News and Commentary

Finding a Balance between Paying Off Debt and Saving for Retirement by Brendan T. Hayes

According to the Federal Reserve, household debt continued to increase in 2018 with Americans owing more than $13.5 trillion at the end of the third quarter. In addition to the obvious challenges this debt may create, it may also be a primary reason why so many Americans have not saved enough to afford an eventual retirement. With the start of a new year, individuals may consider devising a plan now for paying down debt while, at the same time, setting aside appropriate savings for the future.


One of the best ways to begin this process is by taking advantage of an employer-sponsored 401(k) plan, especially if that employer provides a “match.” That means that for every contribution a worker makes to his or her 401(k), the employer will put in additional funds, up to a set amount, that essentially provides the worker with a guaranteed match on part of his or her initial contribution. This may allow individuals some wiggle room to spend some of their earnings paying down debt.


When participating in 401(k) plans, individuals may benefit from the tax-deferred treatment of their contributions, which for 2019 is maxed out at $19,000. Contributions made to a 401(k) are made with pre-tax dollars that are typically subtracted automatically from plan participants’ paychecks. Moreover, contributions to 401(k)s or other retirement accounts allow participants to benefit from compounding interest and realize potential market gains on their investments. In some instances, these gains may exceed the amount individuals pay in interest on outstanding loans.


While 401(k) participants may exclude contribution amounts from their taxable income, they will incur tax when they withdraw funds during retirement. At that point, however, they may be earning less and in a lower income tax bracket than during the years they made the contributions. Alternatively, people who are just starting out in their careers or who have low-income may consider making taxable contributions to Roth 401(k)s now and allowing their earnings to grow tax free, as long as the contributions have been invested for a minimum of five years and the account owners are 59½ or older when they take distributions.


Conversely, individuals who prioritize paying off debt may have confidence knowing that they will likely improve their cash flow once the debt is eliminated. This includes being more prepared to handle a financial setback, such as a layoff or medical issue, and having the ability to save even more for an eventual retirement as well as a child’s future college education, perhaps through a 529 savings plan. Another benefit to paying down debt is the ability to improve one’s credit score. Of course, this allows individuals to borrow more money and potential increase their debt burdens. However, it also has the potential to qualify them for preferential interest rates when taking out a loan for a new car or residence. Furthermore, depending on the amount and type of debt one owes, there may also be opportunities to consolidate existing loans at lower interest rates. This has the potential to allow an individual to lower his or her monthly payments and potentially pay off the debt faster.


One of the best ways to assess the challenge of paying off debt while saving for retirement is to meet with a financial advisor who understands the nuances of different planning strategies and how they may affect an individual’s unique situations. The result may put individuals on a fast track to meeting their ultimate life goals.


About the Author: Brendan T. Hayes is a financial planner with Provenance Wealth Advisors, an Independent Registered Investment advisor affiliated with Berkowitz Pollack Brant Advisors and Accountants and a registered representative with Raymond James Financial Services. He can be reached in the firm’s Boca Raton, Fla., office at (561) 361-2001 or via email at


Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.

Investment Advisory and Financial Planning services are offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors, a Registered Investment Advisor. Provenance Wealth Advisors, Berkowitz Pollack Brant Advisors and Accountants, and BayBridge are not affiliated with Raymond James Financial Services.


This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information contained in this report has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.


Matching contributions from an employer may be subject to a vesting schedule. Please see the retirement plan documents and consult with a financial advisor for more information.


As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer’s official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan. Investments mentioned may not be suitable for all investors.