How to Pay Off Debt While Saving for Retirement

This is one of the most common financial dilemmas, and it feels like a lose-lose. Pay off debt and you’re falling behind on retirement. Save for retirement and your debt grows. Every month you spend doing one, you feel guilty about not doing the other.

Here’s the truth: for most people, the answer isn’t one or the other. It’s both, in the right proportions. The key is knowing which dollars matter most and where they should go.

The One Rule That Almost Always Applies

If your employer offers a 401(k) match, contribute enough to get the full match before making extra debt payments. Full stop.

An employer match is a 50-100% instant return on your money. A typical match is 50 cents on the dollar up to 6% of your salary. On a $60,000 salary, that means contributing $3,600 per year gets you $1,800 in free money.

No debt payoff strategy in existence produces a guaranteed 50% return. Even if you’re carrying credit card debt at 24% APR, the match is still a better deal because the return is immediate and guaranteed.

Here’s how this looks practically:

Salary	Match Formula	Your Contribution	Free Money	Your Cost Per Paycheck (biweekly)
$40,000	50% up to 6%	$2,400/year	$1,200	$92
$60,000	50% up to 6%	$3,600/year	$1,800	$138
$80,000	50% up to 6%	$4,800/year	$2,400	$185

After you’ve captured the match, everything else goes to debt payoff. That’s the baseline rule.

The Math: Debt Interest vs. Investment Returns

Beyond the employer match, the question becomes: is it better to pay off debt or invest?

The comparison is simpler than most people make it:

• If your debt interest rate is higher than your expected investment return, pay off the debt.
• If your debt interest rate is lower than your expected investment return, invest.

The S&P 500 has returned roughly 10% annually over the long term (about 7% after inflation). So:

Pay off first (rate above 7-8%):

• Credit cards (15-28% APR)
• Personal loans (8-15% APR)
• Private student loans (6-12% APR)

Invest first (rate below 5-6%):

• Federal student loans (3-7% APR, often closer to 5%)
• Mortgages (3-7% APR)
• Auto loans (3-7% APR, if on the lower end)

The gray zone (5-8% APR): This is where it gets personal. The math is close enough that your risk tolerance, tax situation, and emotional well-being should drive the decision. If your 6.5% student loan keeps you up at night, paying it off has psychological value that a spreadsheet can’t capture.

The Balanced Approach

For most people with a mix of debt types and rates, here’s a practical framework:

Step 1: Get the Employer Match

Contribute enough to your 401(k) to capture the full employer match. This is non-negotiable.

Step 2: Build a Starter Emergency Fund

Set aside $1,000-2,000 in a high-yield savings account. This prevents emergencies from derailing your debt payoff or forcing you to pull from retirement accounts. See our emergency fund while in debt guide for the full approach.

Step 3: Attack High-Interest Debt

Direct every extra dollar toward debt with interest rates above 7-8%. Use the debt avalanche method to minimize interest costs, or the snowball method if you need motivational wins. This means credit cards, personal loans, and high-rate private student loans.

Step 4: Increase Retirement Contributions

Once high-interest debt is gone, increase your retirement savings to 15% of gross income. This is the widely recommended target to maintain your standard of living in retirement.

Step 5: Address Low-Interest Debt

With retirement contributions at 15% and high-interest debt eliminated, you can now decide whether to aggressively pay off low-interest debt (mortgages, low-rate student loans) or invest the difference. Both are reasonable choices.

Age-Specific Guidance

Your age changes the math significantly because of one factor: compound growth. A dollar invested at 25 has decades to grow. A dollar invested at 50 has much less time.

In Your 20s

You have the most powerful asset in finance: time. A dollar invested at 25 at a 7% real return becomes roughly $15 by age 65. That same dollar invested at 45 becomes about $4.

What this means for you:

• Get the 401(k) match, always.
• After the match, aggressively pay off high-interest debt (credit cards, high-rate student loans). At your age, eliminating these balances early prevents years of compounding interest working against you.
• Don’t skip retirement entirely. Even $50/month into a Roth IRA on top of your matched 401(k) builds the habit and takes advantage of compound growth.
• Federal student loans at 4-5% are low priority. Make your minimum payments, focus on high-rate debt, and increase retirement contributions once the expensive debt is gone.

In Your 30s

You’re likely earning more but also carrying more obligations — mortgage, kids, car loans. The juggling act gets real.

