Should I continue to contribute towards my retirement or pay off my debt in a bull market?
I'm contributing a small amount towards my retirement ($2,500/annually) even though it could go towards paying off my debt. Now that we are in a bull market, should I continue retirement contributions or stop until we hit a bear market? Even though paying more principle on my debt will help, my retirement accounts only have to earn 4.78% to offset the 17% interest on my debt.
We've been in a bull market since the spring of 2009 and as stock prices move higher overall valuations are getting quite stretched. Although no one can predict the future, almost every year has had an interim correction of 10% or so and it's increasingly likely that a substantial temporary pullback lies ahead. With rare exception, it's been a good idea to concentrate on debt reduction first. The interest rate on your debt appears to be fixed, but the return on your retirement accounts could be in the black . . . or in the red, at least over the next year or two. Given these circumstances, you would be best served whittling down the debt and then making further contributions to your retirement accounts.
Speculating on the course of the stock market is risky in the extreme. Over time, stock prices move higher, but there have been many substantial pullbacks along the way. With that understanding, I think your best course is debt reduction first, then adding to your retirement accounts.
I followed you until your last sentence. Your debt carries a rate of 17%? Good heavens -- your investments need to earn more than 17% for you to be better off NOT paying down your debt. A certain return of 17% does not exist. Sure, you save on taxes by contributing to a 401(k) but you are still paying a ton of money to the bank. Get busy and pay off that debt, now. Live like a pauper until it's gone. Cut back on discretionary purchases and get used to having less. When the debt is paid off you can celebrate (and invite me).
Once you are out of the hole you have dug yourself, never again should you let a month go by without paying off your credit cards in full. IN FULL. Always.
But, retirement contributions are very important. Don't stop contributing; get the money for debt paydown from somewhere else. If you can't swing it (because heaven knows life costs money) then cut your contribution if you must, but see if you can do both. I hope you come out of this with a life-lesson and become a saver in earnest. Upon retirement, you will need invested savings of 20 times your annual living needs in order to retire comfortably. So few people get there, and I hope you will be one of them.
I don't think there is necessarily a wrong answer here, given the information you provided. A specific recommendation would depend on the variables. For example, how much debt do you have, how old are you, what is your aversion to debt, how much excess do you have on a monthly basis to contribute in either case, etc.
To your point, you want to be sensitive to the interest rates of your debt. You also don't want to miss out on compound interest, and meeting your retirement goals.
I think one place to start is that if there is a match in your retirement plan, I would recommend contributing up to the match, in almost any situation, because that is "free" money that you don't want to leave on the table.
Next, I would assess your monthly cashflows to ensure that you are able to meet your needs without going further into debt. If you are (there is excess each month), then you will have to decide where to allocate those funds. Perhaps you can split them between making retirement contributions, and paying off your debts. Hope this helps.
In order for me to answer your question more specifically, I would need to know more about your overall financial picture. For example, how much debt do you have? What is the current value of your retirement investments, etc. I believe that you should have little, to no debt by the time you are retired. However, some debt might be unavoidable depending on your unique situation. I am not going to suggest that you stop saving for retirement because if you don't save for your retirement then who will? These days, many companies are no longer offering Defined Benefit (pensions) Plans where money is set aside for your eventual retirement.
Therefore, it is imperative that you continue to save for retirement. Now, as far as your debt is concerned, my suggestion is that you set up a payment plan that you can afford. I wrote a blog post on building excellent credit and I believe some of what I have written may be beneficial to you: https://www.answersaboutwealth.com/build-excellent-credit/.
Keep saving for retirement!
Thank you for the question and it is a good one. There are a lot of factors for you to think about here. First, how much is the outstanding debt balance you owe? If you owe a lot, paying the debt balance gives you a 17% return and is the easy answer. If your debt balance is low, say 10K or less, the 17% is going to be less than 2k, so it probably still makes sense to pay some of it down- say 50% to debt payment, 50% to retirement, but use as much as you can to save for retirement. Also, some of this depends on your age, the younger you are, the more time you have to allocate money towards retirement. Also, to the extent possible, contribute to your retirement accounts as the earnings are tax deferred (Regular IRA) and tax free (Roth). One last thought, one consistent approach to saving for retirement is do it monthly, bull or bear market, that way, during a bear market, the contributions you make will get you more for your money so when the next market advance arrives, you will benefit. I hope this helps answer your question.
Yale Bock, CFA
Y H & C Investments