Student loan debt can zap your retirement if you don't manage your finances early.
Someone with $30,000 in student loans, roughly the average debt level for a college senior who graduated in 2014, could mean $325,000 in lost retirement savings compared with someone who graduated college debt-free, according to estimates from the LIMRA Secure Retirement Institute.
But don't be discouraged about saving for retirement if you have student loans. You can take steps now to close that retirement savings gap.
Know your loans
You can't budget for retirement savings until you have a clear understanding of how much you owe in student loans. Take an inventory of your loans. Identify which ones have high interest rates, such as those with rates of more than 6 percent. High-rate loans should be paid off more quickly than the others. You also can consider refinancing these loans to decrease your total interest payments.
Take "free money" from your employer
One in four workers fail to contribute enough to their employers' retirement plans to qualify for full matching contributions, according to an analysis by financial advisory firm Financial Engines. It found that the typical employee who doesn't receive the full match misses out on $1,336 each year. For the average employee, that's an extra 2.4 percent in missed annual income. When you consider the compounding investment returns of retirement plan contributions, Financial Engines estimates that the loss of missing the employer match can be as much as $42,855 over 20 years.
If your employer offers a matching retirement plan contributions, contribute enough to get the full match. It's free money and contributing up to the employer match is the minimum you should save for retirement, even if saddled with student debt. The most common employer match at large companies is 6 percent of an employee's salary, according to benefits consulting firm Aon Hewitt. Use calculators at PaycheckCity's free salary calculator to determine how raising your retirement plan contribution to the full employer match would affect your take-home pay and student loan payments.
Open an IRA
Not all employers offer an employer match or even have a retirement plan. Individual Retirement Accounts allow you to increase your savings and offer tax advantages without an employer-sponsored retirement plan. IRAs come in two flavors:
A traditional IRA lets you contribute dollars before they are taxed to an investment account so your money can grow without paying income taxes and capital gains taxes on the contributions and earnings. However, withdrawals from traditional IRAs are taxed. And if you take money out of a traditional IRA before age 59 ½, you will likely pay a 10 percent early withdrawal penalty unless you are under financial hardship.
With a Roth IRA, you contribute after-tax dollars to an investment account, contributions grow tax-deferred and withdrawals are tax and penalty free. Keep in mind both traditional and Roth IRAs have contribution limits and, if you are a high earner, your contributions to a Roth IRA may be restricted based on your income.
Consider refinancing your student loans
If you are paying more than 6 percent on your student loans, you can likely find a better rate by refinancing your loans. Refinancing usually makes sense if you do not plan to use federal income-based repayment or loan forgiveness programs.
Generally, the rate you'll receive by refinancing depends on a combination of your income, credit history, and employment. The savings generated depends on the rate, the loan term and how quickly you pay it off. At CommonBond, we save members around $14,000, on average, over the life of their loans.
Through the power of compound returns, contributing to retirement accounts in your 20s will make it easier to reach your savings goals in your 60s.
The Center for Retirement Research at Boston College found that the average 25-year-old would only have to save 7 percent of their income each year to retire comfortably at age 67. If someone started saving for retirement at age 35, that person would need to save 12 percent of their income to build a decent nest egg by 67.
Just because you are making payments on your student loans, doesn't mean you can't get a head start on retirement.