The Biggest Barrier Between You and Retirement

If you plan to retire -- and who doesn't? -- you need to amass a significant nest egg. These days, not even being a millionaire can guarantee you a comfortable retirement. If you have significant debt, that guarantee is even further away. Every dollar you spend paying back debts, whether it goes to principal or to interest, is a dollar you can't put away for your retirement. Instead of earning money for you, that dollar is earning money for the bank.

Banks are getting richer
Banks exist to make money by lending money, whether it's your mortgage, your credit card, or your car loan. And in spite of the subprime meltdown, they're still doing a bang-up job. As the following table shows, the net interest any given bank earns can be tremendous.

$1,000 in interest is $1,000 spent today on something you bought in the past. It does nothing to improve your life today or in the future. Even more critically, if you can pay off the debt that's costing you that interest, and instead save that $1,000 for your retirement, it will grow for you. At the market's historical 10% annual rate of return, that $1,000 will turn into $2,594 after 10 years.

Imagine what can happen when you add the $1,000 you would have paid the following year, and the year after that, and the year after that. And that's just from the interest savings alone!

Digging yourself out
If escaping debt were easy, no one would ever file for bankruptcy. Even worse than recognizing the opportunity cost of debt, though, is the feeling that you're just treading water.

If your debt is significant, and the terms are onerous, you can easily wind up paying two or three times as much as you borrowed in the first place. That kind of debt is hard to overcome.

You have two options: Spend less, or earn more to increase the amount of money you can put towards paying down your debt. Disciplined savings strategies, living below your means, and taking on extra work are all time-honored ways to pay it off and start saving for retirement.

As you pursue those strategies, consider as well that all debt is not created equal. Consumer debt, unlike mortgages and student loans, commonly boasts interest rates much higher than you're likely to earn through investments. Even worse, it doesn't provide any tax benefits.

If you have credit card debt, and you're saving for retirement above and beyond that required for an employer match, consider spending that money on paying down the debt. In the end, your bottom line will grow that much faster.

Wherever it came from, any debt you owe is standing between you and your retirement.

That's where my colleague Robert Brokamp at Motley Fool Rule Your Retirement can help. If you need help designing the path that gets you from here to a comfortable retirement -- and chipping away at the biggest barrier to your future -- try our strategies, recommendations, calculators, and discussion boards at Rule Your Retirement. Give it a shot free of charge for the next 30 days. 

At the time of publication, Fool contributor Chuck Saletta owned shares of Fifth Third Bancorp and Washington Mutual. Washington Mutual and US Bancorp are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.