Robert Weingard, CLTCNancy Weingard, CFP®, CLTC2255 Glades Rd Ste 120-ABoca Raton, FL 33431561-997-9100Robert.Weingard@raymondjames.comwww.weingardwealthmanagement.com

Pay Down Debt or Save forRetirement?

August 06, 2013

You can use a variety of strategies to pay off debt,many of which can cut not only the amount of time itwill take to pay off the debt but also the total interestpaid. But like many people, you may be torn betweenpaying off debt and the need to save for retirement.Both are important; both can help give you a moresecure future. If you're not sure you can afford totackle both at the same time, which should youchoose?

There's no one answer that's right for everyone, buthere are some of the factors you should considerwhen making your decision.

Rate of investment return versusinterest rate on debtProbably the most common way to decide whether topay off debt or to make investments is to considerwhether you could earn a higher after-tax rate ofreturn by investing than the after-tax interest rate youpay on the debt. For example, say you have a creditcard with a $10,000 balance on which you paynondeductible interest of 18%. By getting rid of thoseinterest payments, you're effectively getting an 18%return on your money. That means your money wouldgenerally need to earn an after-tax return greater than18% to make investing a smarter choice than payingoff debt. That's a pretty tough challenge even forprofessional investors.

And bear in mind that investment returns are anythingbut guaranteed. In general, the higher the rate ofreturn, the greater the risk. If you make investmentsrather than pay off debt and your investments incurlosses, you may still have debts to pay, but you won'thave had the benefit of any gains. By contrast, thereturn that comes from eliminating high-interest-ratedebt is a sure thing.

An employer's match may change theequationIf your employer matches a portion of your workplaceretirement account contributions, that can make the

debt versus savings decision more difficult. Let's sayyour company matches 50% of your contributions upto 6% of your salary. That means that you're earninga 50% return on that portion of your retirementaccount contributions. And that doesn't count anyinvestment returns or gains from compounding youmight achieve over time.

If surpassing an 18% return from paying off debt is achallenge, getting a 50% return on your money simplythrough investing is even tougher. The old sayingabout a bird in the hand being worth two in the bushapplies here. Assuming you conform to your plan'srequirements and your company meets its planobligations, you know in advance what your returnfrom the match will be; very few investments can offerthe same degree of certainty. That's why manyfinancial experts argue that saving at least enough toget any employer match for your contributions maymake more sense than focusing on debt.

And don't forget the tax benefits of contributions to aworkplace savings plan. By contributing pretax dollarsto your plan account, you're deferring anywhere from10% to 39.6% in taxes, depending on your federal taxrate. You're able to put money that would ordinarily gotoward taxes to work immediately. That can help youtake advantage of the power of time.

Your choice doesn't have to be all ornothingThe decision about whether to save for retirement orpay off debt can sometimes be affected by the type ofdebt you have. For example, if you itemizedeductions, the interest you pay on a mortgage isgenerally deductible on your federal tax return. Let'ssay you're paying 6% on your mortgage and 18% onyour credit card debt, and your employer matches50% of your retirement account contributions. Youmight consider directing some of your availableresources to paying off the credit card debt and sometoward your retirement account in order to get the fullcompany match, and continuing to pay thetax-deductible mortgage interest.

The most importantdecision you can make isto take action and getstarted now. The sooneryou decide on a plan, thesooner you can begin tomake progress.

Page 1 of 2, see disclaimer on final page

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

This information was developed by Broadridge, an independent third party. It is general in nature, is not a complete statement of all informationnecessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Investments andstrategies mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Raymond James &Associates, Inc. member New York Stock Exchange/SIPC does not provide advice on tax, legal or mortgage issues. These matters should bediscussed with an appropriate professional.

There's another good reason to explore ways toaddress both goals. Time is your best ally whensaving for retirement. If you say to yourself, "I'll wait tostart saving until my debts are completely paid off,"you run the risk that you'll never get to that point,because your good intentions about paying off yourdebt may falter at some point. Putting off saving alsoreduces the number of years you have left to save forretirement; that weakens the power of time as aretirement savings ally.

It might also be easier to address both goals if youcan cut your interest payments by refinancing thatdebt. For example, you might be able to consolidatemultiple credit card payments by rolling them over toa new credit card or a debt consolidation loan thathas a lower interest rate.

Bear in mind that even if you decide to focus onretirement savings, you should make sure that you'reable to make at least the monthly minimum paymentsowed on your debt. Failure to make those minimumpayments can result in penalties and increasedinterest rates; those will only make your debt situationworse.

Other considerationsWhen deciding whether to pay down debt or to savefor retirement, make sure you take into account thefollowing factors:

• Having retirement plan contributions automaticallydeducted from your paycheck eliminates thetemptation to spend that money on things thatmight make your debt dilemma even worse. If youdecide to prioritize paying down debt, make sureyou put in place a mechanism that automaticallydirects money toward the debt--for example,having money deducted automatically from yourchecking account--so you won't be tempted to skipor reduce payments.

• Do you have an emergency fund or otherresources that you can tap in case you lose yourjob or have a medical emergency? Remember thatif your workplace savings plan allows loans,contributing to the plan not only means you'rehelping to provide a more secure retirement butalso building savings that could be used as a lastresort in an emergency. Someemployer-sponsored retirement plans allowhardship withdrawals in certain situations--forexample, payments necessary to prevent aneviction from or foreclosure of your principal

residence--if you have no other resources to tap.(However, remember that the amount of anyhardship withdrawal becomes taxable income, andif you aren't at least age 59½, you also may owe a10% premature distribution tax on that money.)

• If you do need to borrow from your plan, makesure you compare the cost of using that moneywith other financing options, such as loans frombanks, credit unions, friends, or family.

• If you focus on retirement savings rather thanpaying down debt, make sure you're invested sothat your return has a chance of exceeding theinterest you owe on that debt. While yourinvestments should be appropriate for your risktolerance, if you invest too conservatively, the rateof return may not be high enough to offset theinterest rate you'll continue to pay.

Regardless of your choice, perhaps the mostimportant decision you can make is to take action andget started now. The sooner you decide on a plan forboth your debt and your need for retirement savings,the sooner you'll start to make progress towardachieving both goals.

If you decide to prioritizepaying down debt, makesure you put in place amechanism thatautomatically directsmoney toward the debtso you won't be temptedto skip or reducepayments.

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