Retirement vs Debt Repayment

[glitzy07]

Sorry for the long post below, it got longer than I expected.

TLDR: Is it ever reasonable/responsible to temporarily reduce retirement contributions to pay down higher interest CC debt?

Long version:
I was listening to a podcast yesterday that made me re-think how H and I have been handling some of our money allocations in order to pay off some credit card debt. 

We have some credit card debt (from some unexpected additional costs during a home remodel last year) that has been difficult to make significant payments to over the last few months. This is mostly because we have additional childcare costs this year that are new to our budget. Our school-aged child is in full time care for the summer versus before/after care during the school year, and our youngest moved from an inexpensive in-home to a full time pre-school at the beginning of the year that was double the cost.

We've made changes to our budget, including dropping cable down to just internet and paring down in other places (food budget, eating out), but we've unfortunately still added some to our debt over the summer with the higher daycare costs.

My question is this: does it ever make sense to pull back on retirement contributions in the short term (and it would really be just the short term), to try to have some additional income in the budget to more quickly try to pay down higher interest debt.

H had a later start to retirement savings (he is vested in a pension, but only started contributing additionally to his own 401k at around age 29). I've been investing in my retirement since my first full time job at 21. I'm thinking if we made any changes to retirement, we'd leave his be for now since he got a later start and lower my contributions just through the balance of this year.

I'm currently contributing 14% of my income (9.5% pre-tax, 4.5% post-tax), along with a receiving a 6% match from my employer AND a 6% contribution to my employer's pension. 

The podcast I was listening to was an interview with a Certified Financial Planner. While she said everyone's situation is obviously different, she gave a similar example in which she said she'd probably invest in retirement to A) get the full match (duh!), and B) try to be at 15% of your annual income between your contributions and your employee match. After that, she recommended probably allocating money elsewhere first to tackle more high interest debt.

If I dropped down to 6% pre-tax to get my employer's match, I would still also get the 6% pension contribution and would technically still be at 18% of my income. It would free up an additional ~$400/month to pay down some debt through the end of the year.

We are also in the process of working with my step-son's mother to change the child support order that H pays, as SS is no longer in any kind of daycare and his expenses for that portion of child support have reduced. Once that is finalized through the court, it would free up ~$350/month and I could go back to fully contributing what I am now to retirement easily. Unfortunately the full court process to push that through is 60-90 days.

My son goes back to school in two weeks and our childcare costs will go back down to our pre-summer levels, which will help. We hadn't added any additional debt to our budget until summer started and that cost went up. I just REALLY hate having any of it at all and want to aggressively pay it down. I am on target to receive a decent bonus next spring to help us wipe the rest out completely, but I'd love to get moving on it now.
 
TIA if you read this whole thing!

[lessel]

I don't know the official word on whether or not this will doom your financial future, but we have done it. DH and I have been contributing good %s starting at early ages, so we felt like we were ok doing this for two years. Our reason was two kids in daycare w/daycare price hikes. He has more in his retirement account, even though I make more $, so we adjusted his down like 4% and mine 2%.

[sandandsea]

Some advisors like Dave Ramsey suggest stopping retirement completely and focus on getting out of debt as fast as possible and then upping retirement again. It makes sense a a very temporary focused effort and if you commit to staying out of debt. Then youve only missed out on a small period of retirement investing and will have more funds available afterwards to put towards retirement since you won’t have any debt payments. However, if you don’t change your mindset to avoid debt no matter what then it’s a bad idea as you’ll end up with less retirement and more debt in the future.

[raangoli]

Aug 21, 2019 11:23:24 GMT -5 spearmintleaf said:

It makes sense to do it if you’re disciplined and it’s only for a short timeframe. Dropping down to “only” 18% is still quite comfortable.

I would split the reduction in retirement equally between you despite his late start. Women are just too generous with their money, and it comes back to bite them at times.

Ill just co-sign this. As long as you don’t get accustomed to the extra cash and then use it towards other things once the CC debt is paid off, I think it’s a good approach and certainly better than completely stopping retirement savings like Ramsey suggests.

[glitzy07]

Aug 21, 2019 11:33:19 GMT -5 raangoli said:

Aug 21, 2019 11:23:24 GMT -5 spearmintleaf said:

It makes sense to do it if you’re disciplined and it’s only for a short timeframe. Dropping down to “only” 18% is still quite comfortable.

I would split the reduction in retirement equally between you despite his late start. Women are just too generous with their money, and it comes back to bite them at times.

Ill just co-sign this. As long as you don’t get accustomed to the extra cash and then use it towards other things once the CC debt is paid off, I think it’s a good approach and certainly better than completely stopping retirement savings like Ramsey suggests.

No, I definitely wouldn't let this happen. As it is, H is older than me and if at all possible I'd love to be able to retire sooner after he does than later, so I'd go back to being as aggressive as I am able as soon as possible!

Good point on splitting the reduction, spearmintleaf . I'll have to get logged into his accounts and see what his contributions are. I can't remember where we set them. His match isn't nearly as generous as mine with his union job.

[mich1]

Have you looked into transferring the balances to a 0% card? This, along with the retirement reductions will speed up the amount of time you won't be contributing. My bigger concern is that there is going to be another event where you are deficient and you will extend this to the point where it doesn't happen.

[lolalolalola]

Aug 21, 2019 11:33:19 GMT -5 raangoli said:

Aug 21, 2019 11:23:24 GMT -5 spearmintleaf said:

It makes sense to do it if you’re disciplined and it’s only for a short timeframe. Dropping down to “only” 18% is still quite comfortable.

I would split the reduction in retirement equally between you despite his late start. Women are just too generous with their money, and it comes back to bite them at times.

Ill just co-sign this. As long as you don’t get accustomed to the extra cash and then use it towards other things once the CC debt is paid off, I think it’s a good approach and certainly better than completely stopping retirement savings like Ramsey suggests.

I agree with this. Also, not sure how much cc debt it is but you may want to look at transferring to a cheaper form of borrowing. If you have good credit and/or home equity that may be an option for you.

[aspentosh]

Have you looked into 0% (or lower interest rate) cards for a transfer? I know one of my cards is always sending me notices for 0% balance transfers with low fees.

But would I do it? Yes. Although, like a PP said, I'd split between you two. Make sure you're still contributing to your matches (as you said) but then reduce to pay off the debt.

[sadlebred]

I agree with the others. At least keep your contributions up to your full employer matches for retirement.

With the CC debt-either move it to a 0% balance transfer offer or take out some kind of unsecured personal loan to reduce your interest rate.

[dcn]

Do you also usually get a tax refund? I just had h change his withholding because we were on track to get around $5,000 back, and we could use a couple hundred more dollars a month

I am super conservative but even I would be ok with a temporary reduction to pay off debt!

[glitzy07]

dcn We’ve ended up getting around $3-4k back the last few years, so that would definitely be another option!

I hadn’t looked at 0% transfer. I can look into that too!

[ellipses84]

I definitely would. I’ve adjusted my retirement percentages many times throughout the years, contributing a lot when I could and the minimum to get a match when money was tight. My current job has no match, the 401k is only 1/3 of my retirement accounts, and I’m comfortable with my retirement savings, so I keep the percentage pretty low. I like to keep my taxable income as low as I can while still keeping my paychecks at a level that pays the bills, but I use a combo of my HSA, FSA and 401k to do that.

[glitzy07]

Aug 21, 2019 12:28:39 GMT -5 mich1 said:

Have you looked into transferring the balances to a 0% card? This, along with the retirement reductions will speed up the amount of time you won't be contributing. My bigger concern is that there is going to be another event where you are deficient and you will extend this to the point where it doesn't happen.

Question about this, that maybe someone might know the answer to! 

The card that we have the debt balance on is in my name with H as an authorized user. Would a credit card company allow us to open a card in HIS name, transfer the balance, and add me as the authorized user? Or can we only transfer if we open the 0% card in my name? 

The reason I ask is that my name/credit was used for our home equity loan last year, so between the two of us I have the bigger debt/credit ratio right now. It would be more likely that he'd probably be approved for a card to transfer the whole amount than I would. Plus it would be nice to balance out some of our credit/debt ratio to make it more even between the two of us for credit scoring purposes (we're still in the 750+, but just to be safe for future!).

TIA!

[Deleted]

I have reduced it before to help pay down some debt. I regret it because taxes really ate into it and I got a better ROI by not paying taxes on it/investing. 

Will you really get 400 bucks or is that post-tax estimate?

[sloan]

As long as you don’t drop down below what you need to maximize the employer match (free money!) I would absolutely reduce it to pay off CC. Paying down a CC is a guaranteed return of whatever your rate is, and no market is going to beat that (unless you have run the numbers of transferring to a 0% card and can pay it off before interest accrues, which is another viable solution if the balance transfer fee is low enough).

One thing I’ve done before, partly to help with the higher tax bite on a bonus check, is to increase the retirement percentage by a good chunk before bonuses get paid out, then put it back to normal after. If you get the CC down you could always do something like that in the spring to “make up” for some of what you don’t put in now.

[glitzy07]

Aug 23, 2019 18:09:45 GMT -5 @lemonlover said:

I have reduced it before to help pay down some debt. I regret it because taxes really ate into it and I got a better ROI by not paying taxes on it/investing. 

Will you really get 400 bucks or is that post-tax estimate?

I used a paycheck calculator and ran my current scenario and then changed the retirement percentage down to see what the difference was. It was a difference of about ~$200 biweekly.

[lust2hart]

I think this is a good idea. Do you have a good emergency fund? If not, I’d consider continuing the reduced retirement contribution until you’ve got a solid efund so that you can avoid cc debt in the future.

[Gato]

I would do it.  You're doing great on your retirement contributions; lowering them for 6 months or so to gain peace of mind seems like the best thing to do.  IMO, you shouldn't sacrifice TOO much for your future, and continuing stress about credit card debt seems too much of a sacrifice to me.