating their debt.While the answer to this question will vary from person to person, there are a couple of general concepts to consider when deciding what is the appropriate course of action for your situation. Here are questions to answer in order to help with your decision:
- Are you enrolled in an employer-sponsored retirement plan that includes a matching contribution? When your employer offers a retirement plan and includes a matching contribution from the company, it is usually a good idea to contribute at least the minimum required to obtain the full matching contribution. If you were to bypass this offer, you are essentially leaving free money on the table as you cannot recoup the employer matching contributions at a later time.Employer-sponsored retirement plans are not all created equally, so be sure to evaluate the investment options within the plan to ensure that the selections will adhere to your overall asset allocation strategy. If the plan does not offer attractive investments, even the appeal of the matching contribution may not warrant investing your money. The good thing is that many employers are now offering competitive retirement plans with a generous selection of investment options.
- Can you guarantee your investment returns will be higher than the interest rate on your debt? Given the inherent risk with most investments, it is typically a difficult task to guarantee a certain percentage return on your money. In addition to the risks associated with investing, many people are carrying debt at high interest rates. With high interest rate debt, it is even more difficult to consistently earn a higher return through investing your money versus applying that money towards your debt.Consider the following: With an interest rate on your debt of 9.9%, how confident are you that your investments will earn 10% or more? Unless you have found the next great investment, your dollars will be better utilized by eliminating your debt. While it can be difficult to bypass the opportunity to contribute to an Roth IRA or Traditional IRA, you need to evaluate what will make the most financial sense in the long run.
As mentioned earlier, the true answer to this question will vary for each individual. The above points are a few items for consideration as you work through your own decision making process. For further assistance with your own planning, reference the Should I pay off debt or invest in savings? calculator at The Motley Fool.