How Millennials Balance College Debt & Retirement Savings

by Jared Bilodeau, MSFP, Associate Wealth Advisor

You’ve heard it many times before: college costs continue to increase while recent grads owe record high amounts in student loans. It truly is a balancing act to be able to pay off all your monthly expenses while still saving for retirement. Although you may be tempted to pay off those looming student loans as quickly as possible, the best time to start saving for retirement is while you’re in your twenties. This is because of compound interest, which I’ll explain later. Let’s start with your first full-time job after graduating college.

Retirement Plans at Work

Most companies offer some form of a retirement plan, the most common being a 401(k) or, for non-profits, a 403(b). Many offer a match, which is essentially free money and rewarding you for saving for retirement. For example, your employer may match 100% of up to 3% contributed, which means for every dollar you contribute to your plan, your employer will match it up until you contribute 3% of your yearly compensation. If you were making $50,000 a year, and you contributed at least $1500, then your employer would also contribute $1500 to your plan.

Unless you are burdened with high-interest debt, such as credit card debt, we urge all of our clients at Twelve Points to contribute at least enough to take advantage of their employer’s match. What’s more, the contributions you make to your plan come out pre-tax, which means the more you contribute and save for retirement, the less you’ll owe in taxes. You also don’t have to worry about paying capital gains taxes on investments in retirement accounts, which is why they are “tax-advantaged.” As a young professional, you can contribute up to $18,000 per year into your 401(k) or 403(b). In retirement, the money you take out of your 401(k) or 403(b) will be taxed as ordinary income.

IRAs and Roth IRAs

IRAs and Roth IRAs are two other tax-advantaged retirement accounts available in addition to or in place of a 401(k) at work. These accounts also allow tax-deferred growth, but you can only contribute up to $5,500 per year to either an IRA or Roth IRA, which isn’t as much as you can contribute to a 401(k) or 403(b). While you can contribute to both an IRA and Roth IRA at the same time, the total contributed to both cannot exceed $5,500. The difference between the two is mainly when you are taxed: right away with a Roth IRA as opposed to when you take money out with a Traditional IRA. For a young professional, if you expect your income to increase, therefore increasing your tax bracket, Roth IRAs tend to make more sense. Because they are not run through your employer, Roth and Traditional IRAs also have access to many more investment options.

Student Loans

So you just graduated college — congratulations! Now you have more knowledge, a degree, and mountains of debt. Today, the average graduate comes out of school with about $30,000 in student loans, and that’s just for undergrad. Earning higher degrees, especially medical degrees, can easily put you over $100,000 in debt and maybe even up to $500,000 in debt. Many people, myself included before I became an Associate Wealth Advisor, think it’s best to pay off this debt as soon as possible. So how do you know if that’s true?

First, you have to look at the rates you’re paying; if your student loans have a rate of 9%, then I would definitely suggest paying them off as soon as possible. However, if your student loans are 3%, and you could earn 6% by investing, I would advise you to make the minimum payments on your student loans and invest the rest. I’ve talked to numerous clients who are afraid of being in debt and want to pay it off right away. If their interest rates are very high, especially on credit cards, I agree with them. However, controlled debt with a low interest rate (such as a student loan) can actually be a positive. Loans allow us to purchase things such as houses, cars, and education without having all of the money up front. Why pay off a loan with a low interest rate if you are missing out on investing at a higher interest rate, especially in a tax-advantaged account? Bottom line: examine your loan interest rates, compare it to what you could earn by investing, take tax savings into account, then make your decision accordingly.

Refinancing your student loans is also something you should consider. There are numerous banks that will allow you to consolidate all of your loans into one that has a lower interest rate. Shop around to find out about available rates, and keep in mind that you don’t have to consolidate all of your loans. You can keep the student loans with low interest rates separate and consolidate only those with higher interest rates.

The Power of Compounding

As a millennial, you have a massive advantage over many Gen-Xers and Baby Boomers. If you learn and apply this simple concept at an early stage in your career, you can easily save millions by the time you retire. It is the power of compounding returns that allows people to accumulate mass amounts of wealth. Compounding works by earning interest on your interest.

Here’s an example of just how powerful compounding can be to your portfolio. Both Joe and Phil are investing $5,000 a year, except at different times. Joe is investing for years 1-10 and then stops investing altogether. Phil does not invest for the first 10 years, but starts at year 11 and continues through year 50. Both of them are earning a return of 8% a year. As you can see in the chart, Joe ends up with more money after 50 years even though he only contributed 10 years, as opposed to Phil’s 40 years of contributions. At the end of the 50 years, Phil has contributed $200,000 and it has grown to almost $1,400,000. On the other hand, Joe has contributed $50,000 and it has grown to almost $1,700,000. Although Joe contributed less money originally, he earned more simply by starting to invest earlier.

That’s how powerful investing early can be! So, no matter what your student loan debt, you should consider  investing today. To determine the best way to do this for your unique situation, I recommend working with a financial advisor. I encourage you to contact me with questions at or by calling (978) 318-9500.

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