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How to Save for Retirement Even If You’re in Debt » How to Save for Retirement Even If You’re in Debt



People often don’t save for their retirement because they are trying to whittle down their debts first. So, it’s no surprise to see that less than 8% of Americans are prepared for a comfortable retirement, and 25% have nothing saved at all. [1]

“We get this question all the time at — should I pay off debt or save for retirement,” explains Howard Dvorkin, CPA and Chairman, “but it’s not an either-or. You need to be doing both, and with the right debt solution, you can be. Reduce your payments, and you can start saving for retirement immediately.”

This guide is designed to help you learn everything you need to know to effectively save for retirement even though you’re in debt. You’ll learn to determine how much you need to retire comfortably, and you’ll learn of better ways to save. If you can’t seem to dig yourself out of the debt hole, we can help. Call  for a free evaluation.

How much money will you need to retire?

A basic guideline for retirement is to get $1 million in long-term savings accounts, such as a 401k, IRA, or other retirement saving plans. That’s a considerable number, but with the advantages provided by tax laws and retirement accounts available to everyone, most people can hit that number.

Hitting this goal means you’ll have about $40,000 per year in income during retirement.

Savings value at age 65Annual income from savings

But in truth, there is no magic number for how much you’ll need to retire. The answer depends on your lifestyle, travel plans, expenses, debt, and other factors. There are three basic methods you can use to determine how much you, specifically, will need. We outline them below.

As you examine each method, keep in mind that you will get Social Security and Medicare in retirement. These programs can help with your retirement budget—one will provide monthly income, and the other will cover most medical costs. However, they are only a small portion of what you’ll need to live comfortably. You need to be as aggressive as possible with your contributions.

Income method

With this method, you use your current income and multiply it to see how much you need to retire. Experts say you’ll need 60-80% of your current income after retirement. So, if you make $100,000 annually, then you will need about $60,000 to $80,000 each year you are retired.

Expense method

With this method, you track your expenses to determine how much income you’ll need. Keep in mind that your expenses are likely to change during retirement. For instance, you won’t need to spend money commuting to work.

Other factors can also affect your expenses. If you can pay off your mortgage by the time you retire, then you would eliminate that bill. Each year, you’d only need to worry about paying property taxes and insurance. But that would mean your housing costs would be significantly lower.

Savings method

With this method, you don’t focus on what will happen during retirement but instead focus on the here and now. You simply commit to saving 10-20% of all gross income you receive for retirement. The older you are and the later you’re starting, the higher your savings percentage should be. If you’re 20, aim for 10%, but if you’re 40 and haven’t really started saving, then you may need to aim for 20%.

Tip: Finding a debt solution, such as debt consolidation or a debt management plan that can lower your total credit card payments by up to 50%, will free up money for retirement. Once you lower your payments, allocate those funds for retirement savings ASAP.

The right solution could reduce your monthly debt payments by up to 50%. Get a free evaluation to find the best solution for you today.

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Helpful retirement savings milestones

As you’re working to save for retirement, the following milestones can serve as helpful guidelines to make sure you are on track. It works by taking a multiplier of your annual salary that’s based on your age.

AgeAmount saved
301X your salary
403X your salary
506X your salary
608X your salary

The 4% rule – how much retirement savings should you use each year?

One good rule of thumb for how much of your retirement assets you should use each year is known as the 4% rule. The idea is that you would plan to use 4% of your retirement savings in the first year of your retirement. Then you would adjust that amount up or down based on inflation each year thereafter. Using this strategy, you can make your retirement savings last for 30 years.

Ways to save for retirement

Here are some of the ways you can save for retirement.

401(k) plans and other employer-sponsored retirement accounts

A 401(k) plan is one of the best ways to save for retirement. It is powerful for two reasons. First, the money you invest in a Traditional 401k is tax-deferred. In other words, you don’t pay income taxes on the money you put into the account, and you only pay taxes when you withdraw. This works out well for most people because your income tax level is usually much lower when you retire.

The second reason is that many employers contribute to 401(k) accounts through programs called “match” programs. For every dollar you contribute to your retirement, your employer contributes a set amount, usually up to a certain percentage of your salary. Those employer contributions are like getting free money.

