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We are the employees of Smart401k. Contributions to Seeking Alpha come from our investment advisers, our president and CEO, our vice president and our financial communications specialists. Smart401k is a web-based investment adviser providing unbiased investment recommendations for employees... More
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  • 4 Guidelines: Repaying Debt and Saving for Retirement 0 comments
    Feb 4, 2011 2:29 PM

    The news has been filled with stories about debt. Some of us have bitten off more than we can chew.

    Lots of families and individuals (and companies and governments) are awakening from a spending frenzy that, in some cases, was decades-long. Now we’re trying to shape up and settle up. If you’re in that boat, how do you balance your debt repayment strategy with your retirement savings strategy?

    There is not a one-size-fits-all answer. There never is. But here are four general guidelines.

    1) Continue your retirement plan contributions as long as it’s mathematically possible. Don’t give in to the temptation to cease contributions while paying down debt. The benefits of compounding and dollar cost averaging both depend upon long-term investing.

    2) Try very hard to structure your budget so you can contribute enough to take advantage of your employer match. View the match as an excellent return-on-investment. If you must reduce your contributions in order to have enough cash flow to pay debts, reduce them by as little as possible.

    3) Don’t take on additional debt! If you’re reducing retirement contributions and grappling with your debt, it’s probably not time to buy new things. If you’re struggling to make payments on things you don’t need, consider selling them. For example, if you have a big loan on a luxury car, you could downgrade to a less expensive model.

    4) Consider your net worth*. Paying down debt and saving for retirement are both so very important that you should consider selling paid-off assets in order to reduce debt. In many cases, that’s a better move than eliminating retirement plan contributions. Note- If you’re nearing the age you planned to retire, you’ll need to decide whether you’ll be able to retire with debt. Look at your net worth from this perspective:

    • Net worth includes debt, so a high net worth means you could be in pretty good shape despite your debt. However, before you retire, you need to develop a debt payment strategy for retirement to ensure that your debt obligations won’t drain your retirement savings.
    • If you have a low net worth, or even a negative net worth, you should reassess your plans for retirement – even if you have a hefty retirement savings account. Working more years will allow you to contribute more money to your retirement savings, pay down more debt, postpone using retirement savings and take further advantage of compounding.

    There are loads of scams and lots of reputable debt-reduction programs/services out there, so do your research if you’re considering that route. Our Smart401k advisers are happy to discuss both how to invest and how much to invest in your work retirement account – not to mention the big question how much will I need? If you have questions, contact our adviser team at 877.627.8401.

    *This net worth spreadsheet is overly simple and intended to give you a baseline idea of your net worth.

    Carolyn Humpherson, Financial Communication Specialist

    About Smart401k

    Smart401k is a web-based investment adviser providing unbiased advice to help employees invest in their employer-sponsored retirement plans.  Smart401k provides service to almost 11,000 clients who collectively have more than $1.5 billion in assets. Individuals receive personalized investment recommendations based on the funds in their plan and support of professional investment advisers available to answer all investment questions. Based in Overland Park, KS, Smart401k can be found at www.Smart401k.com.

    Themes: 4 Guidelines, debt and retirement, debt reduction, retirement savings, 401(k), nest egg, Smart401k
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