A question people always ask is, should I stop retirement contributions when I am getting out of debt? And the general answer is usually split down the middle. You have people who say yes, and those who say no.
Here’s my take to that statement. You always have to save for retirement. You have to get used to living on less than you make. Say you save 10% for retirement, if you keep using that 10% to pay off debt, build EF, etc, when do you get used to living on 90% of your income? I thought even when paying off debt you have to get used to living your income? And is your income 100% or 90% of what you make?
How do you get into the habit of budgeting on 90% of your income if you are using 100% to pay off debt?
Plus I always wonder, when you stop retirement contributions to pay off debt is it really worth it? I mean you are losing compounding, tax breaks, etc. So the after tax dollars is usually less than say the 10% you are contributing to a 401k, let alone if there is a match. But in most cases, everyone agrees if you have an employer match, then don’t pass it up as 100% FREE money.
My next reason behind not stopping retirement is have you really cut your budget? Are you not eating out? Not renting movies, watching cable, buying clothes, no car or home repairs, turned the heat down to 55, only using coupons to cook, etc?
I mean are has the budget really gone bare bones that it justifies stopping retirement contributions? Where you’ve given up all other luxuries first and continuing the trend to spend less you stop retirement contributions. But if you go on vacation, eat out, have fun, why are you sacrificing retirement for debt instead of luxuries for debt?
I guess I sort of feel stopping retirement contributions to pay off debt is the easy way out. You don’t necessarily change your lifestyle, you just alter it for awhile and use the extra money you shouldn’t be using to get out of debt. Plus once you finish paying off debt, how do you know you’ll still be able to afford those luxuries?
So what’s the reasoning behind stopping retirement contributions to pay off debt? I understand if you are in debt and not making ends meet everything needs to and should GO. But otherwise?
7 responses so far ↓
1 JoeTaxpayer // Nov 20, 2009 at 11:36 am
Another great spin on this topic.
My objection to the “stop retirement savings” mantra is the advocates of this strategy ignore the 401(k) match, which would benefit anyone receiving such a match. Your point adds fuel to my position.
2 Cassie // Nov 20, 2009 at 11:48 am
I used to always think that paying of debt should be #1 and everything else could wait. I am now on the other side of the fence and think saving is just as important (if not more) than paying down your debts.
3 Investing 101 For Dummies // Nov 20, 2009 at 12:50 pm
There will always be a number of conflicting opinions on the subject, because it’s deeply personal. Up until the end of last year, I used to think that saving for retirement was paramount. A couple of personal experiences later, and I think saving is really the way to go. In the end, I think I might flip flop for a while in the next couple of years
4 Lindsay // Nov 20, 2009 at 12:55 pm
I agree completely. My mother recently told me she discontinued her 401K contributions in order to pay down her credit card debt more quickly. I begged her to re-establish the contributions (and I think she did) and we brainstormed some other ways for her to pay off the debt, including selling belongings and drastically limiting her spending.
5 MikeZ // Nov 21, 2009 at 10:14 am
The first rule is do not go into debt unless:
1. You are doing so to earn a higher return that what the interest on the debt is.
2. You are buying a house and it is a more financially wise decision than renting given your personal circumstances.
There are no other reasons for having debt.
None.
Zero.
Living beyond your means is not a valid excuse.
After your debt is paid off, you can then focus on retirement savings.
6 Grace // Nov 22, 2009 at 7:14 pm
At my age (60) and my current level of retirement funds (ahem. Umm, low!), there is no choice. I’m paying down debt (and will pay it all off much faster when my house is paid for in four years) but I’m saving like crazy in my 401 K. It would be so much easier if I’d started a whole lot earlier.
7 LAL // Nov 23, 2009 at 8:01 pm
JoeTax, it depends on whether there is a match!
Cassie, what changed your mind?
Investing what changed your mind?
Lindsey, why did you beg your mom to keep contributing? Is it because she wasn’t cutting her spending?
MikeZ, I would argue, you need debt to go to school for some people. Or else all doctors, lawyers, etc would only be rich people. Second, I would have to say going into debt to pay medical bills is another good reason. Unfortunately in this country medical bills can BK many a responsible people.
If 50% of BK are due to medical bills, are they really living beyond their means? And why should they focus on debt instead of retirement?
You didn’t make an argument for being debt free? I agree living beyond your means is bad.
Grace, definitely easier to start sooner!
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