A debate has emerged over the past several years, thanks in no small part to the national discussion about the growing student loan crisis. Should you contribute to your employer’s retirement plan or work to pay down your debt obligations? This has been, and still is, a very personal decision.

Your employer’s retirement plan will likely offer tax-deferred savings over the long term that would yield a variable rate of return based on the investment choices offered within the plan. The benefit of this approach has historically been to save up for retirement over time. Terminology like “dollar-cost averaging” and “compound interest” are used to explain that the longer your contributions are invested in the market, the more earnings potential they could capture over the long term.

Conversely, personal debt, whether that is comprised of student loans with low interest rates, or high-interest credit cards and loans, presents a restriction on discretionary budgets. Many people set goals to pay down personal debt before beginning their retirement saving. Some feel the simple joy of being “debt-free.”

Over the past several years, some developments have emerged that have had a direct impact on this decision, which has made it difficult for individuals to continue to maintain or increase their contributions for retirement.

• Increase in student loans: According to the Education Data Initiative web page (Hanson, Melanie, September 27, 2021, “Student Loan Debt Statistics,” EducationData.org), tuition costs have grown from generation to generation, with the current younger workforce dealing with higher amounts to pay back. This increase in student loan debt has been a growing concern for the younger generation and has tended to lead them to focus on addressing their debt as a priority.
• Age of the workforce: Viewing labor force statistics made available on the U.S. Bureau of Labor Statistics website, there are more prime-aged individuals in the workforce, which would include Millennials (aka Generation Y, born after 1981), and Generation Z (born after 1996). Traditionally, a younger workforce does not aggressively participate in retirement plans and focuses more on the debt they have incurred.
• COVID-19: As shown in a Pew Research Center Survey in August of 2020, nearly 33% of adults stated they used money from savings or retirement to pay bills, and 25% had trouble paying bills. The impact of the pandemic continues to have lasting effects on individuals and employers. Individuals may have lost part or all of their incomes and incurred larger amounts of debt. Similarly, employers may have had to furlough segments of their workforces and reduce or eliminate the benefits of their retirement plans, such as an employer match or profit sharing. Either way, this has made it very challenging for individuals under these circumstances to continue to save for retirement.

Despite the challenges facing individuals when it comes to a decision to contribute to retirement savings or pay down personal debt, oftentimes a combination strategy might be the best approach. Why not do both? Here are four suggestions to allow for both:

• Step 1. Make sure you have a sound budget in place with respect to income and fixed expenses. Where viable, minimize discretionary spending on impulse purchases. Your employer’s retirement plan may offer accessible savings budgeting calculators that may facilitate this, but there are many free tools available online as well.
• Step 2. Make sure you are making the minimum payments on any revolving installment debt. This is necessary to maintain your credit score and to avoid any additional penalties, charges, or late fees.
• Step 3. Research your company’s retirement plan. Does the plan offer a company match on your salary deferrals, and are you taking full advantage of that feature? If you are not taking advantage of the match, you are leaving money on the table that could ultimately help with your retirement and other long-term financial goals.
• Step 4. Use remaining discretionary funds available to pay down higher interest rate debt.

It may take time, patience, and perseverance, but even in the current landscape employees can contribute to their retirement and pay down their personal debt.