Getting out of debt and saving for retirement go hand in hand. Rather than a choice of one or the other — or debt being a roadblock — both goals are compatible in a comprehensive financial plan.
Paulina Likos, investing reporter at U.S. News, said it’s not necessary to pay off debt before you invest.
“It depends on your financial situation and what your investing goals are,” she said. “If you have extra cash, you may want to keep putting it toward debt or build up your emergency fund or invest toward a retirement account.”
Likos, Lawrence D. Sprung, certified financial planner® and president of Mitlin Financial, and Dr. Barbara O’Neill, owner and chief executive officer of Money Talk, joined financial experts from consumer credit reporting company Experian to discuss the whys and hows of debt and retirement.
Sprung said decisions depend on the type of debt and interest rates charged. One of his Mitlin Financial blog posts looks at “What is ‘good debt?’”
In its own blog post, Experian states that deciding whether to pay off debt or invest depends on your financial situation. The blog offers steps to take to make the right decision for you.
Getting lower interest rates and consolidating where possible will help pay off debt quicker, according to Sprung.
Those struggling with debt and poor credit might feel overwhelmed and confused on how to begin. Experian has ideas to prioritize debt and build credit.
Open to Negotiation
Experian states that “with a little flexibility and patience, just about every monthly bill you have is negotiable.” The company’s blog adds that it doesn’t hurt to ask, especially about utility bills.
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Sprung counts “pay yourself first” as among the best money advice he ever received.
“Then you can take advantage of compound interest, the eighth wonder of the world,” he said. “That’s something I am proud to have taught my teen, who was featured in a piece by Mallika Mitra for Money.”
O’Neill echoed the advice to pay yourself first, do it regularly and pay off credit card bills in full to avoid interest. That’s the ideal setup to save for retirement.
One of the best-known retirement plans is a 401(k).
“This is a retirement plan with your employer that lets you defer a percentage of your paycheck into an account you can access in your retirement years,” Likos said. “You choose how much to contribute each pay period. That money is invested and compounds in growth.”
So Many Choices
O’Neill sorts through the differences in employer plans.
“A 401(k) is a voluntary tax-deferred retirement savings plan for employees of for-profit corporations,” she said. “Workers contribute a portion of their pay — such as 6 percent of gross income — to their 401(k), which may be matched by their employer.
“There are similar plans, too: 403(b) plans for non-profit and school employees, 457 plans, and the Thrift Savings Plan for federal employees,” she said.
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The retirement field has many more options.
“You may be able to use an IRA — Roth or traditional — SEP, or SIMPLE, if you are self-employed,” Sprung said, pointing to the Mitlin Financial Financial Planning Starter Pack.
For those who want to better understand what the terms mean, Mitlin Financial has a glossary on its website.
If an employer doesn’t offer a retirement plan, an IRA is one of your best options for building retirement savings, according to Experian. Its blog features a step-by-step checklist to help you understand your options and open an account.
“Your account choice depends on your tax preferences,” Likos said. “Traditional IRA contributions are pre-tax. A Roth has already been taxed, and you don’t have to pay taxes when you withdraw money in retirement.”
Deciding on Contributions
O’Neill mentioned other ways to save for retirement without a 401(k).
“Use a Roth or traditional IRA at a bank, mutual fund or investment brokerage,” she said. “If you are self-employed, you can set up a SEP or Keogh plan to save for retirement.
“Some states have now established employer savings plans for workers at small businesses that lack 401(k) or 403(b) plans,” O’Neill said.
One of the biggest — perhaps most intimidating — questions is how much people should contribute to their retirement plan.
“You can contribute as much as you can afford,” Likos said. “Current contribution limits are $19,500 for certain retirement accounts with a catch-up contribution of $6,500.”
Besides starting early and often, Sprung suggests trying to hit 10 percent of gross income, if possible.
Experian recommends contributions of 10 to 15 percent of pre-tax income into a 401(k). Those age 40 or older might want to set aside 20 percent. The company’s blog explains how to get the most out of your 401(k).
Whatever the decision amid whatever circumstances, if you take charge of debt, you can still save for retirement. In both cases, the best plan of action is the one that starts today.
About the Author
This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.