Question: I am a 38 year old single parent and I have a huge amount of personal debt. I have student loans ($80k), credit card debt ($22k), a car loan (with 3 years remaining), and a $335k mortgage. Despite all of that, I have a good income so I am able to pay my bills. I have created a debt plan but I am looking for ways to be more aggressive if possible. My question is about my 401K vs. my debt. My company only matches up to 6% but even when the matches are low, I have typically set aside 10% because it is the only way I have been saving (except for a small emergency fund). Should I decrease my 401k to the 6% to free up money to repay the debt? I am concerned about the tax ramifications, and the amount of time that I would be contributing a lower amount. Since my debt (not including mortgage) will take years to pay off, is this a good move? Will I lose too much in retirement savings? I am head of household in the 28% tax bracket so I do try to look for ways to minimize my tax burden. Thanks! Kim, Springfield, VA
Answer: You are making a good income. Yet you’re a single parent carrying a large debt burden. My concern is what if you have a financial setback. How vulnerable will be your household finances? My bias is to lower the overall risk of your finances.
So, I’m glad you’ve devised a debt repayment plan. I applaud your reluctance to reduce the amount you’re contributing to your retirement savings plan, but I would go down to the 6% match. I would the extra money toward getting as aggressive as possible and eliminate the credit card debt and the auto loan. Those two debts are the priority.
Even though you aren’t savings as much for your retirement you are continuing to boost your overall household savings by getting paying off debts. You’re still saving, which will only help you now and in the future. I’d also like to see a much larger emergency savings fund. I think a healthy emergency fund is critical for everyone, but especially single parents.
You can always hike the amount going into retirement when you aren’t carrying as much debt and have more savings.
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