Young and in Debt? You Still Should Be Saving for Retirement.

Between her mortgage, credit-card balances, student and auto loans, Ivana Rosa has nearly $450,000 in debt. But she isn’t letting that stop her from a major goal: saving for retirement.

The 32-year-old school administrator based outside Washington, D.C. says the biggest number is a mortgage on which she and her husband still owe around $373,000. The nearly $41,000 in credit-card balance mostly came from medical bills including her hospital bill after giving birth to her children and home expenses like replacing a broken refrigerator and furnace. Tack on daycare, groceries and pet costs, and chipping away at the debt while investing for the long-term has been challenging. But it’s a balance they, along with their financial advisor, have decided is an important one to maintain.

“Retirement feels so far,” Rosa says. “That’s a double-edged sword. It can feel like it’s so far that it doesn’t matter, but then before you know it, it’s here and now you’ve spent so much time not thinking about it.”

Not everyone feels as though they are able to save for retirement while paying down debt. A survey from Principal of around 2,000 adults fielded late last year found that debt is one of the three main barriers to contributing to a retirement account, alongside high costs and low income.

Americans’ collective household debt hit a record high of $17.69 trillion in the first quarter of 2024, according to New York Federal Reserve’s latest Quarterly Report on Household Debt and Credit.

“Most Americans have some form of debt,” says Heather Winston, assistant vice president and head of product strategy at Principal Financial Group. “We can’t escape it.”

The trick to saving for retirement while paying down debt is to adjust and build a financial plan that can change as your life does. Rosa started investing in a retirement account during her first job out of college, increasing the contribution over time until she was eventually putting away 12% of her income. Once children entered the picture and her debt needed extra attention, that figure dropped back down. She’s now contributing 2%—enough to get a full employer match—with plans to increase more once the debt is paid down. Even with the uneven contributions, she has three decades or more to grow the money in her retirement account before she retires.

Other Americans should take note. You don’t have to pay all your debt off before you start saving for long-term objectives like retirement, Winston says.

“One of the worst things we can do is wait,” Winston adds. “Time is one of our greatest assets. We don’t want to waste time, we want to use it to our advantage.”

Don’t forego an employer match

Rosa’s approach of always investing enough in her retirement account to at least get her company match even while paying down debt is one that financial advisors say is a good one.

“That’s free money from the company, essentially,” says Scott Van Den Berg, president at Century Management Financial Advisors, and Rosa’s financial advisor.

But you can adjust your contribution plan to fit your financial situation, like Rosa did. Van Den Berg says if someone was contributing 10% to their retirement account but also had student debt, he might recommend them reducing that contribution to 3%—assuming that’s what the company offers to match—and put that remaining 7% toward student loan payments.

“At the end of the day, annual returns aren’t guaranteed,” Van Den Berg says. “But you’re still going to owe that debt payment.” Prioritize paying off “bad” debt.

Debt isn’t always a bad thing; it can be used to better your life and finances. Borrowing money for a house, to start a business or to further your education, for example, involves putting money toward things that will ideally pay off: A house can grow in value, a business can earn money and more education can lead to a higher-paying job.

What to pay off first

Prioritize paying off “bad debt” like credit-card debts, car loans and cash advances, which aren’t funding something that could increase in value, tend to have high interests and can impact your credit score quite negatively, says Jordan Naffa, director of financial planning at Arista Wealth Management.

Once you have paid off your bad debt, you may want to consider how you allocate your funds between debt payments for “good” debt and retirement savings.

Look at the interest rates and terms of the loan and compare it with the stock market: If you have a 7% interest rate on your loan but your investment account is targeting 10%, there’s an argument to be made that you should continue investing. But it all depends on an individual’s personal situation and investing approach. A risk-averse investor wouldn’t want to own an all-stock portfolio targeting 10%, and so should focus on paying off his or her mortgage before increasing an investment portfolio.

“Take a look at cash flow, take a look at what the interest rates and loan terms are, in addition to what your risk tolerance level and comfortability are with volatility,” Naffa says. “That can glean insight into what decisions you may consider making first.”

While debt can feel paralyzing, setting aside even a small amount toward retirement while paying off loans can make a big difference in the long term.