Paying Down Debt vs. Investing More: Choosing the Best Path as a Woman Nearing or in Retirement

As we near Tax Day for 2025, it’s the time of year when some folks are getting what they may consider a “bonus payday”: a refund from the IRS. Whether it’s a tax refund, a work bonus, or a pay raise, these moments involving an influx of additional money can prompt a pernicious predicament. Should you spend the money? Stockpile it away? Pay off the rest of your car loan? 

The answer to this question isn’t always straightforward (isn’t that often the case?) Sure, you may feel a pull in a certain direction, an inclination of what’s best. But it can be hard to know what is truly the best financial choice. 

The reason why it can be difficult to discern a “best” choice is the mix of factors at play. You have to consider your proximity to retirement—or if you’re already retired — current financial situation, risk tolerance, and long-term goals, to name a few. This decision doesn’t boil down to answering only one question.   

So let’s explore the key factors for making a decision between clearing out debt, investing more, or a combination of the two for women nearing or in retirement. My goal? To help you make an informed decision that aligns with your retirement goals and financial (and emotional!) well-being.

Understanding Your Financial Position

Before choosing a path at the fork in the road of investing or paying down debt, it’s important to first focus on this question through the lens of your financial position. 

For women nearing or in retirement, this can certainly feel like a pivotal financial moment in your life, as if each financial decision carries a great deal of weight. While there are many different aspects to your financial picture, let’s simplify it to four main areas to reduce the overwhelm as much as we can:  

• Your Debts: List out your debts, including mortgages, credit cards, car loans, personal loans, and any other liabilities. 
• Interest Rates: After developing a list of your debts, hone in on their interest rates. Which ones carry high interest (such as credit cards), and which have lower, manageable interest rates (such as car loans or some mortgages)?
• Outstanding balances: We’d all love to pay off our credit cards each month, but that’s not the reality for many Americans. At the end of the third quarter of 2024, American cardholders with unpaid balances averaged more than $7,200 in card debt, according to this piece from Lending Tree. Because credit cards can carry exceptionally high interest rates, this will be a key part of your decision if you have any outstanding credit card balances. 
• Upcoming expenses and cash needs: What do you have on the horizon for large expenses in the next six months to a year? Are there any other reasons why you may want to have cash on hand in the near future—a new car, a child’s wedding, a job transition? 
• Your Long-Term Financial Goals: Do you plan to leave a legacy, make charitable donations, or travel extensively in retirement? Your financial choices should support your short-term and long-term visions. 

The Case for Paying Down Debt First

For many women, entering retirement debt-free can offer a sense of security and peace of mind. Here are three possible reasons why paying down debt might be the best approach. 

Three Benefits of Paying Off Debt

Lower Financial Stress

Eliminating debt means fewer monthly obligations, which can potentially make your budget more predictable and reduce financial anxiety. Let’s say you didn’t have a $300 car payment each month. How would that make you feel? 

Improved Cash Flow

With fewer debt payments, or none at all, you’ll have more flexibility in your budget for other expenses, including healthcare and leisure. 

There’s a reason the debt-to-income ratio is used as part of the home-buying process. Lending agents need to know how a mortgage will realistically fit into your finances so you don’t default on the loan. It’s the same with your budget in the broad sense. The lower your debt-to-income ratio—that is, the less of the income pie your debt takes up—the more room you have to afford other things or withstand unexpected expenses. 

Avoiding High-Interest Costs

If you have credit card debt or high-interest loans, paying them off can save you thousands in interest. There are plenty of financial calculators out there on the internet, including this one, that can effectively illustrate the impact of paying off a loan early. 

Take a $400,000 mortgage loan at 6.7%, the average rate for a 30-year fixed mortgage in 2024, according to this article. If you paid an additional $100 a month over the life of the loan, you’d save $67,395 in interest. That’s a lot of money. 

When Paying Off Debt First Makes Sense:

• You have high-interest debt (typically above 6–7%).
• You are on a fixed income and want to minimize financial risk.
• You value financial peace of mind over pursuing potential market gains.

The Case for Investing More

Conversely, investing your money might be the smarter move—or just a more palatable one for you personally—if your debt is manageable, you have a higher risk tolerance, or you have a longer time horizon before retiring, among other reasons.

Three Benefits of Investing More

Compounding Growth:

Investing allows your money to grow over time, potentially outpacing the cost of low-interest debt. 

Speaking of financial calculators that can show you effective examples, here’s a compound interest rate calculator from investor.gov. While we saw a big difference in our mortgage payoff example earlier, let’s consider a compound interest growth example. If you put $10,000 into an investment account at age 30 and simply let the interest compound annually at an average rate of 3%, you’d have more than $18,000 in compound interest alone by the time you hit retirement. 

And as the chart below shows, if the interest rate was just 2% better, you would more than double the compound interest by retirement age, with more than $45,000 in interest earnings.

Now, this is a simple example that doesn’t involve any ongoing contributions, but it still shows the value of compounding growth.   

Maintaining Liquidity

Keeping funds in investments rather than aggressively paying off debt ensures you have access to money in case of an emergency. 

Even if you have an emergency fund, there is something to be said about the peace of mind of knowing you have access to money if you need it. Plus, there are investments like money market funds and some shorter-term Certificates of Deposit (CDs) where you can readily access money on shorter notice. 

Employer Match & Tax Benefits

If you’re still working, contributing to a 401(k) with an employer match or funding tax-advantaged accounts like IRAs can be a valuable opportunity. In those cases, the additional funding to your retirement account or the tax benefits of contributing to an IRA may outweigh the benefits of paying off debts. 

When Investing More Makes Sense:

• Your debt has a low, fixed interest rate (typically below 5%).
• Your investment returns are likely to outpace your debt costs over time.
• You have sufficient emergency savings and a solid retirement plan in place.

Finding the Right Balance

For many women in or near retirement, the best solution isn’t an all-or-nothing approach—it’s a balance of both. Here are four tips to help you create a strategy that works for you:

• Build an emergency fund first and foremost. If you don’t have a reserve fund to get you through unexpected situations—at least six months, if not 12 months, of expenses—this is always the first place to start. Aggressively paying off a car loan might feel good, but if you need, say, a $3,000 repair on that car and don’t have an emergency fund, you may have to take on debt at a higher interest rate to afford the repairs. 
• Prioritize high-interest debt (such as credit cards) for quick repayment while continuing to invest. While it’s not uncommon for investments to hit double-digit returns of 10% or more, past performance does not guarantee future returns. The higher your debt interest rates, particularly those pesky credit cards, the less likely it is that you’ll be able to achieve the same or better return on an investment. 
• Make minimum payments on low-interest debt while putting extra funds toward investing. Along the lines of the previous comment, there is a balance to strike between potential investment returns and debt interest rates. The lower the rate of your debt, the better the chances you may have of achieving a higher return on an investment. Again, that’s not a guarantee. It’s just a better likelihood as the rate decreases. 
• Consider your emotional well-being—some women find greater security in being debt-free, while others feel more comfortable with a strong investment portfolio.

Conclusion: What’s Right for You?

There’s no one-size-fits-all answer to this debt vs. investing debate. The best choice depends on your unique financial situation, goals, and comfort level with risk.

If you’re unsure which path is right for you, seeking professional guidance can help you gain clarity. As a financial advisor specializing in helping women navigate retirement, I can help you develop a strategy that brings you confidence and peace of mind.

Next Steps

Do you need help determining your best path forward? Schedule a free consultation with our team at Pleasant Wealth.