I was on the phone the other day helping a good friend figure out retirement and debt repayment, and I realized that I never shared my own personal determination of whether to clear debt or save for retirement.
I do actually have a rule and I developed it after I cleared my debt because I saw how many pressures started coming down as I got older.
I had cleared my $60,000 debt quite young, about 18 months after I graduated so I never experienced having to think about retirement seriously and take care of my family and.. and.. and.. You know how it is.
Rule of Thumb for Debt or Retirement
If you have any debt charging an interest rate of more than 5%, prioritize paying that down first with at least 75% of your income after your necessary fixed and variable expenses (rent, food, utilities, gas).
The stock market on average returns 5% (I know some people say 7% but I am conservative in this assumption).
For any debt that is less than 5%, you are probably better off investing your money in the stock market, and any debt more than 5% (especially in the 10% or higher range), you will get more bang for your buck (so to speak), clearing that debt (and KEEPING IT CLEARED) than you probably would investing it in the stock market.
You can think of it as saving the difference.
If your debt is at 7%, and the stock market is returning 5%, the difference is 2%. You are gaining 2% more with your dollar by clearing your debt over investing it.
Quirks to consider
If you are younger than 40 or have more than $100,000 in debt, then I would say pay off your debt as a higher priority than saving for retirement.
Once you hit 40, you really only have 25 years to go before you retire, so you need to get cracking on this retirement boat because it passes your harbour and you are 50 years old with nothing in the bank.
At those two points, perhaps instead of 75% of your income, than 50%.