Is it more important to pay down debt or put away money for my retirement?

April 24, 2023


The simple answer is you should do both!


People who focus strictly on paying down debt are thinking only about quickly eliminating a finite dollar amount; however, they often do not realize the amount they will need to accumulate for their future retirement. This retirement pool is typically a multiple of what their debt is.


If they wait to save for retirement, they may not get there. The key to saving money for retirement is taking full advantage of the power of compounding.


For many, it can take years to save their first $100,000 but interestingly, the next $100,000 happens quicker. Not only do you have the money you’re contributing but you have the existing capital compounding. Depending on your investment strategy, it might take the same amount of time to double that amount again.


The earlier you start, the more doubling can occur. The key is to get the principal amount accumulated as soon as possible so the power of compounding can be utilized. If you wait too long, you may run out of time.


A famous quote by Albert Einstein stated that “Compound interest is the most powerful Force in the Universe”.


In my work with clients, I have seen people who paid off large mortgages and then started to really focus on their retirement saving only to realize that given the time left they were going to have to contribute a much larger percentage of their income towards their investments which forced them to make some very hard choices about their current and future lifestyle expectations.


The key lesson here is to ensure that when taking on debt, a part of your budget should include consistent savings towards a retirement goal. A little bit per month goes a long way when it’s done over a long period of time. After people pay off their mortgage, many don’t realize that even if their house value has increased over the years, if they haven’t saved for retirement, they ultimately may have to downsize both their house and their lifestyle to free up money for retirement.


I recommend separating your house from your investment portfolio, so you never have to think about relocating or downsizing your lifestyle.

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