SUMMARY: When you’re in your 20s, 30s, or even 40s, you may find yourself caught between two important financial obligations—repayment of student loans and saving for retirement. Here’s our take on how to prioritize these two options.
Workers in their 20s, 30s, and even 40s, will at some point likely find themselves caught between two important financial obligations—repayment of student loans and saving for retirement. While student debt may loom large and appear to be an immediate priority, ignoring retirement may potentially endanger any plans for a prosperous future.
Indeed, 29 percent of Americans put off contributions to their retirement nest egg, and instead put all their spare resources towards student loans. But keep in mind that a lack of savings also means no employer-matched investments, tax breaks, and compound interest, all of which are necessary tools to build enough resources for a secure retirement. In short, you may very well be poorer, even if you’ve paid down your debts.
So, what to do? A bit of both.
A snapshot of student debt.
Many Americans—44 million of them—have student debt, adding up to more than $1.5 trillion. And the young adults in this group save quite a bit less for retirement than their counterparts who have no debt, according to a 2018 study by the Center for Retirement Research at Boston College.
There are many reasons behind this trend, but chief among them is a simple, steep rise in tuition costs. So it’s not surprising that the percentage of graduates with loans—65 percent as of 2017—is high.
By the time these same workers reach age 30, they’re sitting on an average of $9,100 in their 401(k), a far cry from the $18,200 that their non-debt-saddled peers have stashed away in that same period.
So, how to balance both of these crucial priorities? Most financial experts recommend the following:
Don’t miss minimum payments.
Before you tackle student debt, it’s important to first eliminate (or make significant reductions in) any credit card or personal debt, as they tend to have higher interest rates and fees.
No matter what kind of debt you have, the first rule is always to make your minimum monthly payments. This helps set up a solid credit history and may provide a tax deduction if your make under $80,000 in adjusted gross income. Check in regularly with your loan provider to see if refinancing is an option for potentially lowering your rates.
Contribute to your employer’s 401(k).
Once your minimum loan payments are set up and running smoothly, turn your attention to your company’s 401(k), or similar workplace-sponsored plan. If your employer provides a match—typically 5 or 6 percent of your salary—this is essentially free money that gives a healthy boost to your retirement savings.
These contributions work hand-in-hand with your most trusted savings ally—compound interest. Money invested now will grow handsomely over time, putting you that much closer to a secure and stable retirement.
Set up an IRA.
If you’re self-employed or your company doesn’t offer a 401(k) (or an equivalent program), an individual retirement account (IRA) can perform much of the same function. Contribute up to $6,000 in 2019 and either get a tax deduction up front (with a traditional IRA) or withdraw funds tax-free in retirement (with a Roth IRA).
You may even be able to get matching funds from the IRS with their Saver’s Credit program, which applies if you make under $32,000 as a single filer or less than $64,000 as a joint filer.
Surprise cash? Add it to your stash.
If you come upon an unexpected windfall—a generous bonus at work, a surprise inheritance from a distant wealthy uncle—it can be tempting to splurge on an addition to your house or dinner at a Michelin-star restaurant. But this influx of cash can actually help achieve your more long-term financial goals. Split it between loan repayments and retirement investments, or apportion the lion’s share to whichever bucket needs it most.
Lower your tax bill.
Not only will you see tax savings on contributions to your 401(k) or IRA, but you may also be eligible for a deduction of up to $2,500 for interest paid on your student loans. There are income limits on who exactly can claim this deduction, depending on how you file (single, jointly, etc.).
Get started today.
While student loan repayment and retirement savings may seem to be in competition for your dollars, the reality is that you can (and should) service both needs while not busting your budget.
That said, it can sometimes feel like a delicate balance. TDECU’s wealth advisors can lend a hand and keep you steady throughout the process. Our free e-book, Your Complete Road Map to Retirement, is a great place to start.