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3 choices you're making today that could derail your retirement tomorrow

Business Insider logoBusiness Insider 2020-02-20 Liz Knueven

The choices we make today have a big impact on the options we have tomorrow. There's no instance where that's clearer than in retirement savings.

Getting divorced, carrying consumer debt, and waiting until student loans are paid off to start saving for retirement can have a major effect on when you can retire, and how much you'll have to live off when you do.

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That doesn't mean you're doomed if you've made, or are in the process of making, one or more of these choices. It just means you might have to pay some extra attention to your retirement savings now and in the future to make up for any ground lost.

1. Divorce can destroy your retirement savings

Divorce impacts all facets of your finances, but it can hit your retirement savings especially hard.

Retirement accounts can be divided during divorce in some states. They can be considered community property, or an asset that is split in half upon divorce. No matter which partner did the majority of the saving, your retirement accounts may be divided equally, depending on where you live. Additionally, other expenses can eat away at your ability to save, such as spousal support.

After a divorce, it's important to start rebuilding and re-examining your retirement plan as soon as you can. "It's extremely important to start out not with implementing advice, but to start out with analysis," Financial planner Ylisa Sanford previously told Business Insider. "That really needs to be asking yourself, 'What is my new normal? What does my new life look like? And, where do I want to be?'"

Once you've done that, she said, you might want to consider finding a financial planner who can help you start to make a plan that works for your new circumstances.

2. Holding on to consumer debt can be costly

While getting out of debt can be tough, it will be even harder to save for retirement with monthly debt payments in the way.

Personal finance site Kiplinger and wealth management company Personal Capital surveyed 850 Americans on the factors keeping them from saving as much as they'd like for retirement. Of those surveyed, 21.3% said that consumer debt - such as credit card debt, medical debt, and auto loans, but not including student loans - have prevented them from reaching their savings goals.

Consumer debt comes with high interest rates, which makes it one of the most expensive forms of debt. For example, the average interest rate on a credit card is about 17%. Holding this kind of debt for the long term can make it more difficult to retire when the time comes, which is why you'll want to prioritize paying it off as soon as possible using a strategy like the debt snowball or debt avalanche.

Financial planner Ryan Cole of Citrine Capital previously told Business Insider that while he generally advises allocating money to pay off debt and save for retirement at the same time, he also recommends prioritizing any debt with an interest rate over 9% before saving for retirement. "While it may be tempting to save for retirement while you have high-interest debt, doing so can often do more harm than good," he said.

3. Waiting until your student loans are paid off misses growth opportunities

When set against consumer debt, student loan debt tends to be comparatively cheap. That's why many experts recommend tackling student loan debt and saving for retirement at the same time.

Though student loans can eat up a large chunk of an entry-level salary (the average student loan payment in the US in June 2019 was $393 per month), it's still important to save what you can for retirement early in your career. Even small amounts can see big growth with the power of compound interest, where the interest you earn then earns interest on itself.

Over the many years retirement savings have to grow, compound interest can affect even small amounts. Business Insider's Tanza Loudenback calculated the difference between starting to save for retirement at age 25 and age 35, and found that a 10-year difference makes a big impact - potentially to the tune of tens of thousands of dollars.

Generally, the advice is to make the minimum payment on your student loans (if your interest rates aren't too high; otherwise you might consider refinancing for a lower rate), and then save what you can for retirement - allowing you to get the benefit of saving sooner while still chipping away at loans. 

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