If you have student loans, watch out. Your retirement wealth may be reduced.
College graduates who have student debt have about 50 percent less in retirement plan assets by the time they reach age 30 compared to those who have no loans, according to research from the Center for Retirement Research at Boston College.
And just having student loans — no matter the size of those debts — was enough to affect the size of individuals’ retirement savings.
“This result suggests that young graduates consider the simple existence of a student loan — rather than its size — to be a constraint on their 401(k) saving,” the research said.
Not saving enough for retirement in your early years can have a lasting impact, particularly when it comes to lost investment earnings and the potential sacrifice of an employer match.
When juggling high loan balances and a long time horizon until retirement, it can be difficult to decide which financial goal should be your priority.
“In reality, most new graduates should probably be doing a little bit of both,” said Christine Benz, director of personal finance at Morningstar.
That is because making regular payments to whittle down your student loans will enable you to make steady progress toward financial freedom. Meanwhile, you should be contributing at least enough to your retirement plan to receive an employer match, if you are eligible for one.
But after you reach those initial hurdles, there are some key things to consider when deciding where to put your extra money to get the most bang for your buck.
Evaluate your rates
The first thing you want to look at when deciding where to focus your money is the interest rate you are paying on your student loans versus the return you would expect to earn on your investments.
“Debt pay down is guaranteed,” Benz said. “If you pay more on your debt, that means that you will be able to retire that interest rate that much sooner.”
If the interest on your student loans is 5 percent, it might be hard to match that return on an after-tax basis through your investments, she said.
“Arguably, over the next 10 years you won’t be able to earn a 5 percent return on a balanced portfolio, or it might be a stretch,” Benz said.
If you have a longer time horizon, say 30 or 40 years until retirement, that could make it easier to out earn the interest rate by investing in a long-term stock and bond portfolio.
Still, there is one key rule of thumb to keep in mind.
“The higher the rate, the higher your hurdle for your investment portfolio is,” Benz said.