Millennial Retirement Dilemma: Student Debt Reduction Vs. Investment

A Millennial Student Debt DilemmaMillennial retirement planning can be prohibited by a desire to pay off student debt quickly. The right balance between debt payoff and investment is key to a healthy financial future.

Millennials are commonly defined as the generation born from 1981 to 1997, or the current 18 – to 34-year old population. In 2015, Millennials are expected to eclipse the Baby Boomers (born between 1946 – 1964) as the largest living generation in the U.S. at 75.3 million people according to the Pew Research Center. Millennials have been broadly labeled in mostly negative terminology. While words such as entitled and lazy are often used, optimistic is also a common descriptor. In addition, Millennials have been recognized as the most educated generation. But with that comes a high price – they are burdened by high student loan debt.

A Heavy Burden Increases

According to credit reporting agency TransUnion, 51% of Millennials aged 20-29 in 2014 had student debt versus only 31% in 2005. The average debt burden for this segment was $25,525. And 2014 graduates with a bachelors degree fared worse – 70% had some level of student debt with the average totaling $33,000, according to college planning site

While debt repayment and retirement saving are equally important financial goals at any age, Millennials tend to emphasize debt reduction over retirement funding because of the immediate financial and psychological impact. There is a more immediate satisfaction in getting out of debt now as opposed to saving for later.

The All Too Distant Future

Interestingly, when it comes to long-term savings, people are typically disconnected from their “future self” and tend to view their future selves the same way they view a stranger. In a study by Professor Hal Hershfield, Assistant Professor of Marketing at the UCLA Anderson School of Management, subjects were presented with a retirement tool that incorporated a picture of themselves. Participants who were shown a digitally-aged picture of themselves elected to set aside 41% more money for retirement than those who were shown a current picture.

The amount of student debt facing Millennials combined with the motivation to pay debt off quickly and the tendency to separate our current and future selves has put retirement savings on the back burner. The 2014 Wells Fargo Millennial Study revealed that 45% of the 22- to 33-year-old participants were not savingfor retirement and 47% used an average of 57% of their monthly income to pay off debt. Student loan repayments represented an average of 12% of income.

The Importance of Starting Early

Herein lies the dilemma – how do Millennials start to save for retirement when they are burdened with debt? The participants in the Wells Fargo study who said they weren’t currently saving for retirement indicated that they expected to start at age 35, presumably once student loans were repaid.

This scenario creates the opportunity for retirement plan sponsors to educate Millennials about retirement savings, especially the younger end of the Millennial generation that is just entering the workforce. Saving for retirement may still be possible even with a large amount of student loan debt. Paying student loans off quickly can have a much bigger negative impact on future retirement savings than the current benefit of reducing debt. Consider the following:

  1. Compounding is powerful. Delaying retirement funding just 10 years could mean hundreds of thousands of dollars in lost retirement savings.
  2. Student debt interest is tax deductible. Paying less to pay off student debt in order to contribute more to a qualified retirement plan can offer tax benefits on both sides of this Millennial debt/saving equation. Millennials can make pre-tax contributions to a qualified retirement plan, which reduces their adjustable gross income while taking advantage of the tax deductibility of student debt.
  3. Free money and growth unhampered by taxes. Retirement savings are not taxed and could have an employer match. Failing to contribute to a company’s retirement plan and forfeiting a match is a lost opportunity. Many matches are 100% or 50% of a participant’s contribution up to 6% of salary. A new employee making $40,000 who doesn’t contribute at least 6% could be abandoning $1,200 to $2,400 of a company match in the first year.

A Balanced Approach

For Millennials, striking the right balance between paying off student debt and investing for retirement is key. A March 2014 FINRA study found that Millennials have a low level of financial literacy with only 18% able to answer at least four questions correctly on a five question test. Although they may not be financially savvy, they aretechnologically savvy and there are many online tools available to help create a budget that includes retirement savings. Dave Ramsey’s SmartDollar program is one of the financial wellness tools among others that may be available to Alliance Benefit Group plan participants through the plan’s participant website.

In addition, participant communication that stresses both the importance of starting early when it comes to retirement and the concept of balancing both student debt and retirement plan contributions may offer Millennials a realistic plan of action.

Contact your local ABG representative forideas and support as you reach out to this growing workforce population.