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Why Debt is the Biggest Barrier to Retirement Savings: An Insider’s Perspective

One of the most important communication engagement campaigns that a retirement plan sponsor can conduct is working to create a culture in which savings is cool and debt is not – and helping employees to reduce their debt as much as possible. Debt can destroy the capacity for retirement and other savings – and I know this from personal experience, since a friend in the retirement plan industry shared the following story with me (and gave permission to share it with you).

“I received my first credit card at 18, when I was in college and had no money. That would be the first of 15+ credit cards that I eventually maxed out. When I got a job, it got worse, because I was under the illusion that I would eventually make it out of the debt hole. But my spending was out of control - I bought a house that I could not afford back when banks were lending money to people who they shouldn’t have, I had so much clutter that I would buy items I already had because the original had gone missing in the mess, I had expensive hobbies, and I would even give generously to charity. All of this was done on my credit cards, and yet I only had the ability to pay the dreaded minimum.

Eventually, this lifestyle of charging everything caught up with me. I had six figures (!) in debt, and the minimum payments had gotten so high that my total expenses were exceeding my income, even though I had a fantastic job. And savings? Outside of my retirement plan (which thankfully, since I was working at a retirement firm, was a generous plan to which I also deferred), I had not even contemplated saving anything. My net worth was sharply negative, and my overall finances were a mess. I didn’t budget, track spending, or take any of the actions necessary to improve my financial position.

Fast-forward to the present. Thanks to finding an amazing non-profit credit counseling organization to provide debt management assistance, I paid off my six figures of debt in just four years. Out of necessity - since there was no way I would be able to pay off my debt otherwise - I carefully tracked my spending. This helped me realize some of the nonsense on which I was spending money and reduced it so that I could make my debt payments. I also began budgeting. Once my debt was cleared, I made other lifestyle changes to ensure that I would not dig the same hole again, of which I had dug myself out. Paying full price for things became the exception, rather than the rule, and the realization that I could save 100% on something if I didn’t buy it at all became a consideration. Understanding the difference between needs and wants (for example, I had two cars, but did I need them or want them? Bye, bye, second car!) became important to me, as did reading the experiences of others who were reducing their expenses and increasing their income.

And all that stuff I had hoarded? Well, I changed my primary hobby to decluttering, transitioning from activities that wasted money to one that actually made money! I even started tracking my net worth, which has turned from sharply negative to sharply positive. I still consider myself to be a work in progress, but, for the first time in my life, I am consistently saving money outside of retirement!”

Why am I sharing my friend’s story with you? Because, as a financial industry professional who knows chapter and verse on how debt can be destructive, if he/she, of all people, can succumb to it, I know there are countless others like my friend, many of whom were not as fortunate to have at least saved for retirement.

And, if you are a retirement plan sponsor, there are likely many people just like my friend in your plan who cannot save due to the stranglehold of debt that has taken over their lives. To successfully engage them in your retirement plan and other employee benefits, you need to attack the root of the problem – by offering debt management assistance (including assistance with the debt piranha of the Millennial generation: student loans), education, and other financial wellness initiatives. These programs can make a difference in people’s lives. I am certain that my friend wishes he/she had access to such programs at his/her employer!

Do you have any retirement plan participant debt management success stories that you would like to share? Let me know on Twitter or at

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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