For the past 19 years, I have followed the advice of well known financial advisors advocating that I should first get out of debt and then begin saving for retirement.
“Did I just hear you right? Did you say 19 years?” Yep.
I’ve made some pretty bad financial mistakes during this same time, so I don’t blame these advisors for my current situation after following their advice. I just wonder whether it’s still the best advice for me now – to continue putting off saving for retirement until after I’m debt free?
Related article: I Blame the Squirrels for This Mess – How I Ended Up $120k in debt.
So, I needed to research this a bit to decide whether I should get Gazelle Intense and finish paying off the last of my debt first? Or, do I begin setting aside money for retirement now while eliminating my final student loan?
You may shout, “Pay off your debt!! Follow the Baby Steps!” A couple of months ago I would have wholeheartedly agreed with you. I’m a card carrying member of the Debt Free fan club! I hate debt, really.
After further research, though, I don’t know if I can afford to wait any longer to start planning for the future.
I searched the Web and found convincing advice for both “yes” and “no.” Everyone has an opinion, who should I listen to?
Aside from a few well-known advisors who advocate everyone become debt free first no matter what, most of the other advisors agreed that it depends on age.
The closer a person gets to retirement age, the more they need to prioritize saving for retirement.
Ok, that makes sense.
So, How Am I Doing So Far?
Personal Capital’s Retirement Planner showed me that at my current level of investment if I retire at age 67 I would deplete any accrued savings by age 73! This would happen sooner if unexpected major expenses or necessary unplanned purchases popped up. Ouch!
calcxml.com advised: “Based on your current input, it appears that you would be better off investing any surplus funds while paying your minimum debt payment.” ($196/month)
This analysis resulted from calculating that my student loan would add 4.1% annual interest after my annual tax deduction in the 25% income tax bracket, versus the 8% average earnings that would accrue in my IRA.
CNN Money Essentials Retirement Calculator tells me I’m falling critically short of expected income needs in retirement for my age, my current amount already saved, and my current % of money invested per year.
Ok, I get it…I need to start saving, but what would happen if I wait just a couple more years until I’m debt free?
Let’s Do the Math
I decided to put all my relevant numbers into MSN Money’s retirement financial calculator to see what it recommended for my situation.
- 42 years old
- $40,000 per year gross income
- $16,969.69 debt remaining at 5.5% interest (min. 1.5 years to pay off if all extra funds went towards paying it off)
- $10,500 total investment in IRA, employer offers no retirement benefit options
- $75,000 anticipated salary needed per year (inflation) in retirement, starting at age 67
- Life expectancy: age 95 (based on family history)
- 8% anticipated return on any investments pre-retirement, 5% conservative anticipated return in retirement years
Based on this information, I need to save $1,117,360 over the next 25 years. Yowzaa!!
[Note: single adults face a 40-50% increase in cost of living over married couples. Married couples tend to save 10X’s more/faster than a single person relying on one income.] Wow!
MSN Money’s Retirement Calculator recommended the following percentages saved annually to accrue a sustainable retirement income for a single adult female:
- 42 years old = 37.976%, or $15,190 annually.
- 45 years old = 50.126%, or $20,050 annually.
- 50 years old = 82.493%, or $32.997 annually.
Basically, for every year that I put off saving it requires significantly more funds invested to achieve a sustainable retirement.
If You Start Saving for Retirement Younger
The younger you start the less you’d need to save to achieve the same $1M result. Take the same information I used for myself and look at the difference starting younger would have made:
- 23 years old = 7.619%, or $3,047 annually.
- 26 years old = 9.740%, or $3,896 annually.
- 29 years old = 12.468%, or $4,987 annually.
- 32 years old = 15.996%, or $6,399 annually.
- 35 years old = 20.594%, or $8,238 annually.
- 40 years old = 31.750%, or $12,700 annually.
Age makes a huge difference. If I could turn back the hands of time, I would do several things different…not waste so much time paying off student loans, spent and saved money much differently in my 20’s and 30’s, and also I would have started planning for retirement in my 20’s when it would have cost MUCH less.
I don’t disagree with the financial advisors that most people should use all their extra income to aggressively eliminate their debts. It usually works best to focus your efforts and just get it paid off.
Thankfully, I followed this advice too and paid down almost all of my debt, and I’m so glad that I did!
But, the numbers don’t lie. I do NOT want to have to save 50% of my monthly salary at age 45 when my debts get paid off, 38% is bad enough, just because I waited a couple more years!
The long story short answer, I need to figure out how to do BOTH…save for retirement WHILE paying off debt.
Agreed, I also need to find ways to increase my income, but living and working at sea 8-9 months a year this becomes rather challenging.
Or, I could just marry a wealthy widower I meet on the ship and have him bequeath his estate to me. Do you know the average age on a cruise ship? It could happen! [Kidding]
What’s Your Plan?
Have you started planning for retirement yet? Based on what I’ve shown here, share with me your thoughts in the comments below.
Be blessed, friends! xo
-Disclaimer: This article does not claim to be comprehensive in scope for this topic. I’m also not a professional financial advisor. All opinions expressed in this post are my own. You should consult with a paid professional for any questions you may have in your situation.
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