Retirement Savings Vs. Paying Down Your Debt

My e-mail box filled up with quite a number of notes from folks who felt I missed the mark with the advice I gave to a government worker who wants to stop his retirement contributions for three months to get rid of credit card debt. (I wrote about it in this column.)

Here's an excerpt: "I am 34 years old and work for the federal government. . . I have about $75,000 in my Thrift Savings Plan and I am considering stopping my contributions for about three months to pay off my $3,000 credit card bill. I want to be debt free! I can't come up with the extra money elsewhere. What do you think?"

I cautiously said, that this person could stop his contributions as long as he had the discipline to return to saving once the credit card debt was paid off.

But some readers thought I didn't provide enough information:

For example, Merle Ross, a certified financial planner with Premier Planning Group in Columbia, Md., wrote: "There is a bit of information I think you should have added. Based on his/her age, this individual is in FERS (Federal Employees' Retirement System), which has matching. My advice would be to cut back to no less than 5 percent in order to maintain the 5 percent matching. As we know, matching is free money and free money is the best. By eliminating the contributions all together, this person would lose the 5 percent matching for 3 months."

Another reader agreed with Ross:

"I have never understood anyone missing out on what is, in effect, a deferred pay increase by not getting this matching money," wrote James B. Wantland of Silver Spring, Md.

I do appreciate the feedback. And both Ross and Wantland made a good point. However, I still believe I gave the right advice.

It's true that you leave free money on the table by not contributing enough to get a match from your employer if one is available. However, after dealing with so many people deep in debt, I have learned that sometimes it's OK to stop contributing to retirement accounts in order to get rid of the debt.

In the case of the person I wrote about, with the 5 percent match, a three-month hiatus isn't going to leave that much money behind. And, actually, if you are a FERS employee, your agency will automatically contribute to your TSP account an amount equal to 1 percent of your basic pay each pay period whether you contribute or not. Other contributions are matched dollar-for-dollar on the first three percent of pay each pay period and 50 cents on the dollar for the next two percent of pay. (For details of how the automatic agency and matching contributions work click here.)

Sometimes you have to rely on psychology and ignore the math to do what it takes to give yourself some financial peace.

Remember, the person I wrote about in my column said: "I want to be debt free."

I believe you should try to continue saving for both a rainy day and your retirement even when you're in debt. But sometimes, the debt is so overwhelming it's better to reduce your savings to get rid of that albatross. (Although you still need to have a little bit of savings so that if an emergency happents it doesn't pile on even more debt.)

I do end the column with a strong caution. I said: "If you know you're trifling and there's a possibility you won't return to saving, pay down the debt without stopping your retirement contributions."

If you still disagree, let's talk about it.

Let's Chat

I will be hosting my personal finance Web chat today at noon ET. Log on with your personal finance questions and comments. We can discuss anything: foreclosure of a home, open enrollment, or retirement.

If you miss the chat, read the transcript here. Also check-out this recent discussion by Martha M. Hamilton, where she and retirement researcher Jason S. Scott discussed how to financially prepare for retirement.

Sharing Money Before Marriage

In last week's Ask Amy column, Amy Dickson tackles the issue of couples moving in together before marriage to save money, which goes against the letter-writer's parents' conservative values.

Read the column to see if you agree with Amy's advice that couples should not move in together for financial reasons. Regular readers of my columns and chats will know that I, too, am against cohabitation before marriage, but what do you think? E-mail me your responses at colorofmoney@washpost.com. Please put in the subject line: "Shacking Up Yes" or "Shacking up No."

On the Real Estate Front Lines

Sellers are finding innovative new ways to sell their homes in this weak real estate market, reports columnist Elizabeth Razzi in "Creative Financing Can Give Sellers an Edge" (Oct. 7). And if you're facing foreclosure or know someone who is, read this story about a Maryland family who got caught in a scam and are near losing their home. The couple is part of a class-action lawsuit made up of homeowners who collectively lost as much as $60 million in home equity. This story brought me to tears.

Read more in: "Trying to Hold Onto Home," By Ovetta Wiggins (Oct. 10.)

More on the foreclosure front, Housing columnist Kenneth R. Harney reports there may be some tax relief for homeowners forced out of their homes. Many homeowners who have lost their homes through foreclosure are unaware that any forgiven debt could result in a tax bill. But the House recently voted to remove the "phantom income" tax penalty which plagued many homeowners whose debts were partially forgiven. The bill now moves to the Senate for consideration, Harney reports.

Continue reading about this in: "For the Distressed, Tax Relief. For Others, a Bigger Bite" (Oct. 6), and get more details about the bill in this AP story: "Relief Bill for Homeowners Advance" (Oct. 4).

Understanding Your Credit Score

If you don't understand how your credit score is calculated, read this Q&A. The Post's Mary Ellen Slayter had with Liz Pulliam Weston, author of "Your Credit Score: How to Fix, Improve and Protect the 3-Digit Number that Shapes Your Financial Future." You can also find some tips to improving your score here.

Penny Pincher Leftovers

Here are some more environmentally-friendly savings tips I received:

* "One day while I was driving the automatic (Honda Accord) I noticed that even though I had my foot on the brake at a stop, I could feel the car was still trying to move forward... so I thought what if I put the car in neutral [while at a stop sign or long traffic light]," said Pamela Wingfield of Bethesda, Md. "When the car was in drive, I got approximately 22 miles per gallon. When I put the car in neutral at stops, I got 27 miles per gallon."

* "Biking it" is Kathy Elam's idea. The Havelock, N.C., resident said: "Rather than just mindlessly jumping into the car, we choose to jump on our bikes. Not only do we save gas, money and wear on our vehicle, but it saves carbon emissions and potentially a heart attack. Every school morning we ride to the school for drop-off, then ride back for pick-up. The other children seem envious and the parents verbally admire our effort and seem to long to do the same... I can't help but wonder if we haven't inspired others to join in the fun!" said the native.

* Laura MacLachlan of West Brookfield, Mass., gave this tip: "When I shave my legs (which I will admit is not everyday or even every other day) I fill a quart container with shower water. After bathing and shutting off the water, I put conditioner on my legs and shave, using the water in the container to rinse the shaver. It works quite well."

* Chris and Patricia Kaiser of Reston, Va., said: "When we had our kitchen cabinets replaced, the contractor told us that Habitat for Humanity would pick up the old cabinets and sell them in their resale store. We made an appointment for Habitat to come the same day that our cabinets were removed (carefully) from our kitchen."

XM Show

If you have a personal finance question and haven't been able to participate in my online discussions, join me on the radio. I now host every Sunday my own radio show, "Singletary Says," on XM Satellite Radio, Channel 169 The Power! The show airs weekly between 8 p.m. and 10 p.m. ET. Tune in.

Even if you don't have XM, call into the show anyway. This is your chance to get your questions answered live. The number is (866) 801-TALK or (866) 801-8255. You can also e-mail your question and I may read it on the air. You can either e-mail me at michelle@xm169thepower.com or at singletarym@washpost.com. Be sure to put "XM" in the subject line.

You are welcome to e-mail comments and questions singletarym@washpost.com. Please include your name and hometown; your comments may be used in a future column or newsletter unless otherwise requested.