Should Millennials Pay off Student Loans First, Before They Save for Retirement?

Published on July 10, 2018

With the right planning, millennials can pay off student loans and save for retirement through a self-directed retirement plan

Even though many millennials feel pressured to pay those student loans first, this is not necessarily a chicken-or-egg question. Although retirement is years ahead, saving for it is something that must happen now and continue into the future. It might be wise to consult a financial advisor to work out a plan to pay off student debt AND put money away for retirement at the same time. 

Millennials – take advantage of your longer savings horizon

Learning how to balance these long-term and shorter-term priorities is important—and it’s not impossible.

Remember that a longer time horizon for savings is in your favor. Even if you chose to save a small amount every month over 20 years in tandem with making student loan payments, you would still enjoy the growth that your retirement savings would gain while building equity for your future (those loan payments can’t do that for your future). Waiting until you’re done paying off student debt means starting to save for retirement much later and much closer to your retirement age, with less time to play catch up.

An example by TIAA (Teachers Insurance and Annuity Association of America) illustrates the value of starting your retirement savings early. It compares two people who choose to save $30,000, beginning at different ages: Person A starts at age 25, and Person B at age 45. They both save $30,000 within 20 years but because A’s money has a longer time to grow, she ends up with more than three times the amount of money than B.

Meeting with a financial advisor can help you assess what your debt is costing you vs. what you can earn on investments, take your living expenses into account, and factoring in relevant tax issues. This will also help you see what is truly feasible for your unique financial situation, as you and your trusted advisor work out your allocation plan.

Boost those savings through self-direction

Creating a budget that allows for minimum loan payments and small retirement savings can work, and as your career advances and your earnings rise, you can chip away at the loan amount a bit more, while steadily increasing your retirement savings.

If you invest through a self-directed retirement plan, you’ll get the same tax advantages of regular retirement plans and potentially build a more lucrative nest egg through the alternative assets these plans allow. The good news is, it is possible to invest in certain alternative assets without a huge chunk of change and if you start saving early, you’ll be able to do so that much sooner.

For example, private placements into a startup do not always require a lot of money up front, so you could invest in a friend’s new coffee roasting business or robotics firm at an amount and on terms you both agree. You can make a loan to someone and your self-directed IRA will earn the interest on that loan (growing the value of your retirement plan). Or, you can partner up with others to invest in rental property or a Broadway show, with shares for each partner reflective of his/her investment amount.

There are lots of ways to build a diversified retirement portfolio through self-direction—and the professionals at Next Generation can provide lots of helpful