In the most popular match program used in the U.S., your employer will contribute 50 cents for every dollar you contribute up to six percent of your annual salary. Thus, if your company offered this structure, you should allocate at least six percent of each paycheck to retirement savings. This will give you the maximum amount available in matching.

The money in a 401(k) gets invested into funds that the company offers via a licensed stockbroker. Then you decide how to allocate your retirement savings between different types of funds based upon your risk tolerance.

Risk tolerance refers to how much risk you are willing to take to get a return on your investment. For example, a person with a high-risk tolerance might invest in new, untested companies. A person with a low-risk tolerance may invest in government-secured certificates of deposit. Generally speaking, your risk tolerance decreases as you age. You don’t want your money to be in risky investments right before you retire.

There are two main types of 401K plans. One is a “traditional” 401(k), the other is a Roth 401(k).

Tip: If your employer doesn’t offer a 401(k) with a match program, it may be time to consider a different employer.

Traditional IRA

Retirement savings doesn’t have to go through your employer. You can also save for retirement on your own using an Individual Retirement Account (IRA). You don’t get the benefit of employer matching, but with a Traditional IRA, you can enjoy the same tax breaks.

A traditional IRA will allow you to invest tax-deferred income. This income can be from your job, business, or even gig work. The money you contribute to a traditional IRA is tax-deductible, meaning you owe less taxes each year based on how much you save.

You can get a Traditional IRA with any licensed stockbroker either at your local bank or online. You should automate the process and set up automatic payments to fund your IRA each month.

Roth IRA

With a Roth IRA, the income you invest is taxable. The real benefit of the Roth IRA is that when you withdraw your funds, you won’t have to pay taxes. This could benefit you if you plan to have a second income at the time of withdrawal. That is because you will be in a lower tax bracket. Some states do tax you, but there is no federal tax. The Roth IRA can be a great opportunity if you plan to live in a state with no income tax. Like a Traditional IRA, you should automate the process with direct deductions. You can get a Roth IRA with any licensed stockbroker either at your local bank or online.

Saving for long-term medical expenses with an HSA

HSA is shorthand for a Health Savings Account. HSAs are a valuable tool for employees, especially any that can afford the high-deductible healthcare plan you need to set up an HSA.

With an HSA, you are saving money for potential medical expenses. But it can also be a long-term tax-free investment. Just like any other retirement account, though, the money you save gets invested and grows over time. HSAs also offer the best tax breaks. It’s the only investment vehicle that offers triple tax breaks. Your contributions are tax-free, your earnings aren’t taxed, and you don’t get taxed when you take the money out.

An HSA can even be used penalty-free before age 65 as long as the money gets used for qualified medical expenses. After age 65, you can use the money in the account for whatever you want, even if it’s not for medical expenses. However, it’s a good idea to keep this fund there to protect you as your medical costs increase with age.

Flexible Spending Accounts (FSAs) are not the same

Sometimes there is confusion between an HSA and an FSA. An HSA is a long-term, tax-free investment. It is for medical expenses, and it continues to grow every year. An FSA or Flexible Spending Account is a yearly account. It is also for medical expenses, but it does not grow year after year. “Use it or Lose it.” If you don’t use up the money in that year, you lose that money forever. This account lets you avoid out-of-pocket medical costs, so don’t turn it down if offered.

How to start saving for retirement

1. Start a budget

Before you can start investing, you need a budget. You’ll need to understand how much your expenses are each month and how much income you have available to save for retirement. You can also see where your money is going and cut expenses which will give you the money you need to start saving and pay off debt.

Setting a budget is something that you can do on your own or you can get a free consultation from a nonprofit credit counseling service. A certified credit counselor will help you set a realistic budget and find solutions to reduce your total monthly debt payments. This would give you more money to save, so it can be a great first step to getting your retirement saving strategy off the ground.

Connect with a certified credit counselor for a free debt and budget evaluation.

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2. Decide what you can save for retirement

With your budget set and debt solutions in place, you will now be able to set savings targets for retirement. While the total amount you need for retirement may seem daunting, breaking it down into a monthly target can make things more manageable.