What this means for you:

• 401(k) match is still the first priority.
• If you still have credit card or high-interest debt from your 20s, clearing it is urgent. Every year it persists costs more than you think.
• Aim to reach 15% retirement contributions by your mid-30s if possible. You still have 30 years of growth ahead.
• Avoid the trap of financing lifestyle upgrades with debt while telling yourself you’ll save “later.” Later arrives fast.

In Your 40s and 50s

Time is shorter, and the pressure is real. But you also likely have higher earning power and possibly lower expenses if kids are older or debt from earlier decades has been addressed.

What this means for you:

• Maximize retirement contributions. In 2026, you can contribute up to $23,500 to a 401(k), plus $7,500 in catch-up contributions if you’re 50 or older. That’s $31,000 per year.
• High-interest debt should be treated as a five-alarm fire. Every dollar going to 20% interest at age 50 is a dollar that can’t compound for retirement.
• Low-interest debt is less critical. A 3.5% mortgage is cheap money. You may be better served maximizing retirement contributions than paying off your house early.
• Consider a hybrid strategy that splits extra payments between debt and retirement.

Don’t Touch Your Retirement to Pay Off Debt

It’s tempting. You can see the 401(k) balance sitting there, and your credit card debt feels like an emergency. But withdrawing from retirement accounts before 59.5 triggers:

• A 10% early withdrawal penalty
• Income taxes on the full amount (at your current marginal rate)
• Lost compound growth that can never be recovered

A $10,000 withdrawal to pay off credit card debt might net you only $6,500-7,000 after penalties and taxes. And that $10,000, left invested for 20 years at 7%, would have grown to roughly $38,700.

There are very few scenarios where raiding retirement makes sense. Extreme hardship (facing eviction, medical emergency with no other options) is one. Credit card debt is not.

The Roth IRA Advantage for Debt Payoff

If you’re choosing between a traditional 401(k) (beyond the match) and a Roth IRA, the Roth has one advantage worth considering while you’re in debt: you can withdraw your contributions (not earnings) at any time without penalty or taxes.

This makes a Roth IRA a partial backup plan. You contribute to it for retirement, and in a true emergency, your contributions are accessible. It’s not ideal to use it this way, but it’s better than raiding a traditional 401(k) and paying penalties.

The 2026 Roth IRA contribution limit is $7,000 ($8,000 if 50 or older), subject to income limits.

How to Find Money for Both

When you’re splitting dollars between debt and retirement, finding extra money matters:

• Raise your income. Asking for a raise, switching jobs, or adding side income has the biggest impact. Even $200/month in extra income, split between debt and retirement, compounds over years.
• Redirect raises. When you get a raise, put half toward retirement and half toward debt instead of absorbing it into lifestyle spending.
• Use the debt snowflake method. Small windfalls — cash back rewards, rebates, selling items — go straight to debt. This approach lets you keep retirement contributions steady while chipping away at debt on the side.
• Optimize taxes. If your 401(k) contribution lowers your tax bracket, the tax savings itself can go toward debt.

FAQ

I have $30,000 in credit card debt and zero retirement savings. What do I do first?

Get the employer match if available. Then throw everything else at the credit card debt. At 20%+ interest, the math overwhelmingly favors eliminating credit card debt before investing beyond the match. Once the cards are paid off, redirect those payments to retirement and you’ll be surprised how fast it builds.

Is it okay to pause retirement contributions temporarily to pay off debt faster?

Pausing contributions beyond the employer match is reasonable for 6-12 months if you’re tackling high-interest debt aggressively and have a clear payoff plan. Don’t pause the match, and don’t let “temporary” stretch into years. Set a specific date to resume contributions.

My student loans are at 5% APR. Should I pay them off before saving for retirement?

At 5%, you’re in the gray zone. If you’re getting your employer match and contributing at least 10% to retirement, making extra student loan payments is fine but not urgent. If you’re below 10% retirement savings, increasing contributions will likely serve you better over the long term. The emotional component matters too — if the debt stresses you out, paying it off has value beyond the math.

What if I’m 55 with significant debt and barely any retirement savings?

This is a situation that calls for both urgency and calm. Maximize catch-up contributions ($31,000 in 2026 for 401k), aggressively eliminate high-interest debt, and consider working 2-3 years longer than planned. Those extra years both add to savings and reduce the number of years your savings need to cover. Social Security benefits also increase about 8% per year you delay claiming past your full retirement age, up to 70.