One of the most frequent questions millennial wonder is “Should I invest for retirement for try to get out of debt?”
To help answer the question further I have a guest post below. Enjoy!
Now, let’s have a look at the present student loan debt scenario.
As per a study conducted by Experian, from 2008 to 2014, student loan debt has risen to about 84%. About 7 out 10 students, in the 2014 class, graduated with about $28,950 student debt on an average. And, this figure was irrespective of private and public colleges.
A comparatively study in 2016, conducted by the American Institute of CPAs, had revealed that about 80% Americans had to make some kind of financial sacrifice to repay student loan debt. Amongst them, 50% people have said that by doing so, they have neglected paying to their retirement funds.
So, undoubtedly the primary focus is on paying off the student loans.
Should You Delay Retirement?
According to Larry Rosenthal, a certified financial planner and president of Rosenthal Wealth Management Group in Virginia, “Do not forgo putting money into retirement to pay down debt, sacrifice your lifestyle today.”
A report published by Morningstar, a leading provider of independent investment research in North America along with some other countries and continents, every dollar you pay to be student debt free, you reduce your overall retirement savings by about 35 cents. So, calculate – if you’re paying off $50,000 student loan debt, you might be losing about $17,500 from your retirement savings.
According to Judith Ward, senior financial planner at T. Rowe Price, “Millennials are going to be so much more dependent on their own savings for retirement,”, “We don’t want to see young people shortchange themselves trying to pay off student loan debt sooner than it needs to be.”
Though it is YOU who have to decide whether to repay college debt early or save for the golden days, there are certain guidelines, which you can consider to arrive to a decision.
Is Your Employer Matching?
If your employer is offering a match to your 401(k) contributions, then check out how much they’re matching. Try to contribute up to the amount your employer matches. To do so, you can stay current on your student loans and use the extra amount to save for your retirement.
However, if your organization has some rules, that is, you have to be an employee for a definite period before the employer starts matching your contributions, and you have plans to quit before that, then you can rethink about whether paying off student loan will be a better decision.
Will You Need The Money?
You never know when you may need liquid cash. Personal finance experts say that you should have at least 3-6 months of expenses as your emergency fund. <—–(AND Super Millennial)
You should also analyze your financial situation. It isn’t worth of paying back your student loan debt fast and saving, say about 7% interest on student debt, and incurring credit card debt with about 20% rate of interest.
Heather Davis, a North Carolina-based attorney specializing in student-loan education, says that “There are people who have interest rates that are super, super low — such as 2% or 3.5% for newer loans — who’d be much better off saving more for retirement, rather than paying off a student loan aggressively.”
Calculate Rate of Return
If the interest rates on your student loans are somewhat equal to the expected rate of return on your investments, then being student debt free may make more sense.
For example, if your student loan interest rate is 6%, then you may consider paying back the loan fast. Then you can save you 6% of the debt amount for the remaining years. In today’s economy, your long term investments can give you 7%-8% return on average.
So, do the necessary calculations to decide which will be better for you.
If you save in a qualified retirement account, the amount you deposit is usually pre-tax. So, for every dollar you earn, you can deposit more into a retirement account than what you could use to pay on your student loans.
However, you must know that retirement account funds are tax-deferred but not tax-exempt. It means that you’d have to pay tax when you withdraw from it.
On the other hand, you may be eligible for ONLY student loan INTEREST deduction up to $2,500, in 2017.
It is true that getting out of debt gives you psychological boost. But, if you think from a financial perspective, staying current on your student loans and saving for retirement may make more sense for a millennial.
Barbara has written for several blogs. She is also associated with Debt Consolidation Care where she writes on debt and personal finance related topics. When not writing, she spends most of her time reading, cooking and traveling. Follow her on Twitter at @DelinskyBarbara