5 Ways to Get Out of Debt Without Sacrificing Your Retirement Savings

Saving for retirement and getting out of debt aren’t mutually exclusive, yet far too often people give up on one to do the other. While it’s important to lower your debt load as you enter retirement, you don’t want to sacrifice retirement savings to do that. Sure, going into retirement without any debt is an enviable position to be in, but if it means you don’t have any money saved for living expenses, it’s quickly going to become an unsustainable situation.

From budgeting for both to consolidating your debt into a lower interest rate, here’s a look at four ways you can get out of debt and, at the same time, save for retirement. (See also: The 7 Best Ways to Get Out of Debt and Retirement Savings: How Much Is Enough?)

Time Your Strategy to Your Retirement Date

How aggressive you are in terms of saving for retirement is going to depend on your age. If you will be trading in the briefcase for golf clubs in a few years, then saving is going to be the main priority. However, if you have 20 years or more before retirement, your focus should be reducing your debt. That doesn’t mean that you don’t save while you are paying off your loans, but you may have to cut back on how much you're saving to get out of debt.

Consolidate Your Debt into a Lower Interest Rate

Some debt is better than other types of debt; however, all consumers aim to be eventually debt free. When eliminating debt, it’s important to tackle the high-interest rate loans first. After all, the higher the interest rate, the more it’s going to cost you to pay it off.

If you owe money to multiple lenders, consolidating it all into one loan may make it simpler to pay off each month. But don't rush into this. Consolidation only makes sense if you are getting a better interest rate on the debt. You don’t want to consolidate to make it easier and end up paying more. Be wary of loans that consolidate all your debt and have you pay the same amount each month for a certain amount of years. Typically they come with a high interest rate and fees. (For more, read: How to Manage and Consolidate Your Own Debt.)

Alternatively, “If you have outstanding debt, find out if there is an opportunity to settle it, although the IRS considers debt that is canceled, discharged or forgiven as taxable income,” says Carlos Dias Jr., wealth manager, Excel Tax & Wealth Group, Lake Mary, Fla. “Make sure you weigh the pros and cons.”

Take Advantage of Company Match Programs

Retirement can easily last more than 20 years, which means you are going to have to amass a pretty sizeable nest egg. That can seem impossible to do if you are drowning in debt. One way to boost your retirement savings for free is to take advantage of your company’s 401(k) match program, if one is offered. Many employers will make employee contributions up to a certain percentage. That is free money, which is why you should max out the match regardless of how much debt you have. Let’s say your company will match up to 6%. You’ll want to make sure you are contributing 6% into your 401(k) so you can get the full amount.

“At a bare minimum, I like clients to contribute enough to receive the match. I don't want them leaving money on the table,” says Marguerita Cheng, CFP®, CEO of Blue Ocean Global Wealth in Rockville, Md. "They also realize tax savings today that can increase their cash flow."

Downsize Your Lifestyle

Paying down debt and saving for retirement is possible, but it may require some sacrifices on your part. Cutting costs that will free up more money to save or reduce your debt could mean skipping the trips to the coffeehouse or eating in instead of going out to dinner three times a week. Giving up your landline phone, reducing your mobile phone bill and shopping during sales are other relatively painless ways to free up some cash flow.

If the debt is high, and you are close to retirement, selling an expensive home and moving into a cheaper one can go a long way toward improving your debt and retirement savings situation. The idea is to free up money so that it can be used towards those two important goals. 

Budget for Both Goals

Budgeting is the cornerstone of any sound financial plan, and it can easily be applied to saving and paying off your debt at the same time. Once you have your debt in order, and you figure out just how much you need to live comfortably in retirement, you can come up with a budget and earmark money for each goal. Again, your time horizon and the interest rates on your loans will dictate which gets paid first and how much is put in savings. But setting a budget and sticking to it can go a long way in getting out of debt without sacrificing one of the most costly things you face: retirement.

“Budgeting is a mindset. We have to want to do it. We have to want to get out of debt,” says Craig L. Israelsen, Ph.D., designer of the 7Twelve Portfolio and executive-in-residence in the financial planning program at Utah Valley University in Orem, Utah. “Spending can become addictive – so we need to treat it as a potential addiction. Addiction recovery requires relentless commitment. Find someone you will be accountable to when you get the urge to splurge.”

The Bottom Line

Debt and saving for retirement can go hand in hand if you devise a plan to tackle both at the same time. Far too often people wrongly assume they have to do one or the other, and that can end up hurting them in the long run.

From taking full advantage of company-sponsored retirement savings programs to consolidating your debt into a lower interest rate payment, there are many ways to cut your debt load without sacrificing your retirement. (See also: Saving for Retirement: The Quest for Success.)