Why It Matters:
  • 56% of Americans with debt report negative impacts on their lives.
  • Do you suggest to invest for retirement or pay off debt first?
  • Every client’s situation requires a different financial strategy.

Thinking about debt may cause your clients physical and emotional stress. Consumer financial debt is correlated to “higher perceived stress and depression as well as higher diastolic blood pressure,” according to a Social Science & Medicine survey. For many, deciding whether to invest for retirement before paying off debt is one big piece of a stress-causing puzzle.

Now may be a good time to work with clients to weigh the pros and cons of paying off debt versus contributing to a retirement account. Of course, you may assume they’ll pay living expenses such as housing, transportation, food, utilities, and childcare first. Then, you may be able to help them decide whether to first pay off debt, invest for retirement, or maybe do both.

“We need to realize that not all debt is created equal,” said Chris McGovern, a director with Transamerica’s Advanced Markets Group. “There are two kinds of debt, one is good, and the other quite bad.”

McGovern explains that, “installment debt, like a mortgage or student loan, usually has a low interest rate and it can be good debt that is contributing to a larger value. Because clients are decreasing the premium with every payment, they’re always making progress and paying less interest with every payment.”

On the other hand, revolving debt, such as a high-interest credit card debt can be a hindrance for consumers. “When they only make a minimum payment, they can never really make progress,” McGovern said. “This type of debt works against someone trying to get ahead.”

McGovern recommends people pay off high-interest debts quickly. And that they don’t pay off their mortgage or student loan until the term is due. “The low interest rate may give them more income to invest in an account that offers a higher rate of return and can compound over time” he said.

Though this math makes sense, as you know, it’s more complex than these simple guidelines. The following financial professionals’ examples, illustrate various stages of people’s lives and some different financial strategies.

Millennials with significant student loans

Recent college graduates with student loans report they struggle financially and often have a second job. “Younger clients may have student loan debt and feel like they shouldn’t invest in retirement until their student loans are paid off. They may miss out on the trifecta of the employer match, tax deferral, and the time value of money,” said Marguerita M. Cheng of Blue Ocean Global Wealth. But some people’s emotional state may give them enough concern that paying off debt is better for their health. Only the individual can decide how much debt and anxiety he or she can tolerate.

Divorced couple

Michelle Buonincontri, Certified Financial PlannerTM professional, CDFA, and founder of Being Mindful in Divorce, discusses the challenges for recently divorced couples. “Debt paydown and investing in retirement can be difficult for clients to reconcile after a divorce,” she said. “Both parties need to work toward both goals to rebuild their finances. I usually advise them to pay off debt first because credit impacts so many areas of their lives. However, I believe it also depends on the emotional needs of the client. It’s not just about the number.”


When people get close to retirement, they may need to shift their payoff-versus-investment strategy. Financial professionals can help guide clients to determine what makes the most sense given their priorities. It pays to retire with as little debt as possible since income will decrease and it will become more difficult to pay off those debts in retirement.

By discussing what stage of life clients are in, what type of debt they have, access to 401(k) matching proceeds, upcoming known expenses, and how stressed they feel about debt, you may be able to help them identify a path that feels comfortable for them.

Things to Consider:
  • Uncover clients stress levels about current debt.
  • Urge clients to payoff high-interest credit cards
  • Help clients plan their debt payoff and savings strategies as part of the overall financial plan.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™, and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.