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, piles of student loan debt are hindering retirement savings for a huge segment of millennials and Gen Xers. Paying down your student loan debt instead of being in a position to put those dollars towards your retirement savings can translate into hundreds of thousands of less dollars in your 401k by the time you reach retirement. If anything this problem has been getting worse as the average student loan balances have risen steadily over the past 20 years from less than $10,000 owed upon graduation in 1993 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.
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, potentially wondering what balance should be struck between these two. Fortunately, the advice is fairly straightforward when it comes to this subject. 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. Although the employer match can take on many different shapes and sizes, often times it looks something 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%, they will match another 3%. Put in different terms, if you make $50,000 per year and you elect to put 6% of your paycheck into your 401k that would mean you are saving $3,000 towards your retirement (6% of $50,000) AND 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!
Repeating…do NOT miss out on this free money from your employer’s match. Now that we are clear on that – I also want to make sure that you do not contribute even a penny more towards your 401k above what is necessary to get the maximum employer match while you are paying off those student loans. If by chance your employer doesn’t even offer a 401k or 403b OR your employer doesn’t make any kind of matching contribution, then my advice changes. Your sole financial focus should be to get rid of that financially stifling student loan “ball and chain” as soon as humanly possible. The last thing you want to be doing is still paying off student loans when you are trying to put your own kids through college or worse…when you are trying to retire! So in this case you should not be contributing anything to your 401k and instead you should be putting all of your financial resources towards retiring this debt as fast as humanly possible.
You may not like what I am about to say now but if you are still paying off student loans you should NOT be indulging in things like: brand new car purchases (or worse – car leases), a new 80” HDTV, the latest/greatest MacBook, expensive vacations, or designer watches. Make it a singular goal to get all non-mortgage debts out of your life at a relatively early stage (before age 40 ideally) and then and only then, by all means, start treating yourself to some of those types of purchases. The mistake that many Americans make is that they are unwilling to delay gratification. They end up attached at the hip to car loans, credit card loans and student loans for the vast majority of their working lives. I can promise you – the more you are burdened by debt, the higher the likelihood that you may find yourself trapped in a job that you can’t stand simply because you can’t afford to leave. You might have heard this song before “I owe, I owe, so it’s off to work I go, I owe, I owe….”
There is one single trait that financially independent people have in common more than any other singular trait – they are debt free. I don’t care how much you earn, how great your investment portfolio performs, whether or not you own your own business, where you grew up, or how wealthy your parents were/are. If you can find a way to get out of debt quickly you will forever change your financial trajectory. Period.
Prior to blooom he co-founded another investment advisory firm that grew to manage over $500 million for clients. At blooom, Chris leads the company in building innovative financial services to reach a brand new audience of under-served Americans. Blooom has been named one of the world’s most innovative companies by Fast Company, and Chris was selected as “Ten to Watch in 2016" by WealthManagement.
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