Doing the Math: Paying Down Debt vs. Saving for Retirement


By Dahna Chandler

Often, money management comes down to a series of “now” versus “then” decisions—and usually the “then” is years away. That’s especially true when you’re dealing with immediate obligations like debt while considering future needs like retirement. And when money is tight, it’s hard to know exactly where your money should go.

Here, three personal finance experts outline ways to think about debt versus saving for retirement.

Consider your interest rates

Gerri Detweiler, a personal finance expert and head of market education for, highlights the role of interest rates when running the numbers.

“When considering whether to pay down debt or save for retirement, there’s a tradeoff and knowing the numbers can be helpful. One important consideration is the interest rate you are paying on your debt, and how quickly you can pay it off. For example, take $5000 in credit card debt at 21%. At a minimum payment of 1% of the balance plus interest ($137.50 to start) it will take 23 years and 3 months to pay off. And if you think in terms of retirement savings, it’s hard to find an investment vehicle that will guarantee you a return that’s essentially equivalent to 21%!

“Of course, by forgoing retirement savings you may give up an employer match, which is like leaving money on the table. But you may still come out ahead by using funds you’ve earmarked for savings to get your debt paid off faster. Suppose you suspend a $100 a month contribution to your retirement plan and add that to your minimum payment. You’ll be out of debt 21 years faster and save $6837 in interest. If you get a 50% match, you’ll lose out on $1350 in employer match funds by suspending those contributions for the 27 months it takes to pay off your credit cards. It would take a little over 25 years at 6.5% annual rate of return for that $1350 to grow to an amount equal to the amount you saved in interest.

One thing to consider is whether you’ll use the money you save by paying off debt to ramp up your retirement savings later. Additionally, if you wait to start saving for retirement you can lose valuable years of compounding—especially if you’re younger. Sometimes the best plan is to find a way to cut expenses or increase income so you can do both: retire your debt without shortchanging your retirement.”

Pay the toxic debt first

Beverly Harzog, best-selling author of The Debt Escape Plan, draws a distinction between “good” and “bad” debt.

“This is always a tough decision because you want to build your retirement fund as early as possible. But in many cases, it’s best to consider paying off your debt first, depending on what type of debt you have. For example, credit card debt is considered toxic debt because you’re paying interest on purchases that don’t increase in value. Not only that, with compound interest, your debt will continue to grow.

“If you’re in this situation, then consider focusing on paying down your debt before saving for retirement. If you look at the numbers, you’ll come out ahead in most cases. For example, if you’re paying 19% interest on credit card debt, you’d be hard pressed to find a retirement account that earns interest anywhere close to that. So at the end of the day, funding your retirement account when you have high-interest debt doesn’t make financial sense.

“However, if your debt involves ‘good’ debt with a low interest rate, such as student loans, then consider doing both. You can pay down some of your debt and also contribute to your retirement fund. You want to build your retirement fund as early as possible. And if you are in a situation where your employer will match your IRA contributions, take advantage of that opportunity. That’s basically ‘free’ money for you, so contribute as much as you can. The longer your retirement fund has a chance to grow, the more money you’ll have when you need it.”

Refinance high-interest debt to free up money for retirement

Bruce McClary, vice president at the National Foundation for Credit Counseling, puts savings first, but warns against the specter of high-interest debt.

Establishing and maintaining personal savings should be a top priority that seldom takes a back seat to other financial goals. This is especially true when it comes to retirement savings, since it is critical to start as early as possible and maintain a consistent pattern of deposits until it is time to retire.

“Although simple math proves the point that an uninterrupted pattern of saving is the best pathway to a financially secure retirement, there is a spoiler lurking in the mix. The party crasher in this case is high interest debt that is growing at a faster pace than personal savings. A person might be pleased that they have saved their first $25,000 toward retirement, with a 9% annual rate of return. If that same person has $25,000 of credit card debt carrying a 15% interest rate, there is a strong case for turning full attention toward eliminating the debt as quickly as possible. In the simplest terms, this person is investing $25,000 and is being hit with a 6% loss annually, thanks to the costly debt. Refinancing the debt at a lower rate while attacking the balance with substantially increased payments will accelerate the payoff and help free more resources for retirement savings in the future.”

Doing the Math is a series where we ask three experts to weigh in on common financial decisions.