When Your 401k Savings Reaches This Number, It's Time To Pay Off Your Debt

When saving for retirement, starting young is the key to benefiting from compound interest, but once your 401(k) hits the magic number, your money might be better used wiping out debt. According to GoBankingRates, that number is $100,000. Hitting this milestone is a significant step in anyone's financial journey, but in doing so, it is important to reassess and ensure further progress is not hampered. Carrying high-interest debt — especially credit card debt, which comes with average interest rates of around 22% — can quickly erode the progress made in retirement savings.

Households with credit card debt have an average balance of $10,899, which can amount to hundreds of dollars a month in minimum payments and thousands in interest over time. Paying off high-interest debt can free up cash for future retirement investing, enabling individuals to grow their investment accounts even faster and hit retirement goals much sooner. But just as important, it can reduce financial stress.

While hitting $100,000 in a 401(k) can seem like an arbitrary number, it actually carries some significance. At this stage, assuming a 8% annual return, savings could grow by about $8,000 the following year without any additional contribution. At this point, the earnings themselves begin to generate returns and can accelerate growth the longer the money stays invested. However, this milestone is just the beginning; setting new goals, like reaching $250,000 or even $500,000, helps maintain the momentum and further prepares you for retirement.

While many Americans think they need $1.46 million to retire comfortably, it is possible to retire on much less in certain states. In fact, $250,000 may be enough to retire in West Virginia, Mississippi, and Arkansas, where the cost of living is significantly lower. Even if lower-cost states can stretch retirement savings, continuing to contribute and potentially increasing contributions can ensure a stronger financial cushion and protect against inflation, unexpected expenses, and the possibility of a longer-than-expected retirement.