We have all likely been told many times in our lives that everyone should start saving for retirement as soon as possible. This is good advice, and saving for retirement even a year or two earlier can have a massive impact on how much money you have for your “golden years.” However, many of our elders and other individuals who tell us to start saving for retirement immediately do not know what it’s like to have massive student debt. Indeed, it is extremely difficult to think of saving money when saddled with crushing student loans, since this financial emergency needs to be dealt with as soon as possible.
I personally did not prioritize saving for retirement until years into my student debt repayment journey. It was hard for me to see the benefits of capitalizing interest in terms of retirement savings when capitalizing interest was my worst nightmare when dealing with student loans. Also, I wanted to pay off my student debt as soon as possible, and any money I saved for retirement would detract me from achieving this goal.
Ultimately, I began saving for retirement later in my student debt repayment saga, and I think you can strike a balance between paying down student loans and saving money for retirement. Setting money aside for retirement might make it a little more difficult to completely pay off your student loans, but the benefits of increased savings should be worth the sacrifice.
The most important piece of advice I can convey on this subject is that if your employer matches 401(k) contributions, you should contribute to a 401(k) up to the amount your employer matches. I don’t care if you have hundreds of thousands of dollars in student debt, not contributing up to an employer match means that you are missing out on earning additional money. This is the one no-brainer about saving for retirement while paying down student loans, and I am sure that most will agree that paying down debt a little faster is not worth giving up on “free money” from an employer match.
All of my other suggestions are a little more debatable, since reasonable people can disagree about how best to save for retirement while paying down student loans. I will just relate what I personally did when saving for retirement while still contending with student debt, but everyone’s situation is different, and it is perfectly fine to follow another plan when saving for retirement.
I did not contribute any money to retirement accounts until about three years into my student debt repayment journey. When I first entered the workforce, I had around $90,000 of student loans that had an interest rate of 7.8 percent. I also had tens of thousands of dollars of student debt that had interest rates around 7 percent. I did not think I would be guaranteed to make more than this percent return from any safe retirement investment, so I thought that my funds would be better spent paying down student loans.
I also thought that while I was still in my 20s, I would have plenty of time to contribute to retirement accounts and reap the benefits of capitalizing interest. I believe that people will be working longer and living healthier lives in the future, and it might be safe to assume that I will retire a little later than current estimates project. Therefore, I reasoned that even if I saved nothing for retirement during my first few years out from law school, I still should have enough money for retirement.
I eventually began saving for retirement when I was around 28 and a half years old. By this time, I had paid off all of my high interest student loans, and my student debt had an effective interest rate around 5.5 percent. At this point, I was fairly confident that I could obtain higher returns through retirement investments than the effective rate of my debt. Also, I wanted to give myself around four decades to save for retirement so I could reap sizable benefits from the effect of capitalizing interest.
I paid off all my student loans not long after I started saving for retirement, and I just wanted to point out that it is much easier to save for retirement when one is debt-free. Basically all of the money I used to pay off student loans can now be devoted to retirement savings, and it is easy to reach the maximum one is allowed to contribute annually to retirement accounts when one is debt-free. As a result, it might be wise to not begin saving for retirement until student loans are paid off, since then, one’s full attention can be devoted toward saving for retirement.
To recap, based on my own experiences, I suggest that you contribute to a 401(k) up to the amount your employer matches your contribution. I never had this benefit, but if you do, don’t miss out on “free money.” Then, completely devote yourself to paying down student loans until one of two things happen. If the effective interest rate on your student debt falls to around 5 percent after you knock off the high-interest loans, start saving for retirement. In addition, give yourself 35-40 years to save for retirement in order to reap the benefits of capitalizing interest, and if you are beyond this point and have not begun saving for retirement, it would be wise to begin saving.
Ultimately, no one plan is appropriate for everyone when it comes to saving for retirement. However, I have been able to build up a respectable amount of retirement savings even though I started saving later, since I can totally devote myself to saving for retirement now that my student loans are paid off. Therefore, I would suggest that everyone prioritize paying off student loans, but definitely begin saving for retirement when it is financially advisable to do so.