For example, if you earn $50,000 a year and are using the saving method of retirement planning, then you would want to put 10% of your monthly salary into retirement accounts. You would save around $416 per month for your retirement. That could either be saved wholly through your 401(k) or full in an IRA or split between the two. That leads us to the next step…

3. Check your benefits at work and sign up

To decide where to put your retirement savings, you need to know what tools you have at your disposal. That means contacting your HR department to learn about the benefits they offer:

  • Does your company offer a 401(k) plan or another employer-sponsored retirement plan?
  • If so, do they offer a match program and, if so, how does the matching work?
  • Does your company offer employer-sponsored healthcare plans and, if so, do you have the option of signing up for a high-deductible plan with a Health Savings Account (HSA)?

Once you know what benefits are offered, you should sign up immediately for any employer-sponsored retirement account. Your contributions should be set to at least meet any matching offered by your employer. Then you can decide if you want to save solely through your employer-based retirement account or if you need to get or at least supplement those savings with an IRA.

4. Find a financial advisor

Financial advisors aren’t only for the wealthy. You can search for one or find one from a friend. If you bank through a credit union, you may even have a financial advisor that you can work with as a member. But before you hire any advisor, ask about their services, typical clients, communication style, how they get compensated, and how much they charge. The advice they give can more than pay for any fees.

Getting a financial advisor is a good idea regardless of whether you have a retirement plan through your employer. Your employer’s plan will have a plan advisor that you can meet with each year, but the conversation may be limited to your 401(k) plan. A private financial advisor will be able to guide you as a whole, helping you understand how to get the most out of your 401(k) and supplement those savings with other accounts and savings as needed.

Once you find a financial advisor, they can help guide you on setting up Individual Retirement Accounts (IRAs), including advising on whether you should go for Traditional or Roth. Work with your advisor to set up any accounts you need and, if need be, go back to HR at your employer and adjust your 401(k) plan savings accordingly.

5. Boost retirement savings whenever possible

Once you get your retirement savings set up, saving should become automatic. Your employer-sponsored plan savings will be taken out of your paychecks automatically. If you have an IRA, set up AutoPay to make the same contribution to the account each month.

Then, it’s just a matter of upping your retirement savings any chance you get. The easiest way to do that is when you get a pay raise or promotion. Each time your salary increases, make sure a certain percentage of that increase goes to upping your retirement savings. It’s easier to allocate new income for savings because you haven’t gotten used to spending that money yet. So, it’s an easy way to increase your savings without having to give something up in your budget.

You can also boost any time you pay off a debt, and you can take the money you save on that bill and increase your retirement savings.

6. Take advantage of free annual assessments

Every retirement plan, whether it’s a 401(k) through your employer or an IRA you get on your own, will offer a free annual assessment. This allows you to meet with your plan advisor to discuss how the account is doing and make any adjustments that may need to be made.

You should meet with your personal financial advisor once per year to make sure your retirement saving strategy is on track. You should also take advantage of the free annual assessment you get through your employer for a 401(k) or any other employer-sponsored plan.

7. Allocate retirement savings strategically

During these annual assessments, you will be able to review the growth on your accounts with your advisor. In many cases, you will want to adjust the allocations for your funds, so you enjoy the best growth possible.

Allocations are the percentage of your retirement funds that are invested in a particular mutual fund or index. You can adjust these based on your risk tolerance, as well as adjusting them for economic changes that could affect your savings.

8. Take advantage of retirement tax breaks

If you have a 401(k) through your employer, the contributions that you make to the account will decrease your Adjusted Gross Income (AGI). AGI is the measure that the IRS uses to determine how much you owe them each year. So, decreasing that amount means less taxes owed and typically a much larger refund. The same is true with HSA contributions.

If you have a Traditional IRA, you can also deduct your contributions to that account throughout the year. That will decrease your tax liability, giving you a larger refund as well. You are not able to deduct contributions to a Roth IRA.

