This Seemingly Responsible Financial Move Could Be Hurting Your Retirement Savings

If you hope to retire comfortably someday, then saving for the future needs to be a high priority. But that's tough for a lot of people to do. Obviously, you have to pay for your living expenses first. For some, that eats up most of their income.

Others have extra cash to spare, but they also have a lot of debt they're trying to get off their plate. And that's where people can make a seemingly smart decision that could come back to bite them.

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You don't need to be debt-free before saving for retirement

It absolutely makes sense to focus on paying down your debt before saving for retirement if you have a lot of high-interest debt.

For example, if you have a credit card balance you've been carrying for a few months or a payday loan that's ballooning out of control, any extra cash should go toward paying this down rather than investing for retirement. The interest rates on payday loans and credit cards are higher than what you'd likely earn investing your extra cash for retirement, so you're paying more in interest in a year than you'd earn on your investments over the same period.

But that's not the case for all loans. Mortgages, for example, have much lower interest rates. This is especially true for those who were able to lock in low rates during the pandemic.

Paying off your home before you start saving for retirement often just sets you back. You miss out on all the investment growth you could have had if you'd started stashing money in your retirement accounts earlier. That forces you to save even more of your personal savings per month to reach your retirement goals.

What to do instead

After paying your bills each month, take stock of how much money you have left over. If you have high-interest debt, put your extra money toward that first. A balance transfer card or a personal loan might make it easier to put this debt behind you.

If you have other debts with lower interest rates, pay them down while you save for retirement. Stick to your loan payments and designate a regular monthly contribution to your retirement account. This is easy if you have a 401(k). If you have an IRA, check with your provider to see if you can set up recurring transfers from a bank account.

Once you start paying off some of your debts, revisit your budget. You may decide to keep some of your savings for things you enjoy, but consider stepping up your retirement contributions, too. This can be a big help, especially if you got a late start on savings.

Don't forget to review your retirement savings strategy whenever you experience a major life change, such as a new job or the loss of a family member. Making small changes now will be easier than making big changes on the eve of retirement.

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