How to Save for Retirement While Repaying Debt

Monthly budgets increasingly include a line item for the repayment of debt. According to a New York Life’s Wealth Watch division poll, approximately two-thirds of Americans have debt, and the poll indicated that credit card debt, house loan debt, and vehicle loan debt are the most prevalent.

A total of $16.51 trillion will be owed by households in the third quarter of 2024. In comparison to the end of 2019, this is an increase of $2.36 trillion, according to the Federal Reserve Bank of New York. The research revealed that credit card, mortgage, and vehicle loan amounts climbed in the third quarter. The overall balance of student loans, another major source of stress, fell, but millions of Americans continue to struggle to repay their student debt.

Based on Northwestern Mutual’s 2024 Planning and Progress Study, U.S. individuals who report carrying debt, excluding mortgages, hold an average of $22,354. According to the survey, nearly one-third (32%) of the average American’s monthly salary goes toward paying off debts other than mortgages.

According to New York Life, 58% of people believe debt prevents them from achieving their financial objectives. Even after adjusting for inflation, the total amount owed on all types of debt has increased, making workers, particularly those nearing retirement, financially vulnerable, according to Dylan Huang, New York Life’s senior vice president for retirement and wealth management.

How to balance savings and debt

Debt might obscure your financial future, but you can still plan for retirement while tackling debt payback.

Adopt budgeting

How much money is brought in monthly, and where does it go? When it comes to paying off debt and saving for retirement, it is essential to know the answers to these questions.

Warren Ward, a certified financial planner (CFP) and financial adviser at WWA Planning & Investments, frequently uses zero-based budgeting with his clients. They examine every high cost to ensure that the customer values it. He explains that until they reach the intended amount of savings/investment, his company will continue to look for ways to minimize expenditures.

Employ the resources provided by your workplace.

Many firms offer retirement programs. Your retirement savings can be increased through company matching (401(k)). If feasible, you should never turn down an employer match, Retirement Planners of America licensed retirement planning counselor Shawn Stone says.

Additionally, your workplace may provide services you may use to enhance your financial well-being. Huang of New York Life suggests investigating potential perks such as student debt repayment aid, healthcare savings vehicles, and childcare assistance. Using this advantage might help you become less dependent on credit cards.

Boost your cash flow

Increasing your monthly income flow can free up financial space for debt repayment and retirement savings. Additional funds can also be utilized to establish or expand an emergency fund. Marigny deMauriac, CFP, and CEO of deMauriac Financial Consulting & Wealth Management, say that when the next emergency occurs, you’re not back in debt again. She proposes solutions, including negotiating a raise, making a job transfer, or taking on a side hustle to enhance income flow.

Save as much as you can

Determine how much you can save up for retirement within your existing budget. These savings will pile up over time. Time is your most valuable asset when it comes to investment, followed by compound interest, says deMauriac.

What is an effective method for eliminating debt?

How can you repay your debt when interest continues to accrue? Two prevalent debt management techniques break down debt repayment into manageable portions.

Technique 1: The snowball technique

The snowball approach is popular because it gets the ball going. Work from the smallest to the largest debt first, and then utilize all resources available. Clearing financial balances motivate individuals.

Technique 2: The avalanche technique

Using the avalanche technique makes more financial sense as you prioritize paying off loans with the greatest interest rate. This will save you money, which you can use for outstanding loan payments.

How can you eliminate debt before retirement?

Establish good spending and saving habits early in your career if you are just beginning. Contributing the maximum to retirement accounts, concentrating on student loan payments, eliminating credit card debt, and saving for emergencies can help you achieve financial success.

Also beneficial for those nearing retirement are healthy behaviors, although there is less time to eliminate debt. How much do you owe, and how much can you repay before you retire with your present budget?

Even with debt, it is possible to retire.

Some Americans delay retirement, giving them additional time to pay down debt and save money. However, you may discover that you still have debt when your retirement date approaches. Baby boomers average $24,136 in non-mortgage debt and $198,203 in mortgage debt, according to the Experian study State of Credit 2021. The majority of outstanding student debt in the United States is held by those aged 50 and older.

You can retire with debt if the cost of repayment is affordable. Calculate in advance your retirement income and expenses, including debt commitments.

With a greater grasp of expenditures, folks may desire to ‘test drive’ their retirement budget by calculating the monthly amount they would have and living within that budget, says Huang of New York Life. This can assist in establishing if their present living expenditures need to be changed to accommodate a simpler lifestyle and what their post-retirement budget would look like.