How to Pay Off Debt While Saving for Retirement

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In too many American households, the discussion about paying off debt while also contributing regularly to a retirement fund often goes like the discussion about diet and exercise: I’ll get to that… tomorrow.

The problem is that your financial success during retirement could hinge on the ability to do them both at the same time… starting today. Paying off debt and saving for retirement should go hand-in-hand.

Paying Your Debt

The good news is that people appear to be working on the debt half of the equation. U.S. households dumped $110 billion worth of debt in the first quarter of 2013. They have $57 billion less credit card debt than they did two years ago, and while foreclosure rates are still at historic highs, they are falling fast. In fact, many American homeowners actually own their house, free and clear.

So the diet part is working. The exercise part — pitching some pennies at the retirement fund — is not happening, however.

Retirement accounts are flatter than day-old pancakes. People know they should be investing in some combination of stocks, bonds, mutual funds and annuities, but they just can’t bring themselves to get started or keep it going.

Depending on whose survey you want to believe, the average 65-year-old has as little as $25,000 in his 401(k) account or as much as $100,000. Either way, the average retiree has to live 20 years off those paltry sums, and it’s hard to imagine anyone meeting their retirement expectations on savings that small.

So, what to do? The first thing is to keep paying off your debts, especially credit cards.

Paying off a house loan, if possible, or car loans would give you a nice chunk of change to throw at the retirement account, but credit cards are the biggest drain on most people’s wallets. The interest rate on the average credit card is 15 percent. If you pay off your balance, that’s a big chunk of change you could throw at retirement savings.

Cutting Your Costs

The next step would be to look closely at where you are spending money. The most convenient place to find out would be on your family budget, if you have one. (A recent Gallup poll said a shocking 68 percent of Americans have no budget at all.)

So make a budget, even if it’s only to chart what you spent the last few months, because you will be surprised at where the money is going. According to the Bureau of Labor Statistics’ Consumer Expenditure Report, Americans spend an average of $675 a month ($8,100 a year) on dining out, clothing, entertainment and alcohol.

Just saving half that number every month — $337 — would put most workers over the 10 to 15 percent of monthly income that financial planners say you should set aside for retirement.

The other very obvious step is to contribute as much as possible to “matching plans” at your place of employment. The employer typically matches anywhere from 3 to 6 percent of your contribution, which means you’re getting a 100 percent return on the first $3 to $6 you invest.

When those suggestions become habits, it’s time to determine where to put the money and how much investment risk you can tolerate. Some people like the rock-’em, sock-’em action of the stock market. Some prefer to take a step back and throw more money at mutual funds and bonds. The most conservative investors like the guaranteed return on immediate annuities.

Ideally, you would have some combination of all four. Balance them according to your level of tolerance.

Just don’t wait until tomorrow. Get started today.

Bill Fay is a business writer for Debt.org, focused mainly on stories about financial matters affecting families and small businesses. He has 30 years of experience working in newspaper, radio and television, mostly dealing with college and professional sports.

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