2803: 5 Things You Need To Consider When Balancing Student Loan Debt and Saving For Retirement by Kimberly Hamilton

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[00:00:13] and you can combine them with the note assistant in a few key points or make them interlink. Super practical if you want to shine with clear notes later. Galaxy AI is here. Learn more about the new Galaxy Z Fold 6 on samsung.de. This is Optimal Finance Daily episode 2803.

[00:00:34] 5 Things You Need To Consider When Balancing Student Loan Debt and Saving For Retirement by Kimberly Hamilton with thefinancetwins.com. And I'm your host and personal finance enthusiast, Diana Merriam. Welcome back to Optimal Finance Daily,

[00:00:51] where every day I read and offer commentary on some of the best personal finance blogs on the web in about 10 minutes or less. So with that, let's get right to our next article as we optimize your life.

[00:01:07] 5 Things You Need To Consider When Balancing Student Loan Debt and Saving For Retirement by Kimberly Hamilton with thefinancetwins.com. By now you've probably already heard that the student debt crisis in America is off the charts. This year the total student loan debt balance topped 1.5 trillion,

[00:01:30] almost 50% higher than the national credit card debt. Of that amount, millennials ages 25 to 34 account for over 497 billion and 15 million borrowers with an average student debt of $33,000. If you have a graduate degree, it's not uncommon for that figure to be in the six digits

[00:01:54] and not the kind you'd like to see on your paycheck. In other words, the student debt struggle is real. Combine increasing tuition rates with stagnating wages and it's no surprise that many millennials are choosing to prioritize their debt over their retirement.

[00:02:12] Paying off your loans can be stressful, I know firsthand, and sometimes knowing you're decreasing the balance feels better than saving for a date 30 years in the future. The problem is many graduates don't realize that it can be much more expensive

[00:02:28] and in some cases impossible to catch up on your retirement the longer you wait. A recent study found that 73% of borrowers are either not maxing their accounts or not saving for retirement at all until their student debt is paid off.

[00:02:45] For many, it can be hard enough to meet their minimum payments, let alone finding extra cash to invest. Others affected by lifestyle inflation rather live it up now than invest for later. So the question is, how can you balance both? It'll take making some smart money moves.

[00:03:05] Here are five things to consider when deciding to double down on your debt, invest for retirement or both. Number one, remember that investing is key. If you're able to make extra payments on your student debt, it's easy to think that it's the number one priority.

[00:03:22] What you may not realize, however, is how much more expensive it is to save for retirement the longer you wait. For example, someone that invests roughly $250 per month starting at age 25 would have $656,203 by the time they were 65 years old, assuming a 7% rate of return.

[00:03:45] The same person beginning at 35 would only have $450,263. Even if they increased their contributions to $350 per month, they would still only have $630,369, about $26,000 less than if they had started earlier with less money. The reason for this is because of how compound interest works.

[00:04:12] Compound interest means that your investments grow based on the amount you contribute and the amount earned. So when you're starting to invest, you may not see your investments take off right away, but as they grow and compound, the value will increase much more quickly over time.

[00:04:29] This is why it's so important to start saving for your retirement as soon as you can. Waiting even just a few years can cost you tens to hundreds of thousands of dollars in the long run. This means you want to get started immediately if possible.

[00:04:45] Keep in mind the earlier you start investing, the less money it's going to cost you over time. Number two, don't let free money sit on the table. If your employer offers a retirement account like a 401k, they may also provide what's called an employer match.

[00:05:03] An employer match is a certain amount of money, usually a percentage of your income, that your employer agrees to contribute up to a certain amount as long as you also contribute each month. Think of it as free money so long as you do your part.

[00:05:17] The exact amount of your match will vary from employer to employer. In some cases, it represents a guaranteed 100% return on your investment, an opportunity you will not find anywhere else. This makes meeting your employer match a no-brainer.

[00:05:34] If you're already making the minimum payments on your student debt, I recommend you do this too. If you're struggling to meet your minimum payments, consider revising your repayment plan to enable you to meet your employer match. You may also want to revisit your budget.

[00:05:50] Are there any expenses you can cut to take advantage of your match or split the extra cash between your loans and retirement? The bottom line is, do everything you can to take advantage of the free money coming your way. Number three, consider your interest rates.

[00:06:08] When deciding whether to make an extra payment on your student loans or save for retirement, you'll want to take a look at your loan interest rates. For federal loans, they're likely in the 3-5% range,

[00:06:21] which is less than the historical US stock market return of around 6% over any 30 years. This means you may want to start investing for retirement first, as you have a longer time horizon for that money to compound or grow later.

[00:06:35] This is especially true if you have an employer match. If your loans include private loans, the interest rates on these are likely higher, around 8 or 9%. While the difference of a few percentage points may not seem like much in the short term,

[00:06:51] depending on the size of your loan, this can cost you a lot of money over time, making even half a percentage point relevant. In this case, after meeting all of your minimum payments,

[00:07:02] you may want to hold off on investing for retirement until you've paid down your higher interest loans. Or maybe you decide to split the amount, putting the majority toward your debt and the rest towards your retirement. Once you're left with only the lower interest debts,

[00:07:18] you can play catch up on your retirement contributions. Number four, take advantage of all your options. If you don't have an employer match or you're self-employed, you still have options to save for retirement. One is called an individual retirement account or IRA,

[00:07:36] and there are many different kinds depending on your preference and lifestyle. An IRA is a tax-advantaged retirement account, and you set it up through a financial provider that is entirely separate from your employer. Some questions you'll want to consider in deciding between a traditional, Roth, or other IRA

[00:07:55] include whether you prefer to make pre- or post-tax contributions, and might you want access to those funds before you retire. Other factors that will help you decide include whether you're self-employed, married, or run your own business. Once you have an IRA, an employer match won't come into play,

[00:08:15] but at least you can still contribute every month to take advantage of that growth over time. Contributing 10% of your income towards your retirement is a great goal to get you started. Regardless of your starting point, you'll want to increase your contributions over time

[00:08:31] and as you pay off your debt until you eventually reach the max contribution limit. And number five, don't forget about your taxes. One benefit of contributing to your retirement through a traditional 401k or IRA, but not a Roth IRA,

[00:08:48] is that they lower your tax bill at the end of the year. Your taxes are reduced because you can deduct your contributions from your reported income and thereby reducing the amount of taxes you owe.

[00:09:00] This would be in addition to any tax deduction you might receive for paying down interest on your student loans. If you're starting to pay down your debt, you'll likely owe more interest on your loan than principal, making you more likely to qualify for that deduction.

[00:09:16] So while contributing to your retirement while paying down student debt may not be a walk in the park, at least the IRS might give you some money back at the end of the day. You just listened to the post titled,

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[00:11:01] Figuring out a good student loan repayment strategy is no easy task and there are lots of variables to consider. I think the first is to determine if you have federal loans and if they may be eligible for forgiveness. My friend Travis over at Student Loan Planner says,

[00:11:20] Paying off federal loans is never a good decision if you should go for forgiveness. If you can qualify for the Public Service Loan Forgiveness Program or IDR loan forgiveness over 20 to 25 years with a debt to income ratio above 2, you should not pay off your student loans.

[00:11:39] Using student loan forgiveness means that you should be investing whatever you want to put down on your loans instead. But if you don't qualify for forgiveness and you have private loans, considering the interest rate is key.

[00:11:55] Perhaps you can refinance and bring that rate down, but the interest rate on any debt is really what determines the sense of urgency. And that's another edition of Optimal Finance Daily. Thank you for listening and I'll be back with you tomorrow with another post.

[00:12:10] So I'll see you there, where your optimal life awaits.