As a younger worker with student loans, it can be tempting to focus solely on paying off your debt as quickly as possible. However, prioritizing loan repayment at the expense of saving for retirement could hurt your long-term financial stability. It’s essential to strike a balance between tackling student loans and building your retirement savings.

Why You Need to Save for Retirement Early

Kevin Reardon, president of Shakespeare Wealth Management, emphasizes that young people should aim to save for retirement while also addressing their student loans. In addition to contributing to retirement accounts like 401(k)s or IRAs, it’s crucial to build an emergency savings fund to cover unexpected expenses, such as medical bills or a job loss.

While it may seem challenging to juggle multiple financial priorities, starting early and making saving a habit can lead to significant benefits in the future. “Saving money early gives you incredible choices later in life, like helping family members or contributing to causes you care about,” says Reardon. He and his wife made sacrifices early on to pay off a substantial student loan, which paid off in the long run.

The Cost of Delaying Retirement Savings

Many millennials face the difficult decision of whether to focus on paying off student loans or invest in their retirement. Research reveals that 81% of adults with student loans have had to delay major life milestones, such as saving for retirement, investing in stocks, or buying a home. This can have serious consequences for their future retirement.

For instance, if someone begins saving $100 per month at age 25 with an 8% annual return, they could accumulate roughly $390,000 by age 65. However, if they wait until age 35 to start saving and double their contributions to $200 per month, they’d still contribute more but end up with about $330,000 by age 65. The delay in starting retirement savings costs them in potential earnings.

How Student Loans Impact Your Financial Future

The average student loan debt in 2023 was about $37,853, but including private loans, the total debt could be higher. With a 4% interest rate and a standard 10-year repayment term, monthly payments for federal loans would be around $383. For many young adults, this debt load can delay retirement savings and homeownership, especially for those who were affected by financial crises like the Great Recession or the COVID-19 pandemic.

Research from Betterment shows that 83% of millennials increased or maintained their cash holdings during the past year, reflecting a tendency to be overly cautious about investing. While keeping cash can offer safety, it also limits their potential to accumulate wealth through investments in stocks and bonds. For example, investing in a diversified portfolio rather than cash could yield $1.9 million by retirement, compared to only $359,000 by investing in cash-equivalent options.

Striking a Balance: Saving and Paying Off Debt

Young adults often face the dilemma of how to allocate their limited income—should they prioritize paying down student loans or contribute more to retirement accounts? One way to approach this is using the 5-10-15-20 method, developed by MassMutual, which offers a straightforward way to prioritize financial goals. This method encourages you to increase your income by 5% annually, save 10% of your income each year, aim for a retirement nest egg of 15 times your annual income, and pay off most of your debt (excluding your mortgage) within 20 years.

For millennials who have access to a 401(k) match at work, Reardon recommends contributing at least enough to secure the match. Beyond that, it’s essential to weigh the interest rate on student loans against the potential returns on investments. If the loan interest rate is low, the long-term growth from retirement contributions may outweigh the benefits of paying off the loan more quickly.

When Student Loan Interest Rates Are High

If you have private student loans with higher interest rates, the strategy may differ. Many private loans charge rates ranging from 4% to 17%, which could make paying off those loans a higher priority than investing in retirement. However, for most federal loans, the interest rate is lower, and long-term investment returns could justify focusing on retirement savings instead of paying off the loan early.

Starting Retirement Savings Early

Even if you’re still dealing with student debt, it’s important to start saving for retirement as soon as possible. The earlier you begin, the more time your money has to grow through compound interest. For instance, a 23-year-old who invests $10,000 today at a 6% return could see their investment double by age 35 and grow 20 times by age 75.

Financial experts typically recommend saving 10-15% of your annual income for retirement. In addition, consider purchasing disability income insurance, which would provide income if you’re unable to work due to illness or injury. This coverage is especially important for millennials, who are more likely to become disabled than to die prematurely.

It’s Never Too Late to Save for Retirement

Even if you haven’t started saving yet, it’s not too late to catch up. Increasing your savings rate, even by a small amount, can have a significant impact on your retirement funds over time. For example, a 23-year-old saving 10% of a $50,000 salary could accumulate nearly $1.7 million by age 67. Increasing the savings rate to 15% could boost that amount to around $2.6 million, and 20% could result in $3.4 million.

Using automatic savings tools, such as direct deposit into a 401(k) or apps like Acorns, which invest your spare change, can help you stay on track. By prioritizing saving, being frugal, and carefully managing student loan repayment, you can set yourself up for a financially secure retirement.