In recent years, we’ve seen student loan debt cause some millennials to delay buying a house or getting married. New research shows that millennials with student loans may also lack retirement funds – up to $325,000 less by the time they retire than those without education debt.
According to a study from the LIMRA Secure Retirement Institute, a 22-year-old with $30,000 of student loan debt at the start of his career may reach retirement age with $325,000 less than their peers without student loans – and that figure assumes that the $30,000 of debt is paid within ten years. In reality, many millennials are unemployed or underemployed for years after graduation, making it incredibly difficult to pay their student loans – forget saving for retirement.
For those with student debt who are keeping up with their loan payments, it’s critical to start saving for retirement as soon as possible, even if it’s a small amount. There are several calculators available on sites like NerdWallet or CNN Money to predict the amount of money you’ll need to retire and whether or not your current rate of savings will meet that goal. Your priority may be to pay off your student loans before saving for retirement, but as YoungMoney points out, waiting until you have no debt to begin saving for retirement would mean nobody would ever be able to retire! Instead, prioritize paying down or refinancing loans with higher interest rates. The ideal plan of action would be to refinance those higher interest loans to a lower rate and/or shorter term to free up money you’d otherwise spend on interest, and invest that savings into your retirement fund.
There are two types of 401(k) accounts your company may offer that you need to be familiar with: a traditional 401(k) and a Roth 401(k). A Roth 401(k) takes taxes out before you put the funds in retirement savings – which means this money can grow tax-free. A traditional 401(k) contributes pre-tax money directly to the account, but you will have to pay taxes to withdraw the funds when you retire. While every situation is different, a Roth 401(k) is generally best for younger or low-to-mid income workers because they are in a lower tax bracket and their money will have more time to grow tax-free. Withdrawing when you are older and making a higher income requires paying taxes based on that higher income with a traditional 401(k). Since withdrawals from Roth are tax-free, they tend to give more flexibility because there are no penalties for withdrawing funds.
Ultimately, everyone is different, and how you choose to prioritize your finances is up to you. This NerdWallet post is a great place to start for advice on saving for retirement while paying down student loans. Saving for retirement can be a daunting task, but even contributing 5% of your paycheck to your retirement fund now will set you up for your future. Of course, our top recommendation to maximize your savings will always be to refinance your student loans – take a few seconds to find your rate and see how much you can save!