Updated on 09.16.14

Retirement Planning: Contributions & Debt Repayment Tips

Trent Hamm

A few weeks ago, I put out a call on Twitter and on Facebook for detailed posts that people would like to see. I got enough great responses that I’m going to fill the entire month of July – one post per day – addressing these ideas.

On Facebook, Tyler wanted to know, “Should I stop my retirement contributions while i pay back my college loans? I am 23 and my employer will match up to 5% of my contribution. Should i continue? or hold off until my loans are paid?”

The challenge with any question like this is that it relies so much on future events. What will the stock market do over the next thirty or forty years? That’s unknown. What path will Tyler’s life take over the next ten years or so? That’s unknown as well. Both of these factor enormously into answering the question above.

The best thing we can do is follow some reasonable approximations and rules of thumb for future investment growth while also striving to give Tyler as much freedom as possible in the coming years.

The Ghost of Investing Future
In order to get an estimate of how much someone should be investing for retirement, you have to come up with a few basic assumptions.

When will the person retire? This lets us know how many years of investing we’ll be able to account for. I’ll assume that Tyler will retire at 75, giving us 52 (!) years to work with.

How much of an annual raise can we assume? I usually just match this at the same rate as inflation. Speaking of inflation…

How much inflation should we assume? I usually peg this at 3%, which is pretty sound based on the economy of the last twenty five years.

How much of an annual return on stocks can we assume? Warren Buffett projects a 7% annual return over the long haul in the American stock market, so I’ll use that number.

Do you see how tenuous all of these calculations are? When you estimate retirement savings, you’re making a lot of guesses for the future.

What you’re going to shoot for is an amount high enough so that the person’s annual expenses equal 4% of the total savings at the time of retirement.

I ran the numbers, assuming that Tyler is able to live on about 75% of his salary each year. My calculations showed that Tyler should be saving somewhere between 9% and 10% of his annual income for retirement, so we’ll use 10%.

10% is an excellent thumbnail to use. In this case, Tyler has the advantage of a long period until retirement, but I’m also using some pretty conservative returns on his investments for my calculations.

Tyler’s Choice Today
In order to make it to a healthy retirement, Tyler needs to be saving 10% of his annual income starting today. He can choose to delay it a few years, but then he’ll be locking down 11% or 12% or more to make it to his goals. He’s a lot better off locking things down at 10% starting today.

Tyler’s employer will match up to 5% of his contribution, so if Tyler contributes just 5% of his salary today, he’ll be on pace for what he needs for retirement. This is exactly what I would recommend that Tyler does.

Once that’s taken care of, he should throw every dime that he can at his debts. It is far easier to live a little lean now when you’re single and aren’t weighted down with responsibilities than to live lean later on when you’re burdened with career and personal requirements.

Should Debts Ever Delay Retirement Contributions?
This is a tricky one to answer. Quite often, people eschew retirement savings in order to pay off debts because they don’t want to make lifestyle changes. This is a giant mistake. If you find that you’re in a situation where you can’t make your minimum debt payments, a small retirement contribution, and live your current lifestyle all at once, changes need to be made with regards to your lifestyle first and foremost.

If you are in a situation where further lifestyle changes genuinely are not possible – meaning you have no cable or satellite bill, no cell phone, no new or nearly-new car, no living quarters larger than you need, etc. – then you should take care of your high-interest debts before renewing your retirement savings. Of course, this does need to be coupled with an emergency fund and a commitment to avoid debt in the future, because without that, this is all a moot point.

Personal finance almost always comes back to impulse control, and this is no different. If you can’t control your impulses and desires when it comes to spending money, financial success will almost always be elusive in your life. You won’t get ahead if you can’t control yourself.

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  1. Josh says:

    Never ever give up an employer match, for any reason, at any time, under any circumstances. It’s got nothing to do with long term stock market returns, what you think your life will be like in retirement, or any other lifestyle dilemma. If you want to have a retirement, saving for it is mandatory. Giving up free money is a horrible plan.

  2. Josh says:

    Why in the world would you assume he would retire at 75?

  3. valleycat1 says:

    Or, don’t make it an all-or-nothing dichotomy. I’m assuming the question is about whether to use what’s going toward retirement to pay off student loans early. If you don’t have any other way to find additional money to go toward the loans, reduce your retirement contributions a bit & put that toward the loans.

    But, the longer you put off getting $ into retirement, the more painful (dollarwise) it will be to get caught up, particularly with the return on investment you get these days. There’s always something else that seems more urgent than putting more $ toward retirement.

  4. BrentABQ says:

    Vesting certainly affects this. If you won’t be vested until after 3 years or something like you may not get that match. Much better to get the sure deal.

  5. valleycat1 says:

    Is this employer match correct (‘my employer will match up to 5% of my contribution’)? When I worked for a company with a retirement plan option, we could contribute up to 5% of our income and the employer would match (either dollar for dollar or 50% – I forget the details) once vested. We could contribute more but it wouldn’t be matched.

