I currently have around $315,000 in retirement savings and am 38 years old. I have about $30,000 in consumer debt (that’s the only debt we carry, no car payments or mortgages) – of which about $24,000 is an unsecured loan on which I pay about 10 % interest; the rest is on credit cards that are on a 0% promotional period and which I hope to pay off before the 0% period expires in October 2020.
I’m trying to pay down my debt and continue to save aggressively for retirement…I’ve made minimal improvements over the past two years paying off my debt and I continue to play the balance transfer card game loan to maintain 0% interest rates. or other low rate options. We also have two small children who add to the list of expenses.
My plan for 2020 is to reduce my 401(k) contributions from 15% to 5% and use the extra income to pay down debt. My company contributes 10%, no matter what I contribute. What do you think about this?
Your problem is common: the average personal debt (i.e. debt excluding mortgages) of people with debt is about $38,000, according to research by Northwestern Mutual. And many of them, like you, are struggling to pay off that debt while trying to save for retirement. So I asked financial experts: Should pension contributions be cut to pay down the debt?
The answer: “This person has a pretty decent plan: cut 401(k) contributions to pay off their debt,” says Mitchell Hockenbury, financial planner at 1440 Financial Partners in Kansas City, Mo. . “He’s still contributing 15% (10% employer, 5% employee) in retirement with a long track being only 38 years old.”
Frankly, you might even be able to contribute less in retirement if it meant you could pay off your debts faster: “Saving money for retirement is extremely important, but between your savings to date and the contribution of 10% of your business (which is amazing — kudos to them), your retirement fund should continue to grow steadily, even if you stop saving altogether and reduce your contribution rate to 0%,” says Amy Ouellette , Director of Retirement Services at Improvement for businesses – adding that this is only true “as long as you are really ready to focus on paying off your debt as quickly as possible”.
Why is debt repayment so beneficial to you? “Getting rid of debt is one of the most profitable things you can do for your bottom line in terms of net improvement,” says Kimberly Foss, Founder of Empyrion Wealth Management in Rosedale, California. “When you pay off a 10% loan, you are actually increasing your net worth at an annual rate of 10%.”
In fgeneral, many financial experts recommend people with high-interest debt pay it off as quickly as possible, while paying at least until your business matches your 401(k).
Of course, it’s essential that you use the money you redirect from your retirement fund to quickly pay off that debt. “If you can’t get your monthly expenses under control, this can be a temporary solution,” says Hockenbury. “Make a realistic spending plan and give yourself some leeway for unexpected expenses for your two young children. Focus on the spending plan, then work the math on the debt reduction plan.
Also look for money elsewhere or ways to generate additional income, which can help you pay off debt faster.
Once that debt is paid off and you’ve reduced your expenses through budgeting, you’ll likely feel relieved: “When you’ve eliminated your debt, you’ll be in an even stronger position to resume higher contributions in your retirement.” . plan—without having to pay interest to a credit card company or other lender. At your age, you’ll still have many years to make up the difference for declining deposits in your retirement account,” says Foss.
*Letters are edited for clarity and length