The question, “should I pay off debt or save for retirement” is not easily answered.  I’ve thought about my answer for a long time and I believe you should never stop saving for retirement unless you are in financial crisis.  Yes, it feels bad to have debt. Yes, debt can be a huge stress on life and finances. Your particular situation may make the answer easier, but here are a few reasons why it may not make sense to stop saving to pay off debt.

First, let’s discuss the future value of money and its effect on your retirement if you were to halt savings to pay off debt.  For example, let’s say you’re 30 and have decided to stop making your $6000.00 a year retirement contribution to pay off some debt.  You’ve stopped contributing to your retirement funds for two years for a total of $12,000.00. It’s just $12,000.00, right? This isn’t necessarily the case.  Had you put away the $12,000.00, when you retire 30 years from now, assuming a 5% rate of return that money would have been worth over $50,000.00 as calculated by the Future Value of Money Formula.  The value of money over time is so important to retirement planning that paying off debt today can be a disservice to yourself.

Second, stopping retirement contributions to pay down debt can create a financial situation that simulates that you can live beyond your normal means.  One way this can happen is by taking your retirement contribution (let’s says it’s $400.00 monthly) and putting that toward debt. Maybe you were paying off a credit card and only putting $300.00 a month on it, before stopping your retirement contribution.  Now you should be able to put $700.00 a month toward this debt, but since you’re making so much headway maybe you’ll go out to eat and end up using $100.00 of the debt payment making the payment only $600.00. You’ve essentially just stolen some of your retirement money from yourself.  I know, it’s your money, but I like to tell myself, “it’s not my money but my 60-year-old self’s money.”

Another theoretical situation might be that you decide to stop making retirement contributions for 2 years to pay down debt.  At the end of the two years your debt is paid off, but you might’ve forgotten to start your retirement contributions back up. You’ll do it next month, right?  By nature, we are lazy and it’s easy to continue to get a larger paycheck. And then once that debt is paid off, our inner conscience says, “I can afford that car now that I don’t have that debt hanging over my head.”

Ultimately, in my opinion, saving for retirement should always be part of your budget.  If you have over extended your budget it would be my first advice to look for other places to cut to pay down debt.  Everyone’s financial situation is unique, so please seek advice from your financial advisor for a solution that is best for you.

*Future Value of Money Formula: FV = I * [(1 + R)T]