How to Manage Debt and Retirement at The Same Time

There is no doubt about it, debt can severely impact a consumer’s ability to plan for and achieve their retirement goals. Any money going towards repayment of debts could potentially be going towards your retirement portfolio instead. Consumers with excessive debt are missing out on potential investment returns and the effect of compounding from equities, cryptocurrencies, etc.

The Diversified Approach

If you have debt and are looking for ways to retire sooner, one of the best approaches is often going to be to take a diversified approach in handling both things concurrently. Similar to having a diversified portfolio, you also want to have a diversified approach in paying down debt and saving for retirement. Due to this, one strategy can be to pay down debt simultaneously while also looking towards and saving for an eventual retirement. Although, it would be great to completely eliminate your debt before retiring that isn’t always feasible for everyone. It can sometimes be beneficial to do both things simultaneously but there is always a risk factor involved with this approach. You might not want to risk missing out on potential investment returns just because you have bad debt (credit card debt, personal loans, student loans, etc.) and you might not want to risk losing on investments while your debt accrues. With this option you can allocate 70% of your savings towards debt repayment and allocate 30% of your savings towards investing for retirement so you are still prioritizing debt repayment. Diversification is a great approach to take with somethings but utilizing this option will ultimately depend on your preferences and risk appetite.

The Pay Down Debt First Approach

Another approach you can take is to use the pay down debt first approach. As it might sound, the pay down debt first approach uses all excess money to eliminate debt first. Bad debt like credit card debt will often cost more than the average return on the S&P 500. Due to the cost of high interest debt being higher than the average gain of the Benchmark Index Fund this option can typically be considered “the best and safest option” in terms of maximizing opportunity cost. It’s unlikely anyone has ever been financially blindsided by prioritizing paying down high interest credit card debt. This option is many ways the most prudent choice and will allow you to sleep easiest at night.

Debt Consolidation Loan or Refinancing

Debt consolidation/refinancing can sometimes be a good option. It can help you simplify your debt (especially if you are repaying balances on multiple credit cards) and it can help you save money on interest payments. The biggest benefit is a simplified payment and lower interest rate. The biggest drawback being a debt consolidation loan will typically mean you have a higher monthly payment in general. So, this will eat up more of your cashflow and take-home income.

No matter what you option you decide is the best for you, focusing on debt repayment is typically going to be the safest option to utilize for most consumers. It will keep your head above water and make sure that you can eliminate the bad before looking towards saving for the good. The best bet is to bring as little debt as possible into retirement with you, it will only hold you back and ultimately end up costing you more money in the long run.