Reader Earin (obviously from Europe, as they wrote in using the € symbol ;)), asked why someone would save for retirement if they were clearing their debt.
My question is, wouldn’t it be wiser to not save for retirement as long as one has debt and use that money to repay the debt faster.
Then after the debt has been paid one can save more for retirement.
Doing the math is quite complicated as it’s hard to predict what will be in 20,30,40 years.
You might argue that by saving soon for retirement one gets alot more befenits because of the interests accumulating. But at the same time the interest on the debt continue aswell..
The added bonus of paying down the debt with every € available is having the good feeling of being debtfree earlier 🙂
An excellent question and point! Here’s why we do it:
GOVERNMENT ASSISTANCE MAY NOT BE AVAILABLE
In North America, the social security/assistance/government plans are pretty pathetic, unlike the plans I hear of in France (for instance).
Did you know that France’s retirement age is 62!? They just recently raised it and everyone is annoyed.
These North American government retirement plans are low, and not enough to cover basic living expenses when you retire, especially if you consider how long some people have been living after retirement, that their mortgages may not be cleared and/or they might be in an expensive city.
I think my parents’ retirement fund from the government is $300 a month, or something paltry like that. Luckily, their employer supplements.
As a result, we have to save through employers and on the side to make sure we have enough to pay for our basic needs/necessities.
Actually, I wouldn’t be surprised if I near retirement age and the government tells me:
Hey, we ran out of money and have nothing left to give you, even though you contributed throughout your working life, because your parents/grandparents lived much longer than we anticipated.
Oops! Our bad! Sorry, but you won’t be getting anything.
I am actually surprised it hasn’t happened yet. 😛
AGE MATTERS
If you are young, you have time to save for retirement, so you can put more of an emphasis towards clearing your debt.
If you are older, you may not have as much time, and you are fighting the battle on both sides:
- sliding closer to retirement age
- trying to whack your debt load down before you get to retirement, so you can start saving like a rock star
YOU MAY MAKE MORE MONEY OVERALL IF YOU SAVE
Like with fabulous employer contribution match plans!
If you put in $1, they put in $1 too, up to a certain amount.
If you put that same $1 towards debt (with an interest rate of 20% for example), you ‘save’ that interest payment of 20%, which is $0.20.
I don’t know about you, but I’d rather have $1 extra in savings than to save $0.20 on my debt.
TOP 3 REASONS TO SAVE FOR YOUR RETIREMENT WHILE YOU ARE IN DEBT
- If you get a 50% – 100% employer contribution match, you are saving 100% more than what you put in
- If you don’t have the luxury of time (nearing retirement age = greater emphasis on saving something)
- If you live in a country where your retirement assistance from the government = pathetic
And that, my foreign friends, is why we talk so much about saving for retirement, even while we’re in debt 😉
Thanks, Earin!
Just a girl trying to find a balance between being a Shopaholic and a Saver.
I cleared $60,000 in 18 months earning $65,000 gross/year.
Now I am self-employed, and you can read more about 
Thank you for the credit.
The point I wanted to make and the one I think most readers will get is that there is not on single answer to the question.
There are alot of “if”
Everyone has to make the equation for themself
Cheers
Of course! 🙂 I love that you wrote that in. Sometimes PF writers can take what we write for granted, seeing as we’re mostly in North America, we read North American blogs, etc. 🙂
I think taking the age of the person into account matters too. Some PF bloggers are more established in their lives with debt, and others are younger with different priorities.
I think my answer would be more psychology-based: By waiting to save for retirement until after you pay off debt, you are assuming that you will pay your debt off faster then increase your retirement savings to make up for that lost time. But psychologically speaking, most people will not adjust their savings enough once they have paid off their debt to make up for years of not saving, and will end up with less in the long run. It is much easier to make smaller, regular retirement payments throughout your life, then find some way to pay down your debt as quickly as possible after that.
Good point. When you are finally out of debt, it seems like all the money is YOURS to spend, and no one adjusts for retirement if they haven’t thought about it before.
To follow up on Matthew’s post, here’s some reading on how there is really nothing to freak out about regarding Social Security. http://crr.bc.edu/images/stories/Briefs/IB_10-15.pdf
Always reassuring. I’ll download and read it.
Oops – sorry. I forgot you are in Canada. The below applies for US residents.
I am hoping to move there so thank you! 🙂
$300 a month sounds awfully low – did they emigrate here at a late age? $300 a week is more like it – according to the SS sheet they send every year if I retire at 65 I will get $1500 a month, and if I work till 72 I will get $2100 a month.
Assuming the people that want to privatize/get rid of social security fail, social security is fully paid through 2038, and if nothing is done, after that the worst that will happen is that benefits will have to be reduced by 25% to avoid placing a drain on the federal budget.
If they get rid of the exenption on charging SS tax (FICA) on income over $106k per year, there will be no shortfall at all.
I should mention that my parents are working class.. minimum wage most of their lives (or no wage at all) and also attending university to get degrees, and only recently have they started working in the past 10 years at better jobs.
I think no one anticipated that anyone would live past a certain age, and now we’re all living longer and spending more, when we hadn’t worked as much before. It’s very difficult to predict these things, which is exactly why I don’t bother with government programs — I assume I am getting $0.
Great points on both side of the argument in my opinion … I think as along as you have your eye on the ball, it will be fine either way, pay debt quicker and then make up lost time, or sacrifice some high interest going out to ensure the future’s covered. The save for retirement whilst paying down debt has probably one more thing in it’s favour, if you drop the ball, and your contributions are automated, you are at least keeping one positive financial behaviour going without any ongoing decisions or self will required. Decision fatigue and our self will conking out happen, its not a bad idea to plan for it.
I personally only saved for the 100% retirement match when I was getting out of debt. Everything else went to debt, save for $1000 I put in an emergency fund…
But that was because I knew my job was v. secure. A lot of people don’t have that security 🙁