Catch up contributions if you’re over age 50

If you’re over age 50 and haven’t contributed much to your retirement accounts, you’re in luck. The IRS permits people age 50 and over to contribute even more to their retirement. So, you can boost your savings quickly and get even more tax breaks for it.

Catch-up contributions apply to both IRAs and employer-sponsored plans:

  • For IRAs, the 2022 catch-Up contribution is up to $6,500.
  • For 401(k) plans, you can contribute up to $27,000 to your plan per year if you’re over age 50.

Deciding when to retire

Deciding to retire can be a very emotional choice. Some people can’t wait to quit working and enjoy a life of leisure. Others find meaning in their careers and don’t want to leave this part of their life behind.

But aside from the personal decisions, there are some practical ones that will play in as well. You’re required to start drawing Social Security benefits at a certain age. Certain requirement accounts also require you to start taking money out by a set age. So, these requirements may help you decide when to retire.

Full retirement age

According to the Social Security Administration (SSA), there is an age for “full retirement.” That age varies depending on when you were born.

Year of BirthFull (normal) Retirement Age [3]
195566 and 2 months
195666 and 4 months
195766 and 6 months
195866 and 8 months
195966 and 10 months
1960 and later67

When to start drawing Social Security

The SSA says that anyone can begin getting Social Security income by age 62. But if you do it that early, you’ll decrease your monthly payouts for the rest of your life.

If you wait until full retirement age, your Social Security income increases. And if you wait until age 70, you get the biggest payouts of them all. So, it may be worth waiting to retire fully until you hit age 70.

What are RMDs?

RMDs are short for “Required Minimum Distributions.” RMDs are the amount(s) you MUST start taking out of your retirement account(s) after you reach age 72. The amount gets based on the market value of your account(s). The amounts get adjusted by your age and how long your expected lifespan is.

These RMDS can serve as another good indicator of when you should expect to retire fully.

What you need to know about Medicare coverage

Another factor that can play into your decision on when to retire can be healthcare coverage. In general, Americans must enroll in Medicare by the time they turn age 65. You can enroll three months before you turn 65.

If you don’t sign up for Medicare on time, you can face late enrollment penalties that you’ll pay every time you use Medicare for the rest of your life. You can delay taking Medicare in some cases if you are still working, depending on how many employees the company has.

Good indicators you’re ready to retire

The final practical consideration that needs to come into play is where your finances stand as you approach retirement. You want to have little to no unsecured debt. Your retirement savings accounts should be well-funded and diversified. It’s a bonus if you’re a homeowner and your home is fully or at least mostly paid off.

If you have high debt and little saved, it’s probably in your best interest to keep working and focus on getting retirement ready as quickly as possible.

Get rid of your debt and start saving for retirement.

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Retirement savings and taxes

Saving for your future can give you security and the same lifestyle you enjoy now. It is also a powerful tool for saving money on your taxes.

401(k)s and other employer-sponsored plans

Traditional 401k plans are often called “pre-tax” plans. In reality, they are a deferred tax plan, meaning you’ll pay taxes on the income and gains after you retire.

So why pay the tax later? As a worker, your income taxes are likely higher. As a retired person, your income taxes are likely to be lower. This means that you’ll be paying fewer taxes. In your 401(k), you are also not required to pay capital gains taxes on an annual basis. This frees up your investment for a much higher growth potential.

You’ll also pay fewer income taxes right now. In our example earlier, we talked about an employee who makes $50,000 per year having taxes reduced so that they are taxed only on $45,000 when they invest 10% into their 401(k).

If you have a Roth 401(k), you pay income taxes on the money you invest now. But the trade-off is that after you retire, you won’t pay ANY Federal taxes on your income and gains. This can lower your tax bill in the future, especially if you have income from other sources. You’ll still be in that lower tax bracket.


If you have a traditional IRA, you will be able to deduct your annual contributions to the plan on your annual income taxes. This will decrease your tax liability, giving you a tax benefit now.

If you have a Roth IRA, those yearly contributions are not tax-deductible. However, the money you withdraw once you retire will not be taxed, decreasing your tax liability post-retirement.

Make sure to discuss the tax implications of these two plans with your financial advisor, so you can choose the best account for your situation.


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