THE BLOG
01/28/2016 04:00 pm ET Updated Jan 28, 2017

What's Best -- Pay Down Debt or Save for Retirement?

Millennials face a particularly difficult challenge when it comes to retirement savings. They are juggling credit card debt and student loans, while at the same time trying to save for the future.

A recent survey of 1,110 adults found that millennials may not be adequately preparing for retirement. Nearly half of millennials say they have a 401(k) and 68 percent are saving something for retirement, according to the survey. However, 77 percent of millennials say their first step in preparing for retirement is paying down debt. Eliminating all debt before saving for the future puts you at risk of not saving enough -- or early enough -- for retirement.

Here's how millennials can balance paying down debt with saving for retirement:

1. Pay off high interest debt: When it comes to choosing between paying off debt and saving for retirement, it's all about the interest rate. For the most part, consumers will pay much more in interest on high interest debt, such as a credit card debt, than they will earn on retirement savings. Credit cards often charge high interest rates of as much as 15 percent, 18 percent or even 25 percent, so paying down this high interest debt should be a priority. Getting and staying out of high interest debt is essential for building credit and accumulating retirement savings. You might be able to shift your credit card balance to a card that charges no interest for an introductory period of time, which will give you some extra time to pay off the balance without accumulating additional interest charges.

2. Take advantage of a 401(k) match: Many millennials have access to a 401(k) plan, and it's likely that many of these companies offer at least a small match for retirement savings. Consumers who have access to company 401(k) contributions should maximize that match, even if they're still getting out of debt. Think of a company match like a bonus. It's extra money that will start earning interest as soon as it's deposited in a 401(k). This means that the value of that money will compound annually from now until retirement. Taking advantage of employer 401(k) contributions is generally well worth the sacrifice of being in debt a little longer.

3. Be smart with car loans: One way to free up some money for retirement savings is to manage car debt. It's best, if possible, for twenty-somethings to stay out of car debt completely by saving up and paying cash for a car. If this isn't possible, millennials should strive for lower car payments by buying a less expensive vehicle, making a larger down payment and shopping aggressively for lower interest loans. Money saved on car payments can be banked for retirement.

4. Set realistic goals: Many millennials don't have realistic expectations for what they'll need in retirement. For instance, 70 percent of millennials expect to spend less than $36,000 per year in retirement. That's well below the average of $40,938 in annual expenditures for the age 65 and older crowd, according to Bureau of Labor Statistics data. And some millennials say they are counting on winning the lottery (15 percent) or being gifted money (11 percent) they will use for retirement savings.

Many millennials say they will seek out a financial advisor only when they are near retirement, receive an inheritance or have out-of-control debts. While financial advice may seem like an unnecessary expense to twenty-somethings, an advisor can help young people set realistic goals for the future. A financial professional can help you set up retirement savings benchmarks for every decade of life, which can help keep you progressing toward financial independence.

5. Invest aggressively: Retirement savers in their twenties and early thirties should invest aggressively. With retirement still decades away, millennials can afford to ride out the markets, taking some hits but also reaping greater rewards. Millennials should adopt an investing strategy that leans heavily on stocks, which will have decades to grow. However, these relatively risky long-term investments should be tempered with an adequate emergency fund.