Retirement or Student Debt: What Should Millennials Prioritize?

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It’s a dilemma that many young professionals in their 20s and 30s are now facing: is it better to put more money towards retirement or to pay off student loans faster? To many the choice may seem simple. After all Millennials won’t be retiring for several decades and having a large student loan debt hanging over your head can be frustrating and depressing. However, as CNN Money recently highlighted, most financial advisors agree that shorting your retirement savings in order to put more towards your student debt could actually be doing your finances a disservice in the long run.

The first reason you should still focus on retirement savings, even if you do have student debt, is because of how your savings accrues interest. Due to compounding interest, if you saved $100 a month in a retirement account with a 7% annual return between the ages of 22 and 32, you would have $174,217 for retirement. Meanwhile you if saved that same $100/month at 7% from the age of 32 all the way until you were 65 you would still only have $155,307 in accumulated savings.

CNN Money recommends that Millennials save 15% of their income for retirement. This includes any matching contribution that your employer may offer. Additionally, if your employer does match your contributions up to a certain percentage, you should max out that opportunity. These perks are free money that you should absolutely take advantage of. Plus 401k contributions typically come directly out of your paycheck making saving for retirement less painful than it would be if you had to set aside the money from your net income.

If your student debt is still nagging you and you want to pay it off as soon as possible the best way to do so is to make adjustments to other areas of your spending. Some common examples of expenses that can be cut include meals out or cable television. As financial planner Larry Rosenthal told CNN Money, “Stick to the basics: Save for the retirement, pay down debt as best you can and sacrifice lifestyle versus the other way around.” This might not be the advice you want to hear now, but it’ll will pay off down the road.

Obviously you shouldn’t ignore your student debt or stop making payments but paying more than you have to at the expense of your retirement saving could be a major mistake. Although it may not feel like it now, saving up to live comfortably when you retire is far more important than hastening your freedom from student loan debt. Instead remember to take advantage or tax-deferred savings and employer contributions to help you meet a 15% retirement savings goal, as well as look for unnecessary spending that could go towards lightening your student debt load.


Jonathan Dyer

I'm a small town guy living in Los Angeles looking to make solid financial decisions. I write for a number of finance websites, including HuffingtonPost and Business2Community. I founded in 2015 to focus on personal finance and the emerging FinTech markets.

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