How to Save for Retirement While You’re in Debt

Even while you’re paying off debt, it’s possible to save for your golden years with the right strategy.

One of the biggest roadblocks to people saving money for retirement is credit card debt. High balances eat away at cash flow, forcing you to live paycheck to paycheck and making it impossible to save. But even while you’re paying off debt, with a little planning and taking advantage of available retirement savings tools, you can begin to save.

This guide is designed to help you start saving for retirement as you’re working to get out of debt. That way, you’re not continually delaying retirement because you have debt to pay off. Then once you find the right combination of solutions to get out of debt, you can start to gradually boost your retirement savings, so you can have enough saved to retire on time.

Step 1: Start with your employer’s 401k match program

401k statementOne of the most beneficial tools to build retirement savings is a 401k plan through your employer. Most employers offer something known as a match program. For every dollar that you contribute to your 401k, your employer will contribute money, too. The most common example is your employer contributing 50 cents for every dollar you contribute, up to 6 percent of your annual salary.

So, let’s say your gross annual salary is $50,000 per year. If you set your savings at 6% of your salary, that would save $3,000 per year. However, you’d receive an extra $1,500 from your employer. That’s free money for your golden years!

“Another benefit of saving through a 401k is that the contributions are taken directly out of your paychecks,” explains Gary Herman, President of Consolidated Credit. “You don’t need to remember to contribute. You simply set up pre-tax contributions through your HR department and the money gets taken out automatically.

What if you’re living paycheck-to-paycheck?

Depending on how much you make, 401k contributions generally take about $50 to $150 out of the average worker’s bi-weekly paycheck. If you’re already spending every penny you earn, this can make it hard to start your 401k.

If you haven’t done so already, start by making a budget. You need to know exactly where your money is going to know what you might be able to cut back.

  • Look for any discretionary expenses (wants) in your budget that you can cut or scale down.
  • If you use multiple streaming services or have multiple magazine or media subscriptions, find ones you can cut and only keep one.
  • See if there are any services that you pay for that you can do yourself.
  • Evaluate how much of your food budget goes to dining out. If you’re eating more than one dinner or work lunch per week out, cook for yourself instead.

“Cutting down your budget isn’t always easy, but saving for retirement is crucial,” says April Lewis-Parks, Education Director for Consolidated Credit. “Look for anything you can cut back so you can start saving now. Then, make sure to talk to your employer each year and ask for raises at your annual review. Use pay increases to boost your retirement savings, since that’s money that you’re not spending yet.”

Step 2: Find solutions to reduce your debt payments

Once you start taking advantage of the free money your employer offers for retirement, it’s time to focus on paying off debt. Your main goal should be to reduce your monthly debt payments, which will free up more money for saving. There are several debt solutions that provide lower monthly payments:

SolutionType of DebtBenefit
Debt consolidation loanAny unsecured debt, including credit cards, personal loans, student loans, and even federal and state back taxesBy lowering the APR applied to these debts, you can get out of debt faster, even though you usually pay less each month. Choosing a longer term for the consolidation loan will give you the lowest payments possible.
Debt management programCredit cards, personal loans, some medical bills, may be able to include some payday loansOn average, a DMP lowers people’s total credit card payments by 30-50%
Hardship-based federal student loan repayment plansFederal student loansThese plans based monthly payments on your Adjusted Gross Income (AGI) and family size. Payments are generally reduced to 10-20% of your AGI or less.

“Credit cards and student loans are the two biggest sources of problem debts for Americans,” Gary Herman says. “If you can find solutions that lower your payments for both of these kinds of debt, you can immediately free up money to boost your retirement savings.”

As you implement each debt solution, you should immediately move the money you free up to boost your retirement savings. You can simply ask your HR department to increase your 401k plan contributions.

Maxing out 401k contributions

Although most employers only offer matching up to 6% of your salary, that doesn’t mean that’s all you can save. Each year, the IRS sets a maximum limit to 401k plan contributions.[1] That limit is typically much higher than the amount your company will match. For instance, the maximum 401k contribution limits for 2019 is $19,000.

How contributing to a 401k makes it easier to qualify for student loan relief

Financial planning helps ensure the health of your retirement nest effSaving for retirement can make it easier to qualify for hardship-based student loan repayment plans. Things like 401k contributions reduce your AGI and a lower AGI means it’s easier to qualify for student loan relief.

“Most people assume that doing something like contributing to a 401k will show the government that you aren’t facing a hardship,” Herman explains. “But the opposite is true because qualifying is based on AGI. If you reduce your AGI by contributing to a 401k, you may find it easier to qualify for lower payments. It’s a win-win.”

Step 3: Consider opening an IRA to boost your retirement savings

If you don’t have a 401k through your employer or you want to supplement those retirement savings, there are other tools you can use. An Individual Retirement Account (IRA) is a retirement savings plan that allows you to save for retirement outside of your workplace.

There are two types of IRAs – traditional IRA and Roth IRA. A Roth IRA is the most common and popular. You make contributions with after-tax income, but you won’t be taxed when you withdraw the money once you retire. The 2019 IRA contribution limit is $6,000, so that’s the most you can currently contribute in a single year.

