Entering retirement with unsecured debt is not ideal. Generally, paying off all unsecured debt and as much secured debt as possible is the best plan heading into retirement. This is not feasible for all people. Whether you should aggressively attack your debt or push to build up your retirement will depend on your precise financial situation. The answer to this conundrum can be found by considering a few important points.
Your age matters.
People under 40 should always attack debt first. While shoveling money toward retirement sounds great, debt is an anchor that will impede your ability to invest and will reduce your available cash in retirement.
If you are above 50, you may need to take some time to develop a more balanced approach.
You still need to get rid of debt, but your assets will not have enough time to grow to produce income if you delay any longer starting to accumulate capital in your investment portfolio. For those who are in between, you need to think about other issues.
How much do you owe?
Small debts need to be retired as soon as possible regardless of your age. If you owe less than $5,000, pay it off first. If you can pay off your debts in less than a year, it is best to get them out of the way before saving for retirement. For large amounts of debt (unsecured debt above $20,000), be aggressive about the debt, but start some form of modest but consistent investment as you pay down debt. If you owe more than this, you may not be able to do both. Pay off the debt.
For retirement investment purposes, your mortgage does not count as debt.
All debt in retirement can be a problem. However, your mortgage is secured by a house. Hopefully, you owe considerably less on the house than it is worth. If push comes to shove, in most cases, you can sell the house to pay off that debt. This would be last resort, and only used if you could not negotiate affordable terms on your mortgage payment.
Secured debt, in general, is not a huge problem.
So, the only debt that is really a problem is unsecured debt or a debt against an asset that is worth less than the amount owed. Unsecured and inadequately secured debts are the really big problems that need to be eliminated. Put retiring these debts in front of retirement investing.
Do you have any savings?
The unfortunate truth is that most people with too much debt also have too little or no savings. If you have a nice savings cushion or sizable investments already in place, pay off debt before going ahead with more investing.
You need $1,000 or so for an emergency fund.
This will protect you from being tempted to add more to your debt for small emergencies. Beyond this amount, if you have time to pay off your debt and start retirement investing, there is little short-term need for more until your debts are gone.
What income options do you have available?
If your income can be increased, use it to pay off debt. Is your income already at a maximum? Remove your living expenses from your after tax income. Do you have enough cash surplus to service your debts with payment amounts that actually pay off the debt?
If you can only pay the minimum on unsecured debt, you need to find more income.
Otherwise, your debt will not be going anywhere in your lifetime. Minimum amounts on charge cards can take decades to pay off the balances. The same is true for home equity loans to consolidate debts. You may pay less interest, but you still have a long-term loan. Since you are unable to pay extra on your debt, it is unlikely that you are a candidate to do retirement investing.