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It’s Still Possible to Save for Retirement with Student Loan Debt!

Save for Retirement with Student Loan Debt

If you’re trying to pay down student loans, you know just what a burden they can be. Still, you have an even bigger priority to worry about: your future retirement. It’s easy to put off retirement savings — after all, it may be twenty or thirty years away — at a time in your life when you’re dealing with rent or a mortgage, student loans, credit card debt and daily expenses.

Don’t forget, though: after retirement, you’ll be living completely off the money you’ve stashed away, and there’s no substitute for starting early because it’s hard to make up for time you lose.

 

Focus on Both — Don’t Put off the Inevitable

You don’t need to make the decision between saving for retirement and paying down student loans — you can do both. If you have fixed-rate, federal student loans, they’re tax-deductible so you don’t need to be in a rush to pay them off.

In most cases, the best strategy is viewing your student loans as a fixed monthly expense. Meanwhile, spare money you find in your budget should be directed toward retirement savings. If you have private student loans with high interest rates, you may want to put more focus on the loans initially.

 

Are You Paying Your Loans Off in the Best Way?

Federal student loans have seven different repayment plans, and not all will fit your situation. Borrowers are automatically enrolled in the standard plan if they don’t choose another. To make sure your payments are going as far as possible, it’s important to get the right repayment plan.

If you have several federal student loans, it’s probably wise to consolidate them into a single monthly payment. This will free up more money for retirement savings each month, and potentially save you a lot in interest charges as well. You also have the option of consolidating private student loans, but they’ll always be kept separate from any student loans.

 

The 50/30/20 Rule of Budgeting Revised

The 50/30/20 rule tells us that 50% of our monthly budgets should be dedicated to “needs,” including health insurance, auto insurance, utilities, rent or mortgage and food. Wants like restaurant dining, shoes and cable bills should be limited to 30%. That leaves 20% for savings and debt repayment.

Unfortunately, most people with substantial student loans are already paying 20% of their monthly budget toward the debts. What this means is you may need to find other areas in your budget to cut, giving you more money for retirement.

If your monthly net income is $2,500, the “rule” of budgeting would break down as follows:

  • $1,250 for needs
  • $750 for wants
  • $500 for savings and debt

The monthly payment on the average student loan amount ($25,000) is $280. That leaves $220 (or less than 10%) for retirement savings, assuming you don’t have any other debts in this scenario.

Ideally you want at least 10% going toward your retirement fund, which means you’ll want to find other areas in your budget to cut. If your student loan payment is much higher, and your income is significantly lower, contact your lender to discuss your options for lowering your monthly payments.

 

Don’t Be Afraid to Start Small!

It’s absolutely vital to your future that you begin saving for retirement as soon as possible, as it’s almost impossible to catch up if you wait too long. This doesn’t mean the process needs to be overwhelming or stressful.

While you’re paying down your student loans, don’t be afraid to start with small retirement contributions, gradually increasing them as you earn more or begin to pay off the loans. Saving even 1% of your gross income is a good start, and you can slowly increase this percentage every 6 months to get you where you want to be.

When it comes to student loans and retirement planning, remember that you don’t need to choose which is more important. Instead, you have to come up with a strategy to contribute to two very important goals. Always cut discretionary spending and large fixed costs like utility bills before cutting back on your student loan and retirement contributions to invest in your future.

About Amanda Mansfield

Amanda Mansfield is a NY-based freelance writer covering all types of personal finance topics.

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