Which should come first? Retirement vs debt

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by workerdaemon

Here is how I’m prioritizing the distribution of our household income:

  1. Max 401k (has 50% employer matching)
  2. Max IRA
  3. Save 1 month’s worth of bills (I have enough access to credit to handle worse scenarios)
  4. Pay down 10.75% loan
  5. Pay down 2.88% loan

It seems like with the 50% employer matching, it makes sense to put the 401k as first priority.

It seems like the 2.88% interest is low enough to make it a lower priority than the IRA.

My biggest question is about the IRA vs 10.75% loan. I’m not too sure how the long-term benefits of having more in an IRA earlier vs less debt sooner plays out.

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What are your thoughts on this?


comment from azian0713:

Think about your debt as a guaranteed return for whatever the APR is. If you pay off all the debt now, instead of taking 25 years to pay it, you guaranteeing yourself a X% “return” for 25 years on the principal since you “saved” the interest you would have paid had you actually taken the 25 years to pay the loan back.

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In your case, the 2.88% loan is fairly low APR, but it’s also GUARANTEED returns. Almost no retirement fund (401k or IRA) can guarantee returns at all, but the employer matching is quite nice. In my opinion, I would pay the 10.75% loan first, max out your 401k second, pay off the 2.88% third, then invest the rest of your money in your IRA, if you have any left over.


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