Oct 16, 2008

Reacting to the economy again: Cutting back on retirement savings in favor of reducing debt

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.


Camille said...

How nice to be a year away from having the loans paid off! The only debt we have are my law school loans (we rent) and I'm only 4 years out so you can imagine how much is left to pay off! But we pay a little bit more than the minimum every month and it is already making a small difference. I just can't wait to be out from under them! GOOD LUCK!!

Kacie said...

Sounds like a good plan!

Right now, we're contributing about 9% to retirement accounts, and we'll increase that once our car loan is paid off.

It'll be much easier to do once that $277/month is freed up!

Jen_nifer said...

So you don't think the market has bottomed out yet?

Carol M said...

Good for you! We followed Dave Ramsey's plan and are now debt-free except for the house, it's a great feeling! He believes in paying off all your debt before beefing up retirement. I think you made a great choice -- stick with it and you can do it.

Anonymous said...

We are just months away from paying off our debt too, and it is thrilling. We have also done less retirement savings for this time, and I think it was a good choice. Once the students loans are gone, we'll never have to think about them again and will be in a stronger place financially. I love it!


Chief Family Officer said...

@Camille - Thanks! I think you'll find that as your salary increases and you can direct more toward your loans, it gets easier to pay them off faster. I never would have guessed a few years ago that we'd be this close to payoff. Good luck to you too!

@Kacie - It sounds like you have a good plan as well! Although may I suggest that you take part of that monthly car payment to start a car fund? That way you'll be much closer to being able to pay cash for your next car and not having to take out another car loan.

@Jennifer - I'm definitely no expert but no, I don't think the market has bottomed out yet. My conclusion is based not on analysis of the market itself, but more the fact that there doesn't seem to be any good news coming yet, and that seems to lead invariably to the market going down.

@Carol - Congratulations, that's an awesome achievement! Thank you for the support!

@Jennifer - There's a lot to be said for the peace of mind, isn't there? Congratulations - it sounds like you've done great!