Is Debt Delaying Your Retirement Savings Goals?

If so, you’re not alone. A new survey finds non-mortgage debt holders are much less likely to save for retirement.

Debt delays retirement goals: Retire in 5 - No, 6- No, 10 yearsIf you have limited income, the decision to pay off debt instead of saving money can be a constant dilemma. You want to save money to reach your short-tern savings goals, as well as your retirement goals. But you have high interest rate credit card balances to pay. So, which do you do first?

For most people the decision goes to paying off debt. You promise yourself that once you’re done paying off these balances, you’ll focus on saving. But inevitably, emergencies come up, credit card debt increases and you never get around to saving. If this scenario sounds familiar to you, you’re not alone. A new survey from LIMRA (Life Insurance and Market Research Association), this is a common trend for anyone that holds “non-mortgage debt.”

Debt repayment and retirement goals by the numbers

According to the survey, roughly 7 out of 10 American workers currently hold non-mortgage debt. That includes student loans, credit cards, auto loans and other personal debt. It’s pretty typical to hold these kinds of debt, but the survey finds non-mortgage debt drastically hinders people’s ability to save:

  • Just 31% of non-mortgage debt holders save for retirement outside the workplace
  • 69% of workers without non-mortgage debt save for retirement outside the workplace
  • Non-mortgage debt repayment affects younger generations more:
    • Only 20% of Millennial debt holders save for retirement outside of work
    • 34% of Gen X
    • 55% of Baby Boomers

Of those paying down debt, 6 out of 10 say that debt repayment negatively affects their ability to save effectively to reach key retirement goals. Interestingly enough, many people recognize that they may simply spend too much on debt repayment each month.

  • 59% of Millennials say they use too much income on repayment
  • 46% of Gen Xers put too much income to debt elimination
  • And 39% of Baby Boomers say the same

However, lack of free cash flow may not be the only things stopping most workers from reaching their retirement goals.

  • 51% of Millennials, 35% of Gen X and 20% of Boomers say they don’t know enough about IRAs to use them

Finding financial balance

“Your financial life and your budget need to be balanced,” encourages Gary Herman, President of Consolidated Credit. “Focusing all your extra cash on debt repayment seems like a smart choice on the surface. However, if you don’t have long-term and short-term savings built into your budget, then you’re short-changing yourself. It’s just not a sustainable financial strategy.”

Instead, Herman says that people need to work on achieving a balanced financial life. This strategy allows you to focus a little money on each of the goals you have. It may take longer to hit targets, but you’ll be better off in the long run.

“In a balanced budget, you should be able to save about 5-10% of your income every month,” Herman says. “That money should be split between retirement savings and short-term savings. This allows you to build an emergency fund, so you can stop taking on new debt for unexpected emergencies. You also save for the future, so you can retire on time.”

Are you spending too much income on debt?

Consolidated Credit has a few tricks you can use to determine if you’re overspending on debt repayment:

  1. Your debt to income ratio should be less than 36%. Use Consolidated Credit’s free debt-to-income ratio calculator to see where you stand. If your ratio is more than 36%, you probably have too much debt for your income to maintain a balanced budget. Stop borrowing and take steps to find debt relief.
  2. The minimum payment requirements on your credit cards should take up no more than 10% of your take-home income. If your minimum payments take more than that, then it’s time to consolidate. Debt consolidation can reduce your monthly payments and help you get out of debt faster by minimizing interest charges.

Once you find relief, balance your budget to include savings

Herman encourages people to go through the process of making a budget once they consolidate. He says, “Take the money you save by consolidating and put it towards savings. Start by generating an emergency fund that will help you avoid new credit card debt. Then, explore long-term savings tools, like IRA accounts, so you can start working to reach your retirement goals.”

Consolidated Credit offers a free guide to Achieving a Debt-Free Retirement. It includes basic information about accounts that can help you reach your retirement goals, such as IRA and Roth IRA accounts.

“Saving for retirement can be intimidating, from figuring out mutual funds on retirement accounts to even just determining how much you need to save,” Herman says. “But there are resources that put these topics into plain English. Learn the basics and then go from there, but the key is to get started.”

Consolidated Credit is here to make things easy as possible. For example, we offer a Retirement Milestones infographic that explains how much you need to save along the way.

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