As a young person in your 20's, is it better to start saving for retirement or pay off debt?

Question

My debt consists of student loans and a mortgage. I contribute to a retirement plan with my job, but i work for the government, so there is no matching for my contributions. Should I severly reduce the retirement contribution (or end it) and focus on the debt?

Answer 1

I think you need a good balanced approach. You need to pay off debt as well as increase investments. Not all debt is bad. Your mortgage should be the least of your concerns. It is "good debt" as it is backed by an asset that theoretically will increase in value. The student loan isn't even that bad because it's probably at a low interest rate. You should establish a reasonable goal and time frame for paying it off.

Now that being said, I would not put all of my resources into paying off debt. It sounds like the right thing to do, but in reality saving for retirement is as much about how long you save as it it how much you save. Being in the market longer allows you more time to generate interest and compound your wealth. If you put all of your resources into paying off debt, you do lower your liabilities, but you lose the opportunity to accumulate wealth as you do it. In my opinion it is best to do it balanced. If you were deep into credit card debt, I may think otherwise, but if all you have out there are mortgages and student loans, you are really ahead of the game in your 20's.

Answer 2

If all you have is student loans and a mortgage you're doing very well! Don't worry so much about paying off the mortgage. Since you get tax money back from the interest you pay on that it is somewhat beneficial to have a mortgage. Devote as much as you resonably can to paying down your student loans, but don't make that your sole focus. Continue to make contributions to your retirement account as well as building up easy-access savings for if you have an emergency. If it were a case of you not being able to make your bills because you are contributing too much to savings and retirement I'd say reduce the retirement savings b/c you don't want to live your life with that debt hanging over your head and when it's paid off you will have more to contribute to retirement. However, always try to put a little bit (even 1% of your pay) into an account you can have access to when an emergency comes up. Many people make the mistake of not having savings and putting all their money towards paying off debt and when an emergency comes up they have to return to using credit and they are back at square one.

Answer 3

Look at what your alternatives are. You have student loans and a mortgage. Depending on your salary, both of those types of interest could be tax deductible. So the actual interest rate that you're paying may be a little less. When you pay off a loan faster, you get a guaranteed return, it is the after-tax interest rate of the loan.

The question is, will you make a better return investing in a retirement account.

If you are investing in a diversified stock fund, you can expect to make somewhere in the 8-10% a year range over the long-term. And the investment grows tax-deferred (which means you don't have to pay taxes on it until you take the money out in retirement). Assuming that your mortgage and student loans are somewhere in the 6-7% range, I would pay them off at the normal rate, and put money into your retirement account. The money that you put in now will have a long time to grow using the power of compounding interest, and you will in essence be 'earning' a couple of extra percentage points over paying off your other debit early.

Answer 4

The answer to this depends on both your income and the interest rate on your debt.

Both mortgage interest (almost always deductable) and student loan interest (if you make <~$50K annually) are tax deductable. Therefore even if your interest rate is 6%, your effective after tax interest rate would be 4-5%. At those effective rates, you are much better off putting money away for retirement, because your after tax rate of return will likely be in the 7-8% range over the long term.

You would also be giving up your mortgage interest deduction if you paid off the mortgage earlier. That is rarely a good idea, particularly if you are single, since the deduction will be worth more to you than if you are married. You will likely also have to stop itemizing your taxes if you don't have the mortgage interest deduction to put you over the standard deduction, so you will lose out on some additional tax breaks you otherwise would have been able to claim.

Answer 5

Pay off your debt first and then put all the money that you would have been using to pay off your bills into your retirement account--debt will always cost more in the long run because the interest rates are always so high. Don't take anything out of the retirement fund becuase they'll penalize you, but perhaps cut back on how much you're putting in there and get rid of your credit card bills. When you're done with eliminating your credit card debt, keep a savings account for emergencies so that you don't go back into debt if something happens.

Answer 6

If your debt is at 8% interest or less, since your retirement plan is pre-tax, and since market returns tend to be 10%, it's actually better to keep contributing!

If your debts are 12% per year or more, pay them off ASAP.

So long as you make your payments on debts on-time, simply having a debt isn't really harmful to credit rating.

And in an emergency, you can borrow against your retirement fund, usually at a very low interest rate.

So...as long as you're able to make payments on time, if your debt's 8% or less, don't pay it off early by skimping on retirement.

Answer 7

first of all, you're no longer paying into SS for others. you're procuring your self. You sound a splash annoy yet what you're able to do is study this methodology. to help a splash, each and every person that works pays into SS. as nicely to paying into this methodology, you additionally can placed aside your guy or woman monies, i.e., mark downs, 401K, etc. some people can no longer arise with the money for to maintain. The activity they have covers residing expenses, meals, lease/loan, automobile, coverage, etc. etc. it isn't the fault of the "previous" person who did no longer pay for their retirement. you relatively have a poor attitude in this concern. the place does the disgust or detest of older people come from? Are you forgetting that some day you would be there? And what if existence's situations brought about you to no longer be waiting to hold collectively SS (considering the fact which you probably did no longer paintings or you probably did no longer paintings sufficient quarters to get a first rate amt. there are various "what ifs" i'm guessing you're on your 1920s once you point out 40 yrs. that is longer for i'm beneficial they are going to be elevating the retirement age to sixty seven. i've got been attempting to answer each and each remark you made and back, you are able to not be removed from SS. that could be a application for the working person. Paying taxes is diverse than SS.. In remaining, i in my opinion have confidence you are able to study SS. you maintain questioning that is for somebody different then your self however the final diagnosis you're putting your guy or woman monies into the equipment.

Answer 8

If the interest rate of your loan is low, then it could be convenient to keep paying it as contracted (it is cheap money). If the saving for retirement is giving you a high rate, it is good to keep paying it (you could retire sooner or richer). Balance how much you pay for your loans and how much you earn from your retirement savings: if you pay more than what you earn, do not save and finish that debt the sonnest. If you earn more that what you pay, you can keep as you are now.

Answer 9

my student loans have me until I'm about 50, so i gradually pay and also have been blessed with a great job at 23 where they match me for a 401k, so I'm doing both..

i think debt is more important at this time, just so u can get credit and make it easier in the future.

Answer 10

Get out from under Student loans first.