Many millennials say they can’t save for retirement because of the crippling amount of student debt they’re carrying. They argue that before they can focus on investing for the distant future, they need to eradicate their student loans.
Not true, many advisers say. Though it sounds counterintuitive, aggressively paying down student debt isn’t actually necessary — whereas, yes, saving for retirement is.
“The advice I would give, walk the middle of the road — we have multiple goals in our life and a couple of things at the top,” said Jessie Doll, a wealth management adviser at TIAA. “You can handle short-term debts and long-term goals, and not sacrifice one for the other.”
Take a TIAA example of two people who choose to save $30,000 for retirement at different times in their lives. If Kate were to start saving at 25 and stop at 44 when she reached $30,000, with the intention to retire at 65, she would have $160,300 at age 65. Comparatively, if Andy started saving at 45 and stopped at 64, also with $30,000 and the intention to retire at 65, he would have $49,970.
Here’s the rub: Paying down student loan debt chips away at the principal of the loan and keeps interest at bay, but it also doesn’t build equity — something millennials will need as company pensions vanish, Social Security withers, and funding retirement becomes an individual burden.
See: Americans who should be prepping for retirement have a fast-growing student loan debt problem
Saving for retirement is a source of tension for many young adults. Not only might they face an average of $37,000 in student loans, but they may also be the victim of wage stagnation, live in an expensive city or have other financial obligations, such as supporting a loved one or paying medical bills. Putting money aside for an event that’s three decades away seems reckless when student loans demand immediate attention. What’s more, a common misconception is that student loan borrowers need to pay off their debt immediately. They do not, advisers said.
There are a few ways to look at this, said Peter Lazaroff, chief investment officer at Plancorp Financial Services in St. Louis. Mathematically, a student loan borrower trying to decide if she should pay off her loans or start investing for retirement could look at variables such as expected return on investments, interest rates on debts, tax benefits associated with the debt or investing, matching contributions to retirement accounts, private mortgage insurance, variability of future income and the number of years planned for retirement. “This decision in based as much on your personality as it is the math — after all, we don’t live in a spreadsheet. Some people prefer paying down debt to capture a lower, but knowable, return. Others prefer to invest in order to capture higher, but less predictable, returns.”
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The good news: Millennials have the benefit of time, which means saving even a small percentage of their salaries (or even $5 or $20 each paycheck) and building a habit of putting money away can reap serious rewards in the future.
“Life is a trade-off of choices and each person must decide how to prioritize those choices,” said Monica Dwyer, vice president and wealth adviser at Harvest Financial Advisors in West Chester, Ohio. Having debt can be overwhelming or daunting, but it’s similar to paying off a mortgage — it takes time. The silver lining is, it also usually comes with lower interest rates than other types of loans, like credit card debt, she said.
Doing it all can happen, but in small steps. Dwyer suggests paying the minimum monthly payment for student loans first and creating a budget, then meeting the match if your employer offers a 401(k). Other steps to take would include building an emergency fund with six months of savings, then paying down any high interest debt until it’s gone, increasing contributions to a retirement account when that becomes possible and finally aggressively tackling student loan debt. “I have seen doctors making hundreds of thousands of dollars per year who have very little saved for retirement and I have seen others live on $10,000 per year and scrimp and save every penny,” she said. “It’s all about priorities and what is most important to you.”
Also see: Why student loans are no excuse for slacking on retirement savings
Of course, even with advisers saying it’s OK to put less toward student loans and more toward retirement savings, it isn’t always possible. If income isn’t high enough, borrowers may use income-based repayment options to pay down their student loans, said Ashley Foster, a financial adviser and founder of Nxt:Gen Financial Planning in Houston. “Sometimes it’s not feasible to do both,” he said. “You need to ask yourself what feels better today, saving for retirement or paying off that student debt? Once you make a decision, then you can allocate resources to that goal.”
But there’s one more piece of advice millennials in particular need to hear: Don’t put off saving for retirement for too long, just because it seems far off. Millennials expected to retire at age 56 on average, according to a recent TD Ameritrade 2018 Millennials and Money Survey — but they don’t plan to start saving until age 36. “The math won’t add up there,” said JJ Kinahan, chief strategist at TD Ameritrade. “You are responsible for you.”