Is it better to pay off my debt or save for retirement? This is what experts suggest

When it comes to managing your money, some decisions can be as difficult as deciding whether to pay off your debt or save for retirement. Both are important to your financial well-being, so how do you decide?

There is no single answer for everyone, and decisions vary from person to person. In this article, several financial planners will provide insights and help chart their courses, taking into account factors such as interest rates, emotional stress, and financial habits.

One of the first questions I ask myself is, “What kind of debt am I in?” According to Caitlin Harrison of Northeast Planning Associates, “high profit and modest debt, such as credit card balances, should usually be paid first,” and eliminating the rapid compound of 18% or more with a credit card is because it provides guaranteed benefits that you won’t get from most investments.

But that is not necessarily such a clear decision. “For low-interest debts like mortgages and student loans, it may be advantageous to prioritize retirement savings, especially when tax-deductible,” she explains. These are essentially free money.

Harrison emphasizes the importance of the overall plan. “Financial planning, which takes into account cash flow, risk tolerance, tax impacts and long-term goals, is the best way to determine the right strategy.”

In most cases, combining both strategies to reduce debt while contributing to retirement is a measured approach to improving your financial profile.

For the financial advice of Michael Morton, CFP, CHFC, Morton, that comes down to numbers. “If the interest rate is very high (over 8%), paying off your debt makes more sense than saving for retirement,” he says. “If the fees are low (below 4%), we recommend saving for regular payments and retirement.”

But what about medium-distance debt? “Many people have debts in the 4% to 8% range. In that case, it’s mainly a matter of personal preference. Does it keep you awakened at night?”

Morton’s approach highlights one of the most important aspects of personal finance: the emotional aspect. Even if numbers refer to taking a specific approach, peace of mind has its own value. This can be difficult to quantify.

If carrying debt leads to anxiety, even if it’s not the most financially sound path, it may be enough to pay it off more than savings for retirement.

Eric Roberge, CFP and founder of Beyond Your Hammock, approaches strategy from a slightly different perspective. It takes into consideration not only the number, but the “why” behind the debt.

“If your client has a high profit margin debt of 10% or more, we usually create a plan that prioritizes paying it as soon as possible,” he says. But he can be seen beyond the surface. If your debt comes from overexpenditures, it may be worth working with a financial therapist.

“If you assume someone is earning enough…but your credit card balance is carried consistently. This indicates that there may be some mental block or emotionally driven behavior behind that excess habit.”

Sometimes it’s ideal to tackle both retirement and debt goals at once. “We rarely recommend halting all contributions to a retirement account,” Roberge points out, particularly when these accounts offer tax benefits or employer matches.

Still, if financial stress is affecting your mental health, we recommend temporarily reducing your retirement contributions.

Conclusion

It is a tough decision to make between paying off debt and savings for retirement. This is different for everyone. The right decision will mainly depend on interest rates, followed by emotional well-being and your financial situation.

In general, high profit obligations should be prioritized. However, if debt is more manageable, most advisers recommend that you continue saving for retirement, especially if your employer matches the contribution of the 401(k).

Generally, the best path is a balanced approach that helps to strengthen your financial profile and provide peace of mind.