As I mentioned last week, I’ve been thinking about reducing my retirement savings and using the money to pay off debt instead. We’ve decided to go ahead with the plan, and I’m very excited about it.
It wasn’t an easy choice to make. The standard advice during tough economic times – especially for folks like us who have decades until retirement – is to keep up with retirement savings. And we are big believers in saving for retirement. We are committed to not being a burden to our children in our old age, and to retiring with enough years and money to fully enjoy ourselves.
However, I’m confident that the choice we’ve made to reduce our retirement savings for a year is the right one for us. The money will be redirected toward paying off my student loans, which will be paid off in full in a year – leaving us with only the mortgage as our debt.
One reason I say this is the right choice for us is the psychological benefit. I can’t tell you how excited I feel about having zero non-mortgage debt.
Another reason this is the right choice for us is the financial freedom we’ll gain from paying off my loans. The monthly payment we make is pretty substantial, and we’ll be able to redirect all of those funds into other financial goals. Like retirement. Or saving for college. Or paying for private school, should we decide to go that route.
A third reason to opt for paying off my loans right now is the guaranteed 4.5% rate of return. In this economic climate, that’s pretty tough to beat.
And the fourth reason for paying off my loans is the strong likelihood that any money we invest in the market right now will lose value. And there’s a very real possibility, if not probability, that it will not have regained its value by the time my loans are paid off. As Janette mentioned on my last post, I could park the money in a money market fund until the market recovers, but by then, I will have paid off my loans and be in a position to invest more than the contributions that I won’t be making.
There are a couple of points I want to make, though. First, we’re still saving for retirement. We’ll just be saving a little less.
And second, this is what’s right for us. As demonstrated by the comments of Mercedes, Janette and Tony’s Mom on my last post, it’s not the right decision for everyone. The retirement vs. pay off debt debate is one that’s frequently addressed in the personal finance blogosphere, and for good reason. The decision on how to prioritize is an individual one.
I know one thing, though: I can’t wait to be debt-free!
Image credit: Yahoo! Finance.