“Having a combination of retirement accounts allows you to diversify your retirement investments now. You can invest in a more diverse mix of mutual funds, which helps your savings grow and shields you against changes in the economy,” Consolidated Credit’s education director April Lewis-Parks explains. “It also gives you a way to withdraw money tax-free once you retire, because 401k withdrawals will be taxed.”

Step 4: Find a certified financial planner that can advise you moving forward

Talk to a certified financial advisor about your retirement

Once you set up an IRA, it’s time to get serious about your retirement investment strategy. Both 401k plans and IRAs work by investing the money you contribute to mutual funds and exchange-traded funds (ETFs). The difference between the two funds is that mutual funds are actively managed to pick stocks that will provide the most growth. ETFs track investment indexes, such as the S&P 500.

There are different benefits to each type of fund. A mutual fund may provide better, faster growth to increase your retirement savings. However, they generally have much higher fees. By contrast, ETFs have lower fees and give you more oversight and control. There are other types of funds within these two basic categories.

  • You have domestic funds that invest your money here in the United States.
  • Then you have foreign equity funds that invest your money abroad. This can help you diversify your investments, so a slow economy in the U.S. doesn’t completely slow down your investment growth.

“If you’re overwhelmed reading all of these investment terms, that’s proof you need to talk to a certified financial planner,” Lewis-Parks encourages. “Most of us have never taken a class in investing or finance, so it’s easy to get confused frustrated by a lack of knowledge. But instead of avoiding investment, you need to educate yourself and that starts by talking to an expert.”

Make sure you talk to the right investment specialist

If you have a 401k, then you be able to make an appointment with your plan’s advisor. Most companies will invite the investment advisor to their offices at least once a year. So, you may be able to meet with them in person. If not, ask your HR department for their contact information. This advisor will be the best one to talk about your plan because different plans offer access to a different mix of funds. They’ll be able to offer specific advice on how to manage your 401k.

If you’re investing independently, then you may need to find a certified financial advisor on your own. You want to look for a fiduciary advisor. This means that the advisor is legally obligated to act in your best interests. In other words, they won’t drive you into investing in a mutual fund simply because it offers them a higher commission.

Step 5: Start learning so you can ask the right questions

After you talk to a financial advisor and decide how you want to manage your funds, you aren’t done with your work. Mutual funds change and the value of investments change as market conditions fluctuate. That means you can’t just set up your retirement investments and then let them ride until you retire. At least once per year, you should make an appointment with your advisor and review your investments.

In order to have an informed conversation with your advisor, you need to be educated about investments yourself. This will help you ask your advisor the right questions to get the most out of the appointment and your retirement strategy. If you don’t know where to start, Consolidated Credit offers an on-demand webinar that can help you start learning.

Step 6: Decide how and when you want to retire

“Most guides for retirement start with this step, but we think it’s better to end with it,” says Lewis-Parks. “First you need to start saving and then take steps to maximize your savings and get the most out of your investments. Then you can start thinking about what you really want to do once you retire. After that, you can start to refine your investment strategy accordingly.”

Lewis-Parks says these are the kinds of questions you want to ask:

  • By what age do you want to retire?
  • Are you planning on working part-time?
  • Do you want to live somewhere different once you retire or stay where you live now?
  • How much are you interested in traveling?
  • What hobbies will you want to keep up or start once you retire?
  • Will you have pets during retirement?

“Really consider how you’ll want to live after you retire,” Lewis-Parks continues. “For instance, many people keep working at least on a part-time basis because they find work fulfilling and want to keep busy. If this sounds like you, then you will have income to supplement your retirement savings and Social Security. However, if you want to retire fully and travel constantly, then you will need a more aggressive saving strategy to increase the income you’ll have available during retirement.”

Step 7: Don’t forget about healthcare costs!

One reason people fear outliving their savings is retirement healthcare costs. According to a study conducted in 2016, a 65-year-old couple that retired that year will need an estimated $260,000 to cover healthcare costs during retirement. That amount increases every year.

Health Savings Account HSA statement

There are tools that can make it easier to ensure you have enough money to cover healthcare costs during retirement. The main tool is a Health Savings Account (HSA). This is a specialized type of savings account that you can use to cover healthcare costs. However, you can only qualify if you have a high-deductible health insurance plan. Like retirement accounts, HSAs invest your money in a mutual fund, so the money you contribute grows over time.

“HSAs are one of the most beneficial savings tools because they offer something known as a triple tax benefit,” Gary Herman explains. “Your contributions are tax-deductible and you don’t pay taxes on the interest you earn from the investment or your withdrawals, as long as you use them for medical expenses.”

However, Herman warns that you should only consider using an HSA after you have paid off your debt and achieved financial stability.

“HSAs are an incredible tool, but the fact that you have to be enrolled in a high-deductible insurance plan means they’re not for people who are already facing financial challenges,” Herman explains. “With a high deductible plan, one major medical emergency could put you in a situation of severe financial hardship, which will just make the financial challenges you’re facing now even worse.”

Herman says that once you achieve stability however, it may be time to talk to your advisor about whether a high-deductible insurance plan and an HSA would be right for you.

Written by :
Meghan Alard [email protected]Financial Literacy Specialist