Is It Smart to Stop 401(k) Contributions to Pay Off Debt?
If you’re overwhelmed by high-interest debt, you might wonder: Should I stop 401(k) contributions to pay off debt?
This is a deeply personal question and one without a one-size-fits-all answer.
Debt can feel like a weight dragging your finances down.
And with high-interest rates, the cost of carrying credit card balances, personal loans, or even auto debt can quickly outpace the returns you’re earning in your retirement account.
So, is it smart to hit pause on your retirement contributions? Or could that move backfire later? Let’s weigh some facts.
How Does Debt Impact Your Retirement Outlook?
Debt doesn’t just strain your monthly budget.
It may also jeopardize your long-term financial security.
Carrying debt into retirement may reduce the income available for everyday expenses, healthcare, and leisure.
If not addressed early, lingering debt could significantly limit your ability to enjoy a comfortable retirement.
Consider…
- The median average credit card interest rate for August 2025 is 23.99%.¹
- The S&P 500 has delivered an average annual return of 10.33% since 1957, but when adjusted for inflation, the real return drops to 6.47%.²
This comparison reveals a stark gap.
If you’re paying nearly 24% in interest and only earning 6-10% on your investments, the cost of carrying debt far outweighs your potential portfolio growth.
That said, choosing to stop retirement contributions in order to tackle debt may create a savings gap that’s difficult to make up later.
That’s because when you pause contributions, you don’t just miss out on the money you would have set aside, you’re also forgoing compound growth and potential employer matches – both of which may impact your long-term savings.
Ultimately, we believe balancing debt repayment and retirement savings requires a thoughtful strategy that considers your current income, expenses, interest rates, and how far you are from retirement.
When Might It Make Sense to Pause 401(k) Contributions?
While we feel saving for retirement is crucial, there are certain situations when temporarily pausing your 401(k) contributions might make financial sense – especially if you’re drowning in high-interest debt.
Here are some examples:
1. You’re Carrying High-Interest Consumer Debt
If you’re juggling multiple credit cards with interest rates above 20% and only making minimum payments, the interest alone can snowball quickly (often faster than your investments can grow).
In this case, it may be worth pausing or reducing contributions temporarily to aggressively pay down the debt and free up future cash flow.
2. You’re Behind on Essential Bills or Facing Collection
If you’re falling behind on rent, utilities, or car payments, those must take priority.
Getting out of financial survival mode is essential before refocusing on long-term savings goals.
3. You Have No Emergency Fund
If every unexpected expense is going on a credit card, that’s a red flag.
Building a small emergency fund (even $1,000 to start) may help prevent new debt accumulation and, in the long run, make your retirement savings efforts more consistent.
4. You’re in a Short-Term Crunch
Life happens. Job loss, medical bills, or other temporary setbacks may derail your budget.
In short-term hardship situations, pausing 401(k) contributions briefly while you stabilize your finances may be necessary – as long as you have a plan to resume them quickly.
Why Continuing to Contribute (Even a Little) May Still Be Worth It
While pausing your 401(k) contributions might feel like the fastest way to free up money, completely stopping your retirement savings may have long-term consequences that are hard to recover from.
Here’s why contributing even a small amount may still be worth it:
1. You Could Lose Your Employer Match
Many employers offer matching contributions – often up to 3-6% of your salary. If you stop contributing, you may forfeit this “free money” entirely.
Even if you’re working to pay off debt, contributing just enough to receive your full employer match may boost your long-term savings with no extra cost to you.
2. Time Is Your Greatest Asset
When it comes to retirement savings, the earlier you start, the better. Not just because you’re saving longer, but because your money has more time to compound.
For example, skipping just one year of $5,000 contributions at a 7% return could cost you over $38,000 in lost retirement funds over 30 years.
3. Small Contributions Still Add Up
Even if you are unable to contribute the maximum, a reduced contribution is better than none at all.
Setting aside 1-3% of your income keeps the savings habit alive and can be increased again when your financial situation improves.
4. It Keeps You in the Habit of Saving
Stopping contributions completely can make it harder to restart later.
Even a modest amount helps reinforce the habit of paying yourself first, which can make it easier to increase your contributions once your debt is under control.
What to Consider Before You Stop 401(k) Contributions to Pay Off Debt
At the end of the day, the right move typically depends on your debt type, interest rates, time horizon, employer match, and overall financial goals.
Before making the decision to pause your retirement savings, ask yourself the following:
1. What’s the interest rate on my debt vs. expected investment returns?
If your debt carries high interest (20% or more), the math may favor paying it down first.
But if it’s low-interest debt (like federal student loans or a mortgage under 6%), your 401(k) contributions may still offer better long-term value through compounding.
2. Am I leaving free money on the table?
If your employer offers a 401(k) match, stopping contributions could mean missing out on thousands of dollars a year.
Even contributing just enough to earn the full match can make a huge difference over time.
3. Do I have a plan to resume contributions?
One of the biggest dangers of pausing retirement savings is failing to restart them.
If you hit “pause,” set a specific target date or debt milestone that triggers resumption of contributions.
4. Can I reduce expenses or boost income instead?
Before cutting your 401(k), look at your budget.
Could you reduce discretionary spending? Pick up a side hustle? Refinance loans?
Trimming other areas may allow you to pay down debt without sacrificing retirement savings.
5. How close am I to retirement?
If you’re within 10-15 years of retirement, every year of missed contributions have shown to have a bigger impact.
There’s less time for your savings to compound, so it may be wiser to find alternative ways to manage debt.
Have questions or concerns about your 401(k) performance? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors.
Sources:
- https://www.investopedia.com/average-credit-card-interest-rate-5076674
- https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
