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As of the first quarter of 2025, U.S. household debt reached a record $18.2 trillion, an increase of almost $4.6 trillion since 2019. Mortgages remain the largest share, but credit card, auto, and student loan balances are also at historic highs. The average American is now $62,500 in debt, most of it tied up in their home.
Meanwhile, even as more than half of U.S. households report having a retirement account, over 20% of adults aged 50 and older have no retirement savings at all. The typical amount that Americans said they’ll need for a secure retirement, now $1.26 million, also far outstrips what most people have actually saved. One in four Americans has put away only one year or less of their annual income for retirement, and a majority worry they’ll outlive their savings.
The collision between rising debt and the savings needed for retirement planning is forcing millions of Americans to make an impossible choice: pay down what they owe now or save for their future. If you feel like you’re drowning in too much debt to save, we’ll walk you through what you can do to get yourself on track.
Key Takeaways
- Halting retirement savings contributions often costs more in lost growth than what you save on debt interest.
- A hybrid approach that involves splitting efforts between debt and retirement strikes the best long-term balance.
- Focus on paying off high-interest debts first with methods like the avalanche or snowball approach.
Why Stopping Retirement Savings Costs More Than Debt
Pausing your retirement contributions seems like the right move when you’re looking at a sea of debt, but there are costs to taking out your retirement funds. Early withdrawals or skipped contributions can cause you to lose your current savings and strip away years of compound growth. For example, pausing 401(k) contributions for a few years can shrink your final retirement fund significantly as you miss out on employer matches and the effects of compounding.
Worse, withdrawing early from retirement accounts typically triggers a 10% penalty, plus taxes, instantly reducing the funds available to pay off debt. And once those dollars are gone, the power of compounding can never be fully recovered.
The Hybrid Approach to Debt and Saving
The best way out isn’t choosing between paying off debt or saving for retirement—it’s doing both, but you don’t have to tackle everything at once. You can start small and build momentum with this step-by-step approach:
- Secure your employer match: If your company offers a 401(k) match, contribute just enough to get it. This is free money that instantly doubles your investment.
- Start setting a budget: Identify where you can cut expenses to free up cash for both debt payments and retirement savings.
- Look for at least one expense to cut: Maybe it’s one streaming service or eating out once less per week. Use that money for either debt or retirement—your choice.
- Build a small buffer: After the first three steps, you’re hopefully ready to focus on building a small buffer—aim for $500 to $1,000 in savings before aggressively paying down debt. Later, you’ll want to build a full emergency fund to cover three to six months of expenses.
- Split extra funds: Direct any “found” money—side gig income, bonuses, or windfalls—first to high-interest debts while you continue saving regularly for retirement.
Which Debt To Attack First: Avalanche vs. Snowball
Not all debts are created equal. The order you tackle them can save thousands and keep you motivated. Here are two proven strategies:
| Method | Approach | Best For |
| Avalanche | Target debts with the highest interest rates first (while paying minimums on other debts) | Saving the most on interest |
| Snowball | Pay off the smallest balance first for quick psychological “wins,” then roll that payment into the next smallest. | Those motivated by quick progress |
Which should you choose? If you’re disciplined and focused on math, go with avalanche. If you need psychological wins to stay on track, choose snowball. Either method works better than making minimum payments forever.
Important
Whichever debt payment strategy you choose, always make sure to make your minimum payments on all debts to avoid late fees and credit damage.
Bottom Line
When you balance your debt payments with ongoing retirement savings, especially if you maintain employer match contributions, you’ll benefit from both less stress today and more in savings tomorrow.
Whether you choose the avalanche or snowball method for debt payoff, the key is starting now with whatever amount you can manage. Remember, even small, imperfect steps toward both goals will compound into significant results over time, making your future self financially stronger and more secure.
