Should I Invest For Retirement Before Paying Off Student Loans?
America has a savings problem. With more and more transactions going digital, it’s easy to lose track of spending. Healthcare, housing, and education are getting more and more expensive and opening a retirement account can be overwhelming (or at least tedious). And if you’re a college graduate with student debt, how do you even begin to think about saving? Because saving for retirement may not be out of reach for those with student loans.
Student Loans Aren’t The Only Crisis Americans Are Facing
No matter where you look, facts about saving for retirement in America are scary. One third of Americans have NOTHING saved for retirement and more than half have accounts with balances under $10,000. A crisis is brewing as baby boomers reach retirement age with severely underfunded saving vehicles. How much does the average person need to save? The answer depends on your lifestyle, but you’ll probably need more than you think.
Say you make $50,000 per a year and plan on using that as a barometer for post-employment spending. If you expect to live 20 years after retiring, you’ll need $1 million in the bank by the time you hang up your work boots. One million dollars! Don’t read that number in Dr. Evil’s voice, it’s a serious estimate of how much you’ll need (check out NerdWallet’s retirement calculator to play with the numbers yourself). Piling up a million dollars is a daunting task, but recent college graduates have an advantage no other saver else does – time. When it comes to saving for retirement, time is your biggest ally.
Take Advantage of Compound Interest
Albert Einstein is credited with calling compound interest “the most powerful force in the universe”. Whether he actually said that is up for debate, but the message shouldn’t be overlooked. By starting young, savers can give themselves a healthy retirement without becoming hermits today.
Let’s say a 25-year old employee named Jeff gets access to his company’s 401k plan. Jeff makes $30,000 annually and the company offers a 5% match on contributions (meaning they’ll match any deposit up to 5% of Jeff’s salary). So Jeff puts in $1,500 of his salary into his 401k and his company adds another $1,500, bringing the total yearly deposit to $3,000. Now let’s assume that $3,000 is contributed every year until Jeff decides to retire at age 65 (no raises in this exercise, sorry Jeff). If Jeff puts his funds into a portfolio of stocks and bonds averaging 6% per year (a conservative estimate), he’ll retire with over $478,000 after taxes. Nearly half a million dollars in 40 years and he only put in 5% of his pay! Here’s how that grows over time (with taxes factored in).
Year 1…. $3,000
Year 5…. $17,418
Year 10…. $40,728
Year 20…. $113,667
Year 30… $244,289
Year 40… $478,214
Who Should Save For Retirement?
For those with suffocating student debt (ie. federal loans with interest rates over 7% or restrictive private loans), retirement saving might not be in reach yet. But if you’re in a federal repayment program, take advantage of those savings and invest further into your future. If your employer offers a 401K match, enroll and contribute up to that matching point. A 401K match is FREE MONEY, so don’t let fear of student loan payments bog you down. The federal government wants you to save, that’s why so many tax-advantaged retirement accounts exist. Check out the IRS page on retirement plans to learn about these tax-deferred options.
Dan graduated from college with a degree in journalism and about $25,000 in student debt. He luckily landed in a career that allowed him to pay his loans off at a reasonable rate, but not without making some sacrifices (sorry grandmom). Dan buried himself in personal finance books to better manage his debt and start saving for retirement. He thinks $25,000 is more than enough to pay for a good education and is stunned by some of the near six-figure balances he sees student borrowers carrying around.
Born 45 minutes north of Philadelphia, Dan went to Penn State in 2004 to pursue a journalism degree with a minor in political science. He graduated into the worst recession in 80 years and got his first post-college job serving hamburgers and Miller Lite. Dan eventually settled in as a purchasing agent at a printer manufacturing company, which isn’t a profession you’d think would be #2 on a journalist’s list.
Dan now lives in Elkins Park, PA with his girlfriend, who graduated with over $80,000 in student debt herself after getting an education degree from Arcadia University. Seeing a new teacher forced to pay nearly $1000 a month in loans drove him to action and LoanGifting gave him a platform to not only help his significant other, but all kinds of borrowers struggling with student debt. Dan’s hobbies include poker, weightlifting, and watching the Eagles beat the Patriots in the Super Bowl twice a week on BluRay. His writing has been published on Benzinga, Fora Financial, and Credit Donkey.