With Social Security benefits designed to replace just 40% of pre-retirement income, investing for retirement is essential so you'll have supplementary savings to help support you. Unfortunately, far too many people haven't started building their nest eggs yet, and the longer they wait, the harder it becomes to save enough.

People have a lot of reasons for not starting their retirement savings, but a recent study conducted by Northwestern Mutual revealed one of the key obstacles standing in the way. According to the research, 29% of Americans have put off investing for their later years because they're in debt. 

Unfortunately, while there are times this might make sense, the reality is that most people should be saving for retirement even as they work on paying back creditors. 

A broken white piggy bank with coins spilling out.

Image source: Getty Images.

Why you shouldn't necessarily put off retirement savings just to pay down debt

There are some situations where it makes sense to put all of your extra income toward debt payoff and delay investing for your future. But these are few and far between. Typically, this is the right move only if one of the following is true:

  • You have high-interest consumer debt such as credit cards or payday loans that you're working to pay off and you don't get any employer matching on your retirement funds
  • You can't afford to pay the minimums on your debt if you contribute to a retirement savings account 

If you can't afford to cover your bills, you need to get out of debt to free up some cash before you can save for retirement. You don't want to ruin your credit by investing for the future and paying bills late or not at all. And if you have debt with a high interest rate, the amount you'd owe your creditors would likely dwarf what you could earn by investing.

Paying back your debt ASAP, if you're serious about doing so, should likely come before retirement savings. But the exception is when you get an employer match, as this is free money that provides a guaranteed 100% return on investment. If you get an employer match, pay the minimums to creditors, invest enough to get your match, then devote any extra money toward making progress on paying down what you owe.

Outside of these situations, when you have debt at a low rate, it often makes little sense to pay it off early at the expense of retirement savings -- especially if you get tax benefits that defray interest costs or reduce the cost of investing. 

Could you earn a better return by investing?

When you have debt at a low rate, such as mortgage or federal student loan debt, it's almost always possible to earn a better return on investment by putting your money into a diversified portfolio of stocks. Since the market consistently produces average returns of around 7%, why pay extra on a mortgage at 3.5% or 4% or a student loan with a rate under 6% when the return on investment is just the interest saved by paying it off early? 

If you're eligible for the student loan interest deduction or a deduction on your mortgage interest, early payoff instead of saving for retirement makes even less sense. This is true especially since you could likely also get a tax deduction for retirement investing if you could make contributions to a 401(k) or IRA

Since you lose out on tax breaks and potential investment gains when paying off these debts ahead of schedule, think seriously about sending in only the minimum due on them and investing any extra cash available. 

And if you have other kinds of debt, such as personal loan debt, decide where your cash should be allocated by comparing the interest rate on what you owe with the potential return on investment from making tax-advantaged investments. Doing this calculation is the smartest way to decide where you put your dollars, and if you're among the 29% of Americans delaying retirement savings because you're in debt, make sure you do it today.