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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.

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