Mar 14 2012

Retirement series wrap-up: Debt & college vs. retirement and more



Thanks for sticking with me on this retirement series! It can be complicated stuff and I hope I treated the subject matter with the clarity it deserves. This is big bucks we’re talking, after all.

When should you start funding your retirement account while getting out of debt?

As with all questions, the answer is “it depends.” Some financial advisors suggest not contributing to retirement until your debts are paid and you have a starter emergency fund.

Dave recommends stopping your contribution to retirement plans and investments for as long as it takes to get rid of your debt (excluding mortgage payment). Do not withdraw from your retirement plans; just let them sit while you conquer your debt. Then, after everything is paid off, start contributing toward your retirement plans again. — Dave Ramsey

I disagree. I think it’s risky to miss out on an employer match, especially if if takes a year or more to pay off your debt. Dave reasons that if you’re throwing all of your money at debt, it’s a bigger debt snowball and you’ll be out of debt sooner because of that. Maybe.

If you truly are struggling to make traction with your debt pay-off, then maybe it does make sense to be aggressive with debt and hold off on retirement for awhile. But if you’ve got a small emergency fund and are making steady progress with an end in sight, I think it makes sense to at least contribute enough to get the full company match if available.

For most of 2011, we only contributed enough to Shane’s 401(k) to get the full match. Beyond that, we were saving like mad to have enough to put 20% down on our house. In 2012 we’re trying to catch up. I’m glad we didn’t stop our entire retirement contribution.

Where does retirement fit in with saving for kids’ college?

Retirement should trump kids’ college. Well-meaning parents don’t always see it that way. I think of it like this: Kids can come up with a variety of ways to pay for college — part-time jobs, scholarships, testing out of certain classes, loans and more.

The same can’t be said for retirement. You might not physically be able to work into your 80s+. It’s better to prepare for your own retirement over your kids’ college.

Final things to keep in mind

  • Don’t put off planning for retirement. Seriously! If you can’t contribute right now, come up with a plan for how you’ll get to that point, and when.
  • If you can’t invest as much as you’d like right now, at least invest something. It’s easier to gradually bump up your contributions than it is to go from 0 to 10% at once. Plus, the contributions do add up.
  • Pay attention to fees. Keep your expense ratio under 1% and avoid paying front or back-end loads.
Two books you might be interested in:
I obtained Saving for Retirement Without Living Like a Pauper or Winning the Lottery* when it was free for Kindle. It had a great run-down on a lot of retirement topics in an easy-to-understand way. It was a bit condescending in places, unfortunately.

Next, I borrowed the audio and Kindle version of I Will Teach You To Be Rich* from the library. It’s now on sale for $2.24 for Kindle right now, so I bought a copy since it contains material I will probably want to reference later. The title is arrogant and if you don’t like the blog then you won’t like the book.

This book features more financial basics and it doesn’t focus on the entrepreneurial aspect of money like his blog is doing lately. Despite the tone, I think the author has a lot of good info and 20-somethings will probably learn from it.

Posts from the series, in case you want to go back:

Go here to see our retirement calculator, created by my husband, Shane.

  1. Series intro: From drugstore deals to retirement
  2. How do you want to spend your retirement years? This part is about planning your time spent; not planning the financials.
  3. How much money will you need to retire? This post will help you figure out your hypothetical retirement expenses. From there, we’ll calculate how much that will be in inflated dollars, and we’ll also factor in pensions and Social Security to get a final ballpark of how much we’ll need in our nest egg at retirement.
  4. How much should you save with each paycheck to reach your goal? For some people, 10-15% will be plenty, but it’s a rule of thumb that won’t fit everyone’s situation.
  5. Where should we invest our retirement funds? Talking about 401k and IRAs, and setting up your IRA
  6. How to choose your retirement investments in your portfolio. What’s a large cap fund? Are index funds a good choice? How can we decide on specific investment options in our 401(k) or IRA?
  7. How to choose your asset allocation. How much of your portfolio should be stocks or bonds? Breaking it down further, how much should be large cap, small cap? Here are some ideas to get you started.

*Amazon affiliate link. See disclosure policy

Posted under Retirement | 4 Comments »

4 Responses to “Retirement series wrap-up: Debt & college vs. retirement and more”

  1. Retirement vs the kid’s college fund? I agree retirement trumps college fund but I’m not forgetting it completely. I want my kids to finish school and start building their life after college without being bogged down by student loans like me.

  2. The debt vs. saving is a tough topic. But I tend to agree with you. Waiting to save for retirement kills any possibility of compounding while you pay off debt. College is another story.

  3. I agree that putting off retirement savings is a big mistake. We have some credit card debt and student loans that we’re paying on, but we contribute at least a little each paycheck to a Roth IRA religiously. I refuse to sacrifice our future financial security!

  4. I agree with funding retirement ahead of funding college funds. Plus kids can always get a JOB to fund their college if they don’t get scholarships — loans are too much of an automatic option for people now IMO.

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Hey! I'm Kacie, wife and mother of 3. I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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