Student Loans and Retirement Savings: Can You Pay for Both?

Building a nest egg while juggling student debt may seem daunting, but it's still a good idea

So you're in your early twenties, freshly graduated from college and carrying several thousand dollars in student loans. Those monthly payments will kick in after your six-month grace period is up, and because you're starting at the bottom of the totem pole in your career, money is going to be tight for the next few years. Retirement isn't even on your radar - it's still 35 or 40 years away! - so you dismiss the idea of saving for it until you get those student loans paid off.

But is that such a good idea?

Most financial experts agree that 40 years from now, people will need far more money on which to retire than they're actually saving for. Too many people use the last decade of their careers to make up for lost ground on their 401k's, Roth IRAs or other retirement accounts. But the growing phenomenon of "generational squeeze" - that is, needing to financially support elderly parents at the same time as college-aged children - is putting a crimp on this strategy. That last decade of your career may not be the cash cow you're counting on.

What is the solution? Start saving for retirement right from the beginning of your career.

Student debt as an excuse not to save

But if you're like most young people graduating with student debt, you probably can't imagine finding room in your budget for retirement planning right now. In fact, you probably see the length of your student loan repayment scheme (anywhere from five to 15 years) as a nice little financial snooze alarm for thinking about retirement. "I'm in debt right now, and that's my excuse for not saving for the future," you say. "I'll worry about it later."

But the truth is, you shouldn't get into the habit of using debt as a justification not to save. Chances are you're always going to carry debts for something , whether it's a mortgage, car payments, credit card bills, small business loans or other debt. So convincing yourself that you can only start squirreling away money for the future when you're debt free is a bit short sighted. You may be heading for a big financial headache years from now.

So how do I go about it?

When most twenty-somethings imagine saving for retirement, they conjure up images of their parents frantically setting aside thousands of dollars every year in a race against the clock to have enough on which to retire. If you're young and just starting out in your career, you need to get this image out of your head. Unlike your parents, you are in the fortunate position of having decades' worth of compound interest at your disposal, so you don't need to worry about saving a whole lot. Just start saving something . Even $50 a month can get you off on a really good footing.

Let's say you're 22 years old, freshly graduated from college and have a reasonable plan to pay off your student loans in the next 10 years. Right after graduation, you set up a retirement account with a standard interest rate of 7.5 percent and plan to put $50 a month into it. By the time you've paid off your student loans, your $6,000 investment will have grown to about $9,000 with compound interest. Not a huge return, admittedly, but even if you never raise your monthly contribution, by the time you're ready to retire at, say, age 62, that account would worth more than $145,000. Not too shabby for the cost of a few cases of beer each month.

Now imagine that at age 32, with your student debt paid off, you start channeling what you were paying in student loan fees into that retirement account. (Let's say that amounts to $250 a month, including the original $50 you were already squirreling away.) Now, by the time you're 62 years old, that money will have grown to more than $400,000! Not only were you able to save that amount without making any adjustment to your post-graduation budget, but you also got into the habit of funneling money saved from paid-off loans into a nest egg on which to retire - which is a great habit to have when you pay off your house or other major debts.

"But I'm fresh out of college and dirt poor," some twenty-somethings will say. "What should I do if I can't even swing $50 a month?" The answer is to find ways to create additional wiggle room in your budget. You can do this by consolidating your student loans or looking into work options that will help you pay off your debts faster.

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