Dear New College Grads,
First, congratulations on your graduation, or soon-to-be graduation! Welcome to post-college life, where you get to start thinking about questions like...
What comes first, paying off student loan debt, or funding your retirement?
Both are important!
Funding your retirement early is critical because the earlier you start, the more you'll have in your account once you retire. Because of compounding interest, your money builds on itself, and therefore grows at a faster rate each year.
Paying off your student loan debt is also important because the faster you pay it off, the less interest you will pay over the life of your loan. Plus, who wants all of that debt hanging overhead?
The Question is: which one is a priority? And where should you focus your dollars?
The answer is you should continue to pay off your student debt, but don't pay more than necessary and sacrifice your retirement fund to do so.
Financial planners suggest that "if you have income left over once you've met all your debt obligations, your retirement should get priority over paying more than required for student loans."
As a college graduate, you'll find that life comes with more responsibility, and more bills. That's why learning to balance and budget your dollars is crucial. With student loans, groceries, rent, and other expenses, prioritizing is key.
According to Judith Ward, senior financial planner, "Millennials are going to be so much more dependent on their own savings for retirement. We don't want to see young people shortchange themselves trying to pay off student loan debt sooner than it needs to be."
Here's an example:
- You pay $100 a month in a tax-deferred account
- Your age is 22-32
- That would yield $174,217 for retirement assuming a 7% return
Waiting 10 years and saving from 32 until 65 would yield $155,307 -- even though that person is contributing three times more money.
So, instead of upping your contribution to pay down debt, put money into a retirement account.
How and where do you get a retirement account?
Employers will often offer a retirement plan, like a 401(k). Sometimes, they offer matching contributions, and if they do, this is something you should take advantage of...it's FREE money.
For example, they might offer something like this:
The employer will match half of your retirement contribution up to 3%.
If you save 6% of your paycheck into your retirement account, your employer will match it by adding 3%.
What if your employer doesn't offer a retirement plan?
Don't worry! You can still contribute to a retirement account, although you will not receive matching contributions.
A Roth IRA is a good bet. Peter Bielagus, America's Financial Educator, suggests that for most people, Roth is the better bet. You can read more about different types of retirement plans at the IRS website.
How To Save for retirement
Saving for retirement can be easy if you set up automatic transfers from your paycheck to your retirement account.
When your money goes directly from your paycheck to your retirement, you never have the chance to see it, or spend it.
A rule of thumb is to live below your means. When you live below your means, you're not spending more than you're making, you can afford to pay your bills, and contribute to your retirement and savings plans.
Source: CNN Money