Pay off student loans or save for retirement: Which should you prioritize?


An estimated 43.5 million Americans owe money in the form of student loans. If you’re one of them, you can bet that those monthly payments monopolize a significant portion of your income. And it is clear that it tends to make saving for other purposes more difficult.

You may decide to hold off on buying a home until your student loans are paid off. And you may even decide to hold off on having children until you manage to pay off a significant portion of your student loans.

But what about retirement savings? Should I start funding my nest while working on my student loans, or should I pour all my extra money into those loans to pay off the debt faster?

Person heading to laptop.

Image Source: Getty Images.

Don’t Neglect Your Retirement Savings

You may tend to focus on paying off your student loans before investing in an IRA or 401(k) plan. However, if you don’t set aside money for retirement when you’re young, you may run out of money when you get older.

Let’s say you start funding an IRA or 401(k) at about $200 a month at age 35. At this time, student loans are finally forgiven. By the age of 65, you’ll have a nest egg worth about $272,000 if you invest your money at an average annual return of 8%, just below the stock market average.

But look what happened 10 years ago when you were 25 and started contributing $200 a month to your retirement savings. At that point, assuming the same average annual return of 8%, by age 65 you’ll have a nest worth about $622,000.

That’s why you shouldn’t necessarily put your retirement savings aside, but instead focus on paying off your student loans so you can invest more money. Sure, paying off these loans early might save you some interest. But you could miss out on significant IRA or 401(k) growth as a result.

How to save for retirement while paying off student loans

Finding money for an IRA or 401(k) is not easy if you’re writing monthly checks to your loan servicer. If you want to manage your loans while still achieving great results, set a budget that allows you to do both and stick to it.

To do this successfully, you may need to cut back on discretionary spending such as meals and travel outside the home. But if you’re willing to make the sacrifice, your future retirement self may come to appreciate it.

You may also consider turning to the gig economy to increase your income. That might make it easier to pay off the loan and manage the money in the nest egg at the same time.

Depending on how much you earn, addition Putting money into student loans while funding a nest egg can help you reach your goal of getting out of debt faster.

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