For young adults weighed down by student loan payments, it can be tempting to put all your financial efforts toward paying down that debt as soon as possible.
While debt elimination is an important goal, focusing on that at the expense of saving for retirement could actually hurt you financially down the road. A new HelloWallet analysis finds that in most cases, prioritizing student loan payments over retirement savings can leave you with a significantly lower net worth in retirement.
A 25-year-old paying off a $20,000 loan while earning $50,000 a year and getting a 5 percent match on their retirement savings at work could build a nest egg that’s 15 percent larger by using discretionary income to save more for retirement rather than paying off student loans first, according to HelloWallet.
The key to the larger nest egg in this example is the employer match, which provides a return on investment beyond what the worker could get in the markets or by paying off the student loan. Even if the employee doesn’t get a dollar-for-dollar match on retirement savings, a 50 percent or 25 percent match on contributions would still make the case for putting money toward retirement rather student loans. Other incentives that favor putting extra cash toward retirement are the long time horizon for the money to grow, the tax benefits for retirement savings, and the tax write-off for student loan interest.
The authors also argue that students who are eligible for the income-based repayment program could increase their net wealth in retirement significantly by enrolling in that program in order to free up additional cash to save for retirement.