One of the biggest dilemmas that millennials face when planning for their financial futures is the choice between saving for retirement or paying off student debt. With outstanding student loan debt in America affecting 46 million borrowers and totaling approximately $2 trillion as of 2023, it’s become a huge obstacle to face when it comes to securing a sound financial future.
According to a 2018 study by the Center for Retirement Research at Boston College, millennials without student loans have saved nearly two times as much for retirement by age 30 as college graduates who have taken out student loans. This results in $18,200 in retirement savings for college graduates without loans at age 30, compared to $9,100 in retirement savings for college graduates with an average student loan balance of $16,230 at age 30.
Interestingly, even if the debt is small and the student loan payments are manageable, the existence of the debt can be enough to curb saving. In short, many millennials with student debt are prioritizing paying off the entirety of their student debt before saving for retirement, which is not always the smartest choice.
Here are three things that every millennial with student loans should think about.
1. Consider Refinancing Your Student Loans
Refinancing student debt means swapping federal or private student loans for a private loan with a lower interest rate. This can be beneficial, because a lower interest rate decreases the total amount of money you pay over the lifeline of your loan.
Some online lenders known for providing good deals to candidates with healthy credit scores include Social Finance Inc., CommonBond and First Republic Bank.
However, there are cons to refinancing, too. For instance, federal loans allow borrowers to make smaller payments with more flexibility if they cannot make payments. Switching to a private program will remove that safety net.
Therefore, if you decide to refinance your student loans with a private lender, make sure that you have a small safety net in the form of an emergency fund. This should cover all your bills, including student loans, for three to six months.
Candidates should weigh benefits – like an interest rate reduction – against detriments – like income-based repayment – when deciding whether to refinance their student loans.
Related: Why You Need An Emergency Fund
2. Contribute the Maximum Amount to Your Retirement Account(s)
As a general rule, you should try to contribute at least 10% of your income to a retirement account or 401k. And, if your employer provides a match on your 401k, you should try to contribute at least enough to obtain that match, because it essentially doubles your money.
In 2023, workers under age 50 can contribute a maximum of $22,500 to 401k(s) and $6,500 to a Roth IRA or traditional IRA.
Because millennials may currently be in a lower tax bracket, they should also consider contributing to a Roth 401k (instead of the traditional) at their employer, as that will enable them to build their Roth nest egg for the future. The same goes for IRA contributions: Millennials should consider contributing to a Roth IRA versus a traditional IRA.
Related: IRAs for Beginners
3. Plan to Have 10x Your Final Salary in Savings
According to Fidelity, a good goal for millennials is to have 10 times your projected final salary in savings (if you were to retire at age 67). Assuming that a person saves 15% of their income annually beginning at age 25, invests more than 50% on average of their savings in stocks over their lifetime, retires at age 67, and plans to maintain their pre-retirement lifestyle in retirement, Fidelity suggests this timeline:
- By age 30: Have the equivalent of your starting salary saved
- By age 40: Have three times your salary saved
- By age 50: Have six times your salary saved
- By age 60: Have eight times your salary saved
- By age 67: Have ten times your salary saved
Although every person is different when it comes to planning for retirement, these basic guidelines can provide a baseline to go by.
In conclusion, millennials face many challenges on their path to a secure future. But in order to solidify the dream of a prosperous retirement, millennials should start planning and investing now.
Our team of financial advisors are available to answer your questions and discuss your individual situation. If you’re interested, you are welcome to schedule a complimentary consultation at the link below.
Debra Taylor, CPA/PFS, JD, CDFA, writes on tax and retirement planning for Horsesmouth.