  6. jackie says:


  7. valleycat1 says:

    #6 jackie- LOL – I skimmed right over that!

  8. Adam P says:

    Just to note, I ran some calculations on this a while back on a similar note, and with a 50% match, the ONLY time you should not take the match is when you are seeing toxic credit card debt interest rates (say >20%) that will take you years to pay off. Even the free money matching on the initial contribution can’t make up for letting this kind of interest rate compound for a few years. It really doesn’t take long for the toxic debt to cost more than the investment gains are worth (including the match).

    So to that extent, I disagree with comment number 1.

  9. 2million says:

    75? Just a comment about everyone working later in life. How do folks expect to work at their existing job/career path that late in life? I guess it depends on the career path, but at least the corporate jobs that pay a decent salary that I have been exposed to I don’t think folks would be able to continue past their late 50s – its too demanding. If you can’t get to the point were your in the range of being able to walk away with a part-time job by your late 50s your in the danger zone – my 2 cents. That calls into question being able to maintain/grow your salary income in your 60s/70s.

  10. bogart says:

    Thanks for writing about this Trent; I think it’s an important topic.

    Though I agree with many of your points, I think your advice here omits a really crucial piece of information: what is the interest rate on Tyler’s debt? Absent that information, I think it’s very hard to assess what he should do. All my debt (including scandalous stuff, like — gasp! — a car loan) is at 4% or less, and at that rate I think the tax and time benefits of contributing to retirement are well worth it.

  11. Mark says:

    75???? This is the worst retirement planning I have ever heard.

  12. lurker carl says:

    Saving only 10% of your pay is going to be hard on your thumbnails when it comes time to retire. Perhaps Tyler needs to work a second job on nights and weekends to pay off the debt while maintaining or increasing contributions to his 401k.

    FWIW, I know about a dozen folks in their 70s who still work. Most work out of necessity (debt and other monetary issues) while a few others work out of boredom. Only one person works because of loving the job, of which the spouse hates. Not pretty.

  13. Gretchen says:

    75 also assumes you’ll be not only able to work at 75 but also that you are working a job that then is not available for a 25 or 45 year old.

    Also not one mention of vesting in a retirement article?

  14. getagrip says:

    I feel that for someone starting off, 10% of salary savings, 5% with a match and 5% otherwise (e.g. for an emergency fund or other savings) is a good value to shoot for. First off their salary is typically entry level and they will likely need a fair amount just to get established and live off of and they may have student loans or other debts to pay off. Then, as loans are paid off, they can swing a decent chunk of that towards retirement. Then they can add to it over the years, e.g. if they get a 6% raise two years down the road, they could take 2 or 3% of that and put it towards retirement while still seeing a positive effect on their living standard.

    I started with 5% of salary into my retirement fund to get some matching and have grown that to 15% of my salary over the years pretty much along those lines. As others have said, it doesn’t have to be an all or nothing situation. Obviously if you can do more and still pay off loans it may be better for your future self. But that’s a personal decision on how you want to spend your life and your money.

  15. Kevin says:

    Why on Earth would you assume ’75’ as a reasonable retirement age?

    Trent, I know you think that we’re living longer and longer, and somehow, you think that means we’re HEALTHY and ACTIVE longer. But the truth is, our bodies are still getting frail at the same age – medicine is simply better at keeping us alive longer. It seems that in your mind, you see yourself living a healthy and active, mentally-alert lifestyle right up until age 90, then dropping dead suddenly. I’m really not sure why you continue to cling to that belief, even as you aknowledge your lack of success in improving your own physical health and fitness levels.

    Perhaps you’ve heard the news that obesity is growing, diabetes is epidemic, and Gen X may be the first generation to have SHORTER life expectancies than their parents. The trend toward longer life spans is reversing. But even if you refuse to acknowledge that, you must recognize that the people who DO live relatively healthy lives into their 80’s and 90’s are not a random sampling of society. It’s the people who have that rare combination of good genetics, good diets, and exersized regularly.

    That said, I’m really not sure what kind of retirement you think people will have. If Tyler takes your advice and saves 5% of his income (with a 5% employer match) for the next 52 years, then assuming he currently earns $50,000/year, and keeping the rest of your assumptions the same, then Tyler will have $1.3 million (in 2011 dollars) at age 75. That will produce an income of $51,000/year (again, 2011 dollars).

    Once Social Security is added in, and factoring in that he’s delayed taking it for so long, his annual income will be much more than he’s currently used to. Furthermore, at such an advanced age, he could take the entire $1.3 million and throw it in an annuity. The actuarial tables for a 75-year old would work in his favor, and he’d get a very generous payout.

    The question is – what would he DO with all that money? Put gold-plated spinners on his wheel-chair? Show off the diamond-encrusted spoon he eats all his meals with? Boast about having the biggest big-screen TV in his entire retirement home complex, on which to watch Antiques Roadshow?

    Why on earth would he wait so late in life to leave the rat-race?

  16. DOT says:

    How about learning to live a satisfying life while saving at least 30%-40% of your income and planning on retiring in your 50’s.
    This advice will have to be tweeked a bit here and there depending on life events (good and bad) that will happen along the way.
    However, having the option to leave a paying job at 50ish seems a heck of a alot better than being required to work until you are 75.
    Just the thought alone of possibly being able to retire early could increase his quality of life from ages 23-50.

  17. TC says:

    How reasonable is it to assume that wages will keep pace with inflation? I thought wages in real dollars have been decreasing over time.

  18. Allie says:

    Trent, it is almost adorable how you seem to think that people are receiving annual raises.

  19. valleycat1 says:

    Allie – you’re correct – I haven’t had a pay raise for 3 years.

    But in Trent’s defense, the days of retiring when you’re 55 or so are pretty much over except for the lucky few. And I think Trent was talking about full retirement, not ‘retiring’ from a full time & working part time at something else (which technically isn’t retirement).

    As age 60 is coming up on me pretty fast, 75 doesn’t seem all that old; people my age are now being advised to wait until 67 or later to retire. And my spouse intends to work at something until the day he dies – he plans to wear out, not fade out. If you’re working at what you love, staying in that work to a later age isn’t a huge sacrifice or onerous prospect.

  20. Earth MaMa Jo says:

    In the last year or so, I’ve heard comments from people that basically say that if you are 50+ you should already be able to retire and if you aren’t, you did something wrong. Sorry, but being of a generation that was raised to believe you work until 65 and then retire….and then having all the rules change in recent years, I think it is an “ageist” comment to be judged by these new rules. Adapting to the current economy is tough. I know plenty of folks who fully intended on retiring at age 65 or younger who simply cannot. It’s not because they didn’t plan well either. Too many have seen their retirement funds dwindle or disappear altogether. So many I know watched their 401K vanish while they sat on the sideline really not knowing what to do (yes, many of us are ignorant about these things). We trusted the gov’t about Social Security and are now being told it probably won’t be there for us. A small retirement income I’d planned on from a former employer is being underfunded now, and it looks like they won’t be able to fund what they promised me when I am eligible to draw from it. How do you plan for THAT?! We trusted the gov’t and the greedy “financial advisors” about IRA’s and 401K’s who seem to disappear along with the money invested in their plans. Did we know that we’d have to take on the lion’s share of health care in our old age? No, we didn’t. The rules has CHANGED, so I think it is unfair to judge 50+ people by these new rules. Also, imagine being told when you are 40 something that you need 3 MILLION dollars to retire, when you won’t earn a fraction of that in a lifetime. This generation wasn’t educated in investing the way I think younger people might be. Investing in the stock market used to just be for “rich” people, not the average Joe. We are doing the best we can with the circumstances we are given, and I resent having younger people voice the opinion that we should have known better, planned better, etc. They didn’t give out crystal balls when I was growing up…does anyone else have one? To those who seem to have made all the right choices and KNOW they will be comfortable forever….my hat is off to you, but not everybody has the same sequence of events that lead to “success”. My 2 cents.

  21. Earth MaMa Jo says:

    Another 2 cents here. When I was 38 (in 1999) I was “too old” to get a job by a recruiting agency. I found a job anyway. Imagine being 49 now and KNOWING that the reason you don’t get interviews and such is because of your age. My 30 years of work experience AND brand spanking new college degrees (yes, plural) mean nothing. Also, despite popular belief, it’s not because I demand a large salary or am in poor health, or too old to adapt or any other reason that gets slapped onto older workers. I’ve eeked out earnings in the last 8 years ANY WAY I can. I work twice as many hours for about 1/4 the pay. I haven’t stopped sending out resumes….but it seems to be an exercise in futility.

  22. Mary Dyer says:

    Trent started writing these columns at the end of 2006, start of 2007, back just before the economic crash now almost half a decade ago before the era of having cash money from regular paychecks or other once considered reliable cash money income simply dried up and blew away.

    starting “retirement” from a serious overdose of “caregiving” that ended with medical bankruptcy forclosing my once carerfully planned and paid for home, quickly snowballed into other personal and family disasters beyond posting here.

    but looking back at 81, I think the thing I regret most is all the things we might have done ttogether or might have had that we gave up to more sensibly save and invest for a more secure future that never did come.

    RDetirement is a crap shoot, luck of the draw, for people who didnt get laid off in a jobless recovery degrees and experience was a plus if having to find another job, not a minus that left you over aged, over qualified, underskilled, and lucky to get neighborhood baby sitting evgen with three dgrees in education for stuff like home ec that is getting cut because it isnt contributing to no child left behind scores.

    Decades of payro9ll deducions for social security is turning out to be a grand national Ponzi scheme and even if they dont outright cancel SS, its going to take all your frugality and tightwad skills to make devalued U.S dollars last to the end of the month if you dont blow it on groceries beyond the limits of food stamps for the month as well.

    Its a public secret the country has been bankrupted by 2 and a half wars and if I werent renting rooms with tenantshelping pay the internet bill I wouldnt be posting here either.

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