I read all the time people asking on blogs, message boards, and even in real life, “Should I reduce my retirement contributions to pay off debt?” I cannot emphasize what a HORRIBLE statement that is.
It’s funny that when getting out of debt, people view retirement as free money to be cut and used for debt repayment. They justify that they need to cut all outgoing money and focus on debt, either credit cards, car loans, HELOCs, etc. However, when asked to actually write down their budgets, turns out there’s a lot of excess spending still going on above and beyond the retirement spending.
Instead of giving up going out to eat, fun money, entertainment, etc, people choose to cut retirement savings. They instead want to use money they already don’t see to pay off their debts they created when they didn’t see the money. And I question the logic of this because once you cut retirement savings, how easy will it be to get back into the habit of saving again? Will you stop retirement while you save for an emergency fund? Why is that retirement savings is the first category cut?
There will always be emergencies and reasons to not save for retirement. There will always be important things you need to pay “cash” for, yet I wonder if these needs will not prevent someone who finishes paying off their debt from getting back into the retirement savings habit? That instead their need to always pay cash will take priority and they will find the habit of savings “hard”? And easier to justify they need the extra money to pay cash for their lifestyle?
How do you even know you can really afford your lifestyle if say you go from being in debt to debt free but are unable to contribute your 15% to retirement? Perhaps you had cut your lifestyle and lived on 85% of the income, you’d be able to manage better once you are out of debt. The living within your means lifestyle would be more permenant because it wasn’t so easy?
I could be wrong, and maybe everyone who is cutting retirement has no “extras” in their budget. But I think that the average consumer paying off debt does have more extras that could be cut other than retirement.
5 responses so far ↓
1 Kristy // Oct 23, 2008 at 9:22 am
I agree with you.
2 fengshui // Oct 23, 2008 at 11:45 am
“Instead of giving up going out to eat, fun money, entertainment, etc, people choose to cut retirement savings. They instead want to use money they already don’t see to pay off their debts they created when they didn’t see the money. ”
Being a reckluse isn’t easy for some people. Some people see this as a “quality of life” issue. To some people, enjoying a meal out once per week is more important than having $5 million once they retire. Some people think that $200k is enough for retirement (I’m just throwing numbers out there). So, some people may be perfectly happy with having no cable, no cell phone, clunker car, and no social outings that require spending money while having loads in the bank, others may view that type of lifestyle as “boring” and unhappy….. So it is all a matter of pespective and what one perceives as a priority and quality of life.
3 Jim ~ mydebtblog.com // Oct 23, 2008 at 4:42 pm
I think there are pros and cons when it comes to retirement savings.
Say you were to stop contributing to retirement for a short period of time in order to focus that money to get out of debt. While the money you already have saved isn’t going anywhere, you can boost the ability to pay off debt quickly. I don’t think you should allow more than a year or so of not saving for retirement though, time works against you.
The other idea is whether or not it is smart to cash out retirement savings in order to pay debt. Overwhelmingly it is a costly financial move to make. After holding, a penalty, and then having to pay income tax on the money taken out, only half of what you take out can go towards paying off your debt. It’s like taking out a 50% loan to pay off debt.
I think it’s okay to stop retirement to pay debt as long as it’s short term. It’s expensive to take out the money you already have saved though because you cannot put that money back, ever. It’s probably best to find better ways to pay off debt while continuing to save for retirement. I agree though that lifestyle choices and the extras have to be addressed well before looking to stop retirement.
4 LivingAlmostLarge // Oct 23, 2008 at 4:54 pm
Fengshui, I think we are talking about two different things. You are talking about a lifestyle after debt. That you are balancing going out with retirement savings. I have no issues with that.
That is truly about priorities. BUT I do think it’s stupid to try and get out of debt and instead of cutting your lifestyle, which must happen, you use your retirement savings. Let’s say you were saving 5% and use that to pay off debt for 2-3 years and then suddenly you pay off debt but how do you start saving again? Especially if you have to save more than 5%?
You don’t. Truth is you haven’t gotten used to living on less of your income. And that is something that needs to happen.
If you say 10% to retirement and you live on 90%, then I say 90% is living and debt repayment should come from that 90%. Not from the 100%.
I think that Jim, the problem is even stopping retirement for 1 year is often difficult to get restarted. And why are you cutting the retirement first? Or if you stopped your retirement did you stop all other extras as well.
5 Fabulously Broke // Oct 24, 2008 at 12:50 pm
Hear hear. I totally agree with you.
And people also cut on food, but they refuse to cut on entertainment. HELLO!! It’s going INTO YOUR BODY!! .. Jeez.
Anyway, different topic, that.
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