5 Key Elements to Retirement Planning

Most Americans have noticed that there is often more month than paycheck. Increasingly, people worry that they might have more retirement years than retirement funding. With limited resources, is it smarter to save money for your future retirement, or to use funds to pay off debt?

The short answer is that for most people, it's smart to pay off credit card and consumer debt before investing for retirement. Do it as quickly as possible, however, and then make saving a priority. Here are the facts about choosing to pay debt vs. retirement. Educate yourself, and make the right decision for your future.

1) Today, debt costs more than investments earn.
If you owe money, the interest you pay costs much more than you earn on investments. Here is an example: Credit cards currently have an average interest rate of 16.79 percent. The S&P 500 (one major marker of performance for the stock market, where many retirement funds are held) has provided a negative return over the past 10 years. That means if you had invested $10,000 in the stock market 10 years ago, you would have lost money on your investment. If, however, you had used that $10,000 in cash 10 years ago to pay off credit card debt, instead of making monthly minimum payments (that amount to 2 percent per month on the debt), you would have saved $11,000 in interest payments over that time period

2) Do pay into an employer-sponsored plan if possible.
If your employer offers a 401(k) or similar retirement savings plan, choose the automatic contribution option. As these contributions come from pre-tax income, they reduce your taxable income and thus let you invest and pay less in taxes. Plus, many employers match 401(k) contributions you make. Not participating means you might be walking away from adding 2 percent or more to your paycheck. It is, in effect, a paycheck for your future.

3) You do need to save for retirement when you can.
The average Social Security benefit for retirees is less than $1,200 per month. The number will increase with inflation, but that income is hard to live on without additional savings. Once you have paid off high-cost credit card debt, transfer some or all of those payments to retirement savings. It is still important to pay off other debt such as car loans and student loans, but try to save for retirement alongside those payments.

4) Make a plan, choose a number.
Retirees commonly will want to have about 80 percent of their pre-retirement income. These funds will come from Social Security and retirement savings (interest and principle). To reach that goal, many retirement planners estimate that people should save 10 percent to 15 percent of their gross income (wages before taxes and deductions) each year. Do your research to find a ballpark prediction for yourself. One example: A 35-year-old worker with $20,000 in a 401(k) should save about 7.5 percent of her annual income to have enough in retirement. Check the number again every few years. You can save via your employer plan or by opening an individual retirement account (IRA).

5) Get help now if you need it.
If you have so much debt that you cannot make even minimum payments, or are going deeper into a hole, seek help. A reputable debt settlement company provides one option; other options exist, too. It is better to handle debt during your working years than to carry it with you into retirement.

The sooner you learn to manage your money and eliminate debt, the sooner you will be able to plan for your future peace of mind. Make a promise to yourself that you will value your future enough to get rid of debt and save for your old age. You will feel good about treating yourself -- and your finances -- right.

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