Should You Lower 401(k) Contributions to Pay Off Debt?

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If you are considering reducing your 401(k) contribution to pay off your debt, there are certain points to keep in mind. (iStock)

Saving money for your retirement is crucial. If you are burdened with heavy credit card balances, school loans, or other debts, but you may be tempted to cut back on your 401(k) contributions to pay off the debt first.

Lowering your retirement savings to get rid of your debt can indeed make sense in certain circumstances. Whether it’s the best move for you depends on a number of variables, including your age, the interest on your debt, the type of debt, and whether your employer matches a portion of your 401(k) contributions.

More than 77 percent of U.S. households had some sort of debt as of 2016, the most recent year the government released data from its government Consumer finance research. New data is expected later this year.


Almost 42 percent own mortgages or other debt backed by their primary home, borne 38 percent credit card balances, while about 31 percent had auto loans and 20 percent had education loans, representing the largest source of dollar-denominated household non-mortgage debt.

It’s clear it’s important to address that debt, especially high-interest balances. On the other hand, securing a financially healthy retirement is also critical and that requires saving or investing.

A 401(k) is an employer-sponsored retirement plan that offers significant benefits in addition to the ability to save automatically through payroll deductions. You can lower your flow taxable income (and tax bill) by participating because the company withholds your pre-tax contributions.

In addition, many employers match a portion of the employees’ 401(k) contributions — often up to about 3 percent of salary or wages, although levels vary by company. That match is part of the employees’ pay, and they will waive it if they don’t contribute enough.


Different experts offer different rules of thumb for debt and retirement. Consider the following factors when balancing the competing needs to pay off debt and save for retirement.

Type of debt

When you’re nearing retirement and wearing a lot student loan accounts, it may be wise to channel some income into debt payments, especially if your investment gains are unlikely to exceed interest.

As mutual fund giant Vanguard noted, student loan Debts typically have to be repaid even in bankruptcy, and the government can garnish up to 15 percent of Social Security payments if you default on a federal student loan. This can pose major problems for a retiree, or for a young person receiving disability benefits.

On the other hand, if you enjoy a low-interest mortgage, feeding your 401(k) may serve you better than paying extra on your home loan.


AN high interest credit card balance can make it difficult to get ahead financially. Temporarily cutting 401(k) savings to get rid of this burden can work in your favor and also bring peace of mind.

After all, your retirement account would have to deliver remarkable returns year after year to outpace a credit card with a 19 percent interest rate.

Paying off debt can also increase your credit score, which can provide more financial flexibility overall.

Debt Amount

If your debt level is quite low, there may not be an urgent need to convert cash from 401(k) investments to make additional payments. You should be able to pay off this debt relatively quickly while saving for your pension.

Your personality

While emotions can fuel financial decisions, it can cause problems, but your personal priorities and comfort zones can play a role in the decision to put off retirement savings to pay off debt.

If impending debt is keeping you up at night, it can give you peace of mind and mental energy to take care of that part of your financial life first to take other healthy financial steps, including retirement savings, once you’ve freed yourself from the burden.

A large 401(k) balance may look and feel great, but the number can provide a false sense of security if high interest rates are bleeding you financially, or if you’re paying off debt in retirement.

Remember, any debt you retire will become part of your retirement cost and limit your ability to spend money elsewhere.

Consider consulting an expert financial planner to help you assess the best steps and weigh your savings against debt repayment as you work to secure your financial future.

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