You hear it all the time: Save, save, save for retirement. It’s solid advice, but maxing out your retirement contributions doesn’t do you a lot of good if you’re also maxing out your credit cards and paying interest on that debt month after month after month.
Of course, it’s even worse if you’re skipping your retirement contributions altogether just so you can pay your monthly financial obligations. That’s why paying off your debt, especially revolving debt like credit cards, is an important first step in retirement planning. Just ask one of the millions of retirees who still have debt hanging over their heads.
A recent study commissioned by Bankers Life Center for a Secure Retirement found that only 23% of retirees report being debt free. The study also found that nearly a third (28%) of middle-income Baby Boomers nearing retirement spend more than 40% of their monthly income toward debt. That’s not a great scenario for building up adequate retirement savings. Fortunately, there’s hope.
“It is never too late to improve the outlook for your retirement financial security,” Scott Goldberg, president of Bankers Life, said in a prepared statement. “Beginning to pay down debt and developing an action plan are critical first steps toward a secure retirement.”
With those words of advice in mind, let’s take a look at how you can start paying down your debt as soon as possible so that you can begin maxing out your retirement savings.
Avoid Lifestyle Inflation
For many people, earning more income as they advance in their careers means they’re able to afford a nicer lifestyle. A bigger house or a nicer car is great, but not if you already aren’t able to pay off things like your credit card payments every month, make extra payments toward your mortgage or automobile loan or have an emergency fund in place. Chances are if you aren’t doing those things because your bigger, better life is so expensive, you’re probably also not saving enough for retirement. Try to keep your lifestyle in check until you’ve built up significant savings and are maxing out your retirement savings.
Prioritize Your Debt
There’s good debt and bad debt. Things like mortgages and student loans fall into the first category and credit cards fall into the second. If you have a mortgage, you can focus on trying to pay it off as quickly as possible to save money on interest, but it’s a good idea to do so only if you’ve paid off your credit card debt first. (Here are five signs you should be paying more toward your mortgage.) That’s because significant credit card debt can negatively impact your credit scores, which means you’ll pay more for borrowing on everything from your mortgage to automobile loans.
You can start working on prioritizing your debt a couple of different ways. Here’s a handy explainer on how to prioritize your debt and get rid of it once and for all.
Let Your Retirement Savings Take a Back Seat — Temporarily
It may seem counterintuitive, but focusing on your debt today and your retirement savings tomorrow can help you be better prepared and save more for retirement. So, if you’re strapped with some debt, you can consider temporarily reducing your retirement savings to the minimum amount that lets you max out any employer contributions you may have, and focus the difference on paying off your debt.
With some dedication, you can keep your spending reined in, your debt at a minimum, your emergency fund fully stocked and your retirement savings on track.
[Editorial Disclosure: PayDownMyDebt.com is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]