Retirement or Student Loans?

Drowning in Student Loan Debt!

One of the frequently asked questions we get from our blooom clients is – “I am still paying on my student loans, how much should I contribute to my 401k, if anything?” Unfortunately, student loan debts are hindering retirement savings for a huge segment of millennials and Gen Xers. Paying your student loans instead of saving for retirement can translate into hundreds of thousands of dollars less in your 401k by the time you reach retirement. If anything, this problem has been getting worse. Average student loan balances have risen steadily over the past 20 years. In 1993, the average graduating student owed less than $10,000. This went up to $35,000 for the unfortunate class of 2015 (source Mark Kantrowitz, wsj.com). Personally, when I walked down the Hill at my college commencement in 1995, I was also dragging along $29,000 in student loans. My point is: you are definitely not alone with this burden.

Student loans or retirement savings? A simple answer.

For those of you in the workforce with access to participate in your employer sponsored retirement account (such as a 401k or 403b), you are likely juggling your student loan re-payment and retirement contributions. Maybe you’re wondering what balance should be struck between these two. Fortunately, the advice is fairly straightforward. IF your employer offers a match on contributions that you make into your 401k, PLEASE, PLEASE DO NOT miss out on this free money! So even if you are saddled with student loan payments, I still strongly encourage you to contribute to your 401k. But: ONLY enough to get the maximum employer match.

What does the employer match get you?

The employer match can take on many different shapes and sizes. Oftentimes it looks like this: For the first 6% that you contribute to your 401k, your employer will match $0.50 on the dollar. In other words – if you contribute 6% of your paycheck, they will match another 3%. Put in different terms, if you make $50,000 per year and you elect to put 6% into your 401k, you are saving $3,000 towards your retirement (6% of $50,000). On top of this, your employer is contributing another $1,500 into your account (3% of $50,000). Try this one on for size: your $3,000 contribution just received an automatic 50% return before any investment return!

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When to Start Contributing to your 401k?

At blooom, we are huge advocates for starting to save early and often for your retirement. We are commonly asked the question – I still owe money on my student loans –is it OK to start contributing to my 401k?

Often times people are advised to pay off all of their debts (other than a mortgage) before beginning to save for retirement. I disagree with that strategy.

If you work for a company that offers a pre-tax retirement savings account like a 401k, 403b, or similar AND that company offers a match based on your contributions I think it would be foolish to pass up this free money while you are busy paying off debts. You would be missing out on a guaranteed return on your money by not contributing to your 401k. If you are still saddled with student loan debt, credit card debt, car loans, etc – my advice would be to contribute just enough (and not a penny more) to get the maximum match from your employer. All other excess funds should be aggressively applied to paying down your debts from smallest balance to largest balance – the Debt Snowball method that Dave Ramsey has advocated for years. Once these debts are paid off you can ratchet up your contributions to 10% or more.

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