What are the first three things you think of when you hear the word millennials? iPhones, Chipotle, Facebook? There may be a few other good answers, and one I’d like to suggest is the term student debt. Combinations of rising tuition, souring job opportunities and other factors have increased the amount of debt millennials are carrying after snagging their degree. In fact, from 1992 to 2012, the average balance of student loans roughly tripled, when adjusted for inflation[1]. As the ranks of those saving for retirement are progressively filled more by millennials, many individuals of this age bracket are finding themselves debating on whether or not to put those few extra dollars at the end of their paycheck toward their student loan debt or to channel it into their 401(k) or IRA. It’s a question I’ve heard often from those who are retirement planning in and around Costa Mesa.
Researchers from Morningstar took up this conundrum and plumbed data from the Survey of Consumer Finances, among other places, in an attempt to find a definite answer to the question of which is better. The answer was surprising, but possibly predictable.
Initially, the report’s finding that every dollar of student debt resulted in a loss of up to $0.35 in retirement savings seems to argue that eliminating debt is an imperative for maximizing one’s retirement savings; however, that is just one angle of looking at the equation.
In simple terms, the report suggested that it is very difficult to justify paying down a student loan instead of putting that dollar away in a retirement plan, where it will grow over time—and it goes without saying that it makes no sense to not put that dollar into a 401(k) if you are below the max contribution for your company’s employer match. $0.35 on the dollar for a $10,000 student loan is just $3,500. Not contributing to your retirement plan early on could cost you tens of thousands of dollars—or more—once you reach retirement age.
So our answer, then, conforms to common sense. It would be foolish to put off contributing to the huge amount you’ll need for your retirement for the much smaller debt of student loans. Certainly, you’ll need to make your minimum payments so that your credit won’t be negatively affected, but don’t go overboard to eliminate the debt faster than you need to. Even if you retire with student debt, you’ll still be able to pay it off on into retirement. The same can’t be said for boosting your savings. If you have more questions about student loan debt strategies or retirement planning, call our offices in Costa Mesa. We’ll be happy to help.
[1] Spiegel, Jake. “How Student Debt Affects Retirement Wealth.” Morningstar. news.morningstar.com. 16 April, 2016. Web. 20 April, 2016.