Something else occurred to me, when balancing debt reduction vs retirement savings: Does your workplace offer any kind of matching on a retirement account?

If so, it’s fairly standard advice to put aside enough of your own money to maximize that matching - because you’re essentially getting free money that way.

Let’s say your employer matches half of your contributions, up to 6% of your salary. You put aside 6%, but you get an extra 3%. That is, arguably, a 50% rate of return on your money plus whatever growth happens.

For giggles (and because I’m avoiding work) I played around with a very, very simplistic model, assuming 100,000 in debt, at 8% interest, where you’re paying 1,000 a month (12,000 a year). That gets paid down to zero somewhere around 18 years.

Change your payment amount to 9,000 a year and you’re still reducing debt but it’s more like 28 years before it’s paid off.

Use that 3,000, with a 50% employer match to make it 4,500 a year, and assuming 6% in returns, means that after 10 years, your debt is 85,500 (vs 42,000 if you pay ALL toward debt), while you’ve now got 62,800 saved - so your net worth is about - 22,000 (versus -42000 if all goes toward debt). At 18 years, you’d have paid off the old debt if you don’t save in that matched 401(k); if you pay less on debt but go for the 401(k), you owe nearly 76,000 but you have over 100,000 in the 401(k) - so your net worth is higher. In fact, it’s higher every year from the beginning.

Assuming you start saving the whole 12,000 (Plus the1,500 matching) as soon as the debt is paid off - you’re better off starting the 401(k) savings sooner, even though the 12,000 savings starts 10 years earlier with the all-debt approach.

Some broad assumptions there:

- You’re paying at least the interest on the debt (if your debt is increasing, this falls apart).
- Those interest rates and returns are of course pulled out of thin air; while 6% isn’t an insane assumption given recent decades, there’s no guarantee.
- There is in fact decent matching. Without the matching, I’m pretty sure the numbers tip the other way.
- In each case, when the debt is paid, you put the whole 12,000 into the 401(k) and you still get that same 1,500 matching - so your yearly savings is 13,500. You still never catch up with the plan that has you saving the 3,000 + matching from the beginning.