Yahoo Finance The Money Guy Show: Should You Prioritize Retirement Savings or Student Loans?
Student loan debt can be a tough financial burden, especially when faced with competing financial goals like retirement savings. Are you better off focusing on one over the other?
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In a recent The Money Guy Show clip, hosts Brian Preston and Bo Hanson answered a listener’s question about this topic. The listener, who is 40 years old, has $54,000 in student loan debt but minimal retirement savings within a Roth account. So, he wants to know whether he should first pay off his student loans before maxing out his Roth account every year.
The Money Guy Show has a system called the Financial Order of Operations (FOO). Within that system, contributing enough to your retirement accounts to get your full employer match comes before paying off high-interest debt. Still, high-interest debt comes before prioritizing Roth retirement accounts and health savings accounts (which can also be utilized for retirement planning). And maxing out regular retirement accounts comes after that.
So, said Hanson, student loans often fall within this high-interest debt category, meaning these should often be paid off before turning more toward retirement savings (assuming you’ve gotten your full employer match). However, whether or not student loans are considered high-interest debt can depend on your age, the hosts explained.
People in their 20s should prioritize paying off student loans with a 6%+ interest rate; someone in their 30s should focus on loans with 5%+ rates; someone in their 40s should prioritize 4%+ debt; and those in their 50s should prioritize any student debt.
“You don’t want to have that debt hanging over your head and need to figure out how to budget for it while you’re retired,” said Hanson.
However, the hosts added sometimes the question is not just which one to prioritize. For someone in their 40s who doesn’t have much saved for retirement and still has student loan debt, for example, you might need to focus on both.
That’s because if you’re in this situation, you might not have prioritized saving and investing enough overall. So, it’s more about systematically changing your approach, they said. Tinkering about which one to prioritize will only get you so far when the real issue might be that you need to spend less and/or make more to reach your financial goals.
But if you find yourself in this situation, you’re not alone. The average federal student loan balance is $37,338 per borrower, and the average private student loan balance is $54,921, according to the Education Data Initiative. Meanwhile, according to the Federal Reserve, the median retirement balance for someone ages 35-44 is $45,000.
But that doesn’t mean you want to stay within these averages. You likely need more savings if you want to enjoy retirement and avoid student loan debt dragging you down. According to Fidelity, you should aim to save 10 times your pre-retirement income when you retire, which means by age 40, you should save at least three times your income by age 40.
So, if you’re not there yet, you might need to not only figure out where to prioritize putting your money; you also might need to increase your overall savings and investing while paying off debt.
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This article originally appeared on GOBankingRates.com: The Money Guy Show: Should You Prioritize Retirement Savings or Student Loans?
