Should paying off your student loans take priority, or should saving for retirement be your focus? Saving for retirement and paying off your student loans are equally important. You know that your debt has an impact on your retirement savings, but you may be struggling with how to balance both. What would happen if you hold off on retirement savings until your loans are paid off?
How Can I Afford to Save When I’m Paying off Student Loans?
If you feel that your student loan debt is keeping you from saving for retirement, you aren’t alone. Nearly 80% of adults with student loan debt feel the same way, and a quarter of the US population carries a fair amount of student loan debt. The average loan payment is close to $400 a month, which is a big chunk of the average American’s monthly income. Setting aside 10% of your income on top of that can feel daunting. If you’re struggling, experts recommend contributing enough for an employer match. If your company matches 3%, that’s free money in your account. Turning that down isn’t a smart financial move.
What is the Disadvantage of Waiting to Save?
If you wait to save for your retirement until your loans are paid off, you’ll be missing out on a big portion of your working income and a lot of potential savings. By the time your loans are paid off, which is typically in your 40s in most cases, you’ve lost a lot of time where interest could be working in your favor. If you don’t start until your 40s, you may never “catch up”. If you start saving in your 20s, you can reach your retirement goals by putting away just 10% of your income, thanks to compounding interest and other important factors. If you wait until your 30s, you’ll need to put away 20%. And if you wait until you’re finished paying off your loans in your 40s, you’ll need to save almost 40% of your income to catch up. That’s not very practical.
How to Prioritize Getting Out of Debt While Still Planning for Retirement
If your interest rate on your student loans is over 7%, you do need to prioritize getting out of debt. You don’t want to pay more in interest than you can earn back through savings. Look at your student loan payment and your retirement savings as one chunk of your take-home income. A percentage of that goes to your loan, and the rest goes toward retirement planning. Many experts recommend an 85/15 split. So, for example, if your student loan payment is $255 a month, budget for $300 and put the remaining $45 into retirement. If you can budget more for retirement, even if it means trimming your spending or getting a second job, do it. Getting into the habit of saving early, even alongside paying off student loan debt, will put you in a much better position. Once your loan is paid off, you’ll have that money to invest in your retirement without missing it from your take-home income.
Starting your working years with student loan debt can be frustrating, but you can manage to save for your future while paying for your education. It may involve making some sacrifices initially, but you will be glad you had the foresight not to ignore your retirement as you move into the second half of your employment years. Contact Safe Money Partners for more information about how to best save for your future while getting out of debt now.