Pay off debt or save for retirement?

Choosing between saving for retirement or paying off debt

Paying off debts first

Paying off debt first seems like a reasonable choice, and there are many reasons why people take that approach. Here are a few:

• High-interest debt — If you have credit card bills that have a high monthly interest rate, then you're paying far more over the long run just to keep up with your minimum payments. It might make sense to start paying off your debt with the highest interest rates first.
• Mental health — Taking solid steps to reduce debt can help you feel less stressed about your financial situation.
• Boost your credit score — Less debt, especially on your credit cards, can have a positive impact on your credit score. With a better credit score, you'll qualify for loans at lower interest rates, which can help reduce your debt over the long run.

Saving for retirement first 

Retirement matters, so saving for it isn't something you want to put off for the long term. Here are a few reasons why you may want to focus on saving now:

• Time in the market — Generally, having your retirement savings in the market for a long time can help with growth and overcoming any down periods.
• Tax-benefits — Consider the benefits of tax-advantaged retirement accounts. Making contributions to a traditional Individual Retirement Account (IRA) can offer tax benefits to you that can help make the most of your money over the long term.
• Employer matching — If your employer offers a retirement savings program, like a 401(k) and they match your contributions, maxing that out could add a boost to your retirement savings.

Of course, when it comes to the market, there are no certainties. Past market performance does not indicate future results. The market and your investments are likely to fluctuate in value over time. As you consider your options, look at your current financial situation. You might find a combination works best for your needs.

How to start saving for retirement

If you are ready to start or improve your retirement savings, here's what you can do:

1. Start saving early
The earlier you start saving, the more compounding your investments can do over time. Many personal finance experts suggest saving at least 10-15% of your salary every payday. If you can save more, even better.

2. Set up a retirement account
When you decide it is time to start saving, you'll need a place to put those dollars.

Here are popular options:

• Traditional IRAs — A traditional IRA allows you to save for retirement with pre-tax dollars and invest your funds in a variety of investment vehicles for retirement. Pre-tax means you don't pay any taxes on those funds contributed to your traditional IRA, up to the contribution limit stated by the IRS.
• Roth IRAs — A Roth IRA is another form of self-directed IRA, but instead of investing with pre-tax dollars like a traditional IRA, it uses after-tax dollars. So, while your annual contributions are not tax-deductible, qualified Roth IRA withdrawals in retirement aren't subject to income tax or capital gains tax.
• 401(k) — A 401(k) account is an employer-sponsored retirement account. Like the traditional IRA, it uses pre-tax dollars. So you can save on taxes the year you invest and only pay taxes when you withdraw. Some 401(k) accounts may come with some form of employer matching, where your employer will match your contributions up to a certain dollar amount or percentage.

3. Set up automatic contributions
Schedule automatic retirement contributions so you can save without thinking about it.

If you participate in a 401(k) through your employer, your contributions are likely automatically deducted from your earnings. With some retirement plan providers, you can also set up periodic contribution rate increases, which is a great way to increase savings over time.

Retirement is too important to ignore

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