Liz Pulliam Weston wrote a nice article recently describing nine money priorities. She lists them from top priority on down:
- Pay your bills
- Save $500
- Start saving for retirement
- Pay off “toxic” debt
- Bolster your emergency fund
- Check out long-term disability insurance
- Enhance your retirement savings
- Start saving for college
- Save for spectacular expenses
I emphasized #3 and #4 because she thinks that starting to save for retirement edges out paying off debt. Sensing backlash, she defends this position:
You may be surprised to see retirement so high on the list. Surely your credit card debt and your kids' college educations are more important.
Except they're not. You have only so many working years to set aside enough cash to last you for the rest of your life, and any delay in getting started will cost you big time. Waiting just five years to begin can reduce your total nest egg by as much as 30%.
Retiring (or not retiring) is about money, not about age. If you reach age 55 (or 65, or 75, or 80) and don't have enough money to support yourself, you won't be able to retire. Fill out an application to hand out yellow smiley stickers while you wear a blue vest. Socking away money at 8% annual return (ha!) does you absolutely no good if you're paying 17.99% APR on a credit card. If the interest you're paying out is outstripping the interest and dividends and appreciation you're getting with your investments, you're falling behind. Filling up a leaky bucket just means you'll be thirsty later.
There are a couple of instances when it might pay to follow this advice:
- You get a match with your 401(k). If you contribute to your 401(k) only to the point for which you get a maximum match from your employer, then this might offset putting off your debt repayment. It's free money. But if your employer doesn't match your contribution, forget contributing until your consumer debt is paid off.
- You have low fixed-rate mortgage debt. This debt is a good inflation hedge. Gosh, if you have a rate under 5%, you're golden. Pay that one off slowly, and put what you want into retirement savings. If there's a chance that your rate will increase, pay it off ASAP before funding retirement.
Otherwise, I really don't seen the merit of saving for retirement until you get rid of the high-APR debt. But maybe it's a psychology thing.