Rented life asks:
If you have credit card debt should you pay that off completely before setting up and contributing to retirement? (And does your advice change is the employer doesn’t offer a plan and your retirement is just whatever you set up?) My friend thinks you should pay off credit card first, no matter what and then when that is gone you can start saving for retirement. I feel that can do more harm than good, waiting to set up retirement until your debts are gone might have you setting up really late or possibly always having to push it off. Who is “right?”
If you get an employer match that is anywhere decent you should absolutely save for retirement up to the match before paying off the credit card. In fact, depending on the match rate, your credit card interest rate, and penalties, there can be situations in which you would put money in, get the match, then take your original money out minus the penalty and you would still be ahead.
If you’re young (with a lot of earning years left), have high interest debt, and have lousy options for saving for retirement at work (no match, high cost plans at work, etc.) and can (and will) knock out that debt really quickly, and will definitely start putting money away for retirement as soon as you’re done with the debt, then go ahead and pay off the debt first! This is, in fact, what DH and I did when we got married. We paid off his (relatively high interest rate) student loans first and were still able to max out our IRAs the next fiscal year. We benefited more from those 6K getting rid of the debt than we would have putting them in an IRA (especially since it would have been a market peak! But we didn’t know the tech bubble was going to burst, so that was just luck.)
After those two easy scenarios, there’s a lot more grey area. And it’s going to depend on your personality and your options what you do. You will have to sit down and run the numbers, think about the risk, the benefits, and your own personality. The goal is not necessarily to make the most money on paper, but to get rid of your debt and have enough saved for retirement. It is far better to make a little less money on paper if it means you’re going to make more money in reality because you actually stick to your goals instead of giving up.
If you’re really bad at doing multiple goals at the same time and you would have to save for your retirement manually (and you don’t get a nice match), then go ahead and focus on the debt. However, even if you’re bad at doing multiple goals at the same time, if you have retirement through work, you can usually have it auto-deducted so you don’t even think about it.
Similarly, if you know deep down that as soon as your credit card debt is gone or down, you’re just going to spend again until you’re back in the same situation you were in before, put money away for retirement so you can’t touch it. We don’t understand people who can’t keep from maxing out their credit cards no matter how much they make (and we try really hard not to read their blogs because they’re so depressing), but if that’s you, then you need to contribute the max to your retirement accounts in a way that it’s auto-deducted without you even realizing it’s happening. That way you can continue to pay off your debt in your 60s, 70s, and 80s, or at least still have something to live on when you’re old after declaring bankruptcy multiple times (as retirement money is protected).
Speaking of which, if you have plans to file hard-core bankruptcy, max out that retirement. I’m not sure what you should do if you’re planning on doing the lighter kind of bankruptcy… you should probably talk to a lawyer about that.
If your work offers good plans, that’s more attractive than if it offers bad plans. But, as you note, even if your work only has bad plans, you can still invest up to the IRA or Roth IRA limit with Vanguard. However it’s more difficult to set up auto-deduction before you see the money than it would be with work, which may interact with your personality type and how many goals you can focus on at the same time.
If you aren’t going to remember to set up auto-deduction for retirement just as soon as you get out of debt, then do it right away when you’re thinking of it instead of paying off debt.
If you are going to be in debt for a long time, then it might also be worth investing in the stock market just to add a little bit of risk to your portfolio, or, as mentioned before, to protect your future self in case of bankruptcy.
There’s probably even more scenarios that I’m not thinking about. But no, I don’t agree that you should always pay off high interest debt first while ignoring retirement (*especially* if you’ve got a 100% match at work!), nor is it always the best idea to contribute the max to retirement while you’re still paying off high interest debt. (Heck, if you work for the government, the max you can contribute to tax-advantaged retirement savings might be a lot more than 20% of your income!)
What say you, grumpy nation? High interest debt? Retirement savings? Both? Neither? Is it always clear-cut what you should do?