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Save For Retirement or Pay Off Loans — Which is Better for You?

Written by: Kristy Welsh

Last Updated: September 11, 2017

Of all money matters, the question of saving for retirement or paying off debt is a common one, primarily because it's such a tough question to answer. In fact, it seems there is no right or wrong answer in general, only what seems like a right or wrong answer for you.

Reasons to Pay Off Your Loans First

  1. Your loans have you paying a higher percentage in interest rates than you can earn through investments. As you know, the longer you keep yourself in debt, the more you pay for it. So if the interest you can earn on investments is less than what you could save by paying off debt, it's a no-brainer. Focus on your highest-interest debt first. If much of your debt is in credit cards, you may try transferring your balance to a lower-interest credit card instead. Here at, we have a number of tips on debt settlement, debt negotiation and debt consolidation.
  2. Your employer doesn't match your 401(k). Stock options don't count. If you're not getting matched with cold-hard-cash, put the money you would otherwise invest into the 401(k) into your debt pay-off plan.
  3. Once paid off, all of the money that previously went toward your loans can go into your retirement savings. Of course, this requires that you stick to your guns, creating and following a plan-of-action in terms of paying down your debt in a timely manner. The faster you're able to do it, the sooner you'll stop paying interest and earning it instead.

Reasons to Save for Retirement First

  1. The sooner you start setting aside money for your retirement, the less stress you'll feel later when you realize the big day is just around the corner but you're a long way from what you need to make it happen. No matter how aggressive our saving habits, most of us underestimate how much we need to retire. What's equally disturbing, though, is that even if we do accurately predict how much we need, most of us don't have enough extra income to save that much anyway. In other words, the sooner you can start saving something, the longer it will accumulate interest, increasing exponentially over the years.
  2. Saving for retirement affords you tax breaks that add up to a significant amount over several years time. If you wait to save for retirement, or take a break from it to focus on paying down debt, you could miss out on cumulative tax breaks too lucrative to miss.
  3. Your employer provides a 50 percent or more match for your 401(k). If you are in the fortunate position of having an employer that contributes significantly to your 401(k), by all means, take advantage of it!

Reasons to do Both at the Same Time

  1. You're trying to pay off your debt first, but not aggressively enough to pay it off any time soon. The longer it takes you to pay down your debt, the more you're ultimately paying in interest. So if you're only paying a little above your minimum payments due, it's worth setting some aside for retirement too.
  2. You're saving for retirement first, but accumulating debt for regular and/or unforeseen living expenses. What's the point of putting money away in savings if you're only losing money on interest charged for debt needed to cover living expenses? Yes, it feels good having a chunk of change earmarked for retirement savings, but it feels even better to take part of that money and setting it aside for your regular living and/or emergency fund.
  3. The interest you're earning in savings is greater than the interest you're accumulating on your debt. Yes, you could take advantage of this by putting all your extra money into savings, but consider setting some aside for paying down debt at the same time, even if it's just a little more than your minimum monthly payments.

Still not sure? Go with your gut. Which feels better — getting debt-free faster, aggressively building your nest egg, or doing a little bit of both, though more slowly, at the same time? Only you can be the judge.