Why save for retirement before paying off student loans
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- My husband and I went to a financial planner with about $ 80,000 in student loans and an aggressive plan to prioritize repayment.
- However, the planner told us we didn’t need to be so aggressive – since the interest rates on our loans are low, we’d better spend extra money on retirement savings rather than spending more money on retirement savings. ‘to loans.
- This is because the amount of money we will need for retirement is huge, and we will need as much time as possible to save it.
- After talking to him, we fine-tuned our financial strategy to pay the minimum on our loans and contribute more to our future. Once we’re back on track with retirement savings, we’ll do a reassessment.
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Once my husband paid our credit card debt, taking care of our student loans seemed like the next natural step. We have about $ 80,000 in loans left between us, and it doesn’t do good to owe someone money. We have always been taught that being “debt free” is the main way to be financially stable, but what if the willingness to pay off debt comes at the expense of contributing to our future?
During our second meeting with our new financial planner, Tom canale, CFP®, ChSNC®, ChFC®, CLU®, wealth management advisor at The Canale Financial group with Northwestern Mutual, we have put our game plan on the table. We were proud to be so motivated to turn our financial lives from red to black, so that we could start building our net worth.
That’s why we were surprised when he told us to consider another path and focus on investing in our retirement funds instead.
Student loans can seem more emotional than retirement savings
First of all, Canale recognized that our desire to reduce debt is good. Since student loan companies are constantly sending out reminders of what borrowers owe, it’s easy to invest finances and emotional energy in that debt. It’s not quite the same with retirement savings. “There’s a statement every month saying you owe $ 200,000, but there’s no monthly picture of the $ 2.5 million you need for your retirement,” Canale says.
He reminded us that not all debt is the same, and the willingness to pay off low-interest student loans can often be emotional, not logical, especially since we haven’t contributed much to the debt. 401 (k) from my husband. .
“Emotional action is about checking a box and saying it’s done – we just want this debt taken from us,” he told me in an interview. “But it may be better to pay on time rather than up front if you are not on track to accumulate what you need for retirement.”
Here are some of the reasons he recommended that we change our focus and move from aggressive student debt repayment to a bigger investment in our future.
Retirement will always cost more than student loans
One of the reasons Canale encouraged us to slow down our student loan payments and contribute more to our retirement funds: The money needed for retirement is probably a larger “bucket” than the money already invested in a person’s education.
For example, a person may have $ 200,000 in undergraduate and law school student loan debt, but Canale says most people expect to need around $ 2 million to $ 2.5 million. for their retirement. Saving $ 2.5 million is much harder than paying $ 200,000, so the sooner people can get started the better.
“Retirement is just a bigger and more intangible obstacle,” he says. “Most people need to accumulate 10 to 15 times more than they owe in student loans.”
You may not know when you will have to retire
An uncertain timeline is another reason Canale recommends people stay intentional about their 401 (k) contributions despite student loan debt. Someone can retirement plan at 65, but what if they don’t have enough savings in case of job loss or unforeseen medical event before that age? We really have no idea how long we’ll need the money we’ve saved, he says.
“If you have a stroke at 58, you won’t have the savings you need,” he says. “The unknown moment should create more pressure than the benefit of paying off a student loan.”
A low interest rate on loans makes them less urgent
My husband and I have low interest rates on our student loans – an average of 4% between the four loans we repay (three federal loans and one private loan I have refinanced at a lower interest rate). Laser Focus on Student Loans Just for “Debt Paydown” Could Miss Our Opportunity to Grow Our Money in stock exchange. The extra money that we had planned to spend on our loans would increase more quickly in investments for the future.
“The interest rate on most student loans is generally low, and it can be outperformed in the long term in the stock market because you accumulate savings up to a rate of 8%,” Canale explains. “I’d rather accumulate at 8% than focus on paying down the 6% debt.”
Everyone’s balance is different
For anyone looking to find the ideal balance between paying off debt and saving for the future, Canale recommends consulting a financial planner for advice – everyone’s financial situation is unique and may require a whole lot of approach. also unique.
For us, we are now planning to pay the minimum payment on our student loans while my husband increases its contribution 401 (k) and I contribute to a Roth IRA. Because the interest rates are so low on our loans, we prefer to focus on more aggressive contributions in our retirement. Once our financial planner tells us that we’re on track for the future we want – and have more discretionary income – we might consider paying more on our student loans again.
For someone else with credit card debt or even a automatic loan, which are unsecured debt that usually comes with high interest rates, a financial advisor would likely advise reducing that debt before contributing more to a retirement fund. The same may be true of higher interest student loans. The important thing is to bring in an expert who can help ensure a secure financial future.
“If people can get the information they need about their finances sooner, they will benefit sooner,” says Canale.