Of course you know you should be saving for retirement, but it's so easy to find reasons to put the task off. Retirement is decades away, after all, and your student loan payments are already eating into your paycheck.
Student loans or not, delaying retirement savings is one of the biggest personal finance mistakes you can make. A LIMRA analysis found that Americans with $30,000 in student loans at the start of their career could be more than $300,000 behind in retirement savings by the time they're done working.
"If you just take every dollar you've got and pay your loan and don't put money away for retirement early on, the compounding of money and interest over time is going to be more impactful at retirement than the shorter term debt of student loan," says certified financial planner Nancy Butler.
It's possible to pay off your loans while saving for retirement, it just requires careful planning. Here's how to make sure your student loans don't ruin your retirement.
- Start with the minimums. No matter what, you need to make the minimum payments on your student loans. If you can't afford that payment, look for ways to cut back on your expenses and research government programs that may help reduce your monthly payment. Be careful though, because such programs typically will cost you more in interest in the long-term, so as soon as you can increase your monthly payments you should.
In addition, you should be putting away enough money into your retirement account to get any match offered by your employer. "Your company match is free money that could compound over time and really add up," says Michael Ericson, a research analyst for LIMRA's Secured Retirement Institute. One in four employees doesn't get their available match, a mistake that can add up to more than $43,000 over 20 years, according to Financial Engines.
- Fund your emergency savings account. Once you're doing the basics in terms of retirement savings and student loan payments, start stashing money in an emergency savings account. If an unexpected event occurs, having a rainy day fund will keep you from borrowing from your retirement account or taking on credit card debt. "You've got to have a cushion for emergencies," says Cheryl J. Sherrard, a certified financial planner and director of financial planning at Clearview Wealth Management in Charlotte, N.C.
- Increase payments strategically. After you've got your emergency account squared away, you can start thinking about the best way to direct any additional funds. If you have high-interest, private student loans, using extra cash to pay those off first is a smart move. If your student loans have low interest rates, you may be better off putting money in the markets where your long-term returns will likely be higher than the interest rate you're paying on the student loans.
Once you've paid off your loans direct the extra cash toward retirement savings. Ultimately, you'll want to be saving 15 percent of your income for retirement by age 25 in order to assure yourself a comfortable retirement. The later you start, the more you'll have to put away.