Is It Better to Save for Retirement or Pay Down Debt?

Should you save for retirement? Or is it better to pay down debt?

Millions of people struggle to choose the right strategy. And as it turns out, the answer might not be as simple as you would hope.

Money Talks News founder Stacy Johnson believes that saving for retirement is a worthy goal that should always be among your top financial priorities. As he has written in the past:

While living debt-free is a great goal, accumulating a pile of cash is critical, especially for those approaching retirement.

A few years ago, a reader named Retha asked whether it was better to pay off the mortgage or to accumulate retirement savings. Retha said that she had not saved enough money to retire.

Stacy replied that as a worker gets older, it becomes increasingly likely that he or she will become unable — or unwilling — to work. As he said:

Should that happen, cash will be king. If push comes to shove, (Retha) could rid herself of the mortgage debt by selling her house and downsizing. But once she quits working, she has no way to generate more savings. So, that’s where the priority lies.

Stacy went on to write that for others in Retha’s position, saving “as much as possible” inside and outside retirement accounts should be the main priority. Once you achieve a “comfortable cushion,” you can turn to paying off debts such as your mortgage.

When it makes sense to pay down debt first

Of course, a mortgage is a form of debt that typically comes with a reasonable interest rate. However, other forms of debt often are attached to much higher — and more costly — rates.

In those situations — such as a credit card with a sky-high interest rate — it might make sense to pay down debt first. However, before you do so, understand your financial situation.

As Stacy says in “What’s the Best Way to Pay Down Debt?“:

If you’ve been working at the DMV for 35 years, you’re probably not about to get laid off. Your emergency fund may not need to be as big as other people’s. If your job is stable and you know you’re going to keep it, I’m not suggesting you spend your emergency fund down to zero. But if you’re paying 18% interest on a credit card and earning 1% on your savings, there’s nothing wrong with using savings to pay debts.

As Stacy has said in the past, paying off a high-interest debt is like earning that interest, risk-free and tax-free. That makes it tough to beat.

If you decide to pay down debts first, just make sure you have some money set aside for an emergency. And pay off that debt as fast as you can, so you can get back to saving for retirement or any other worthy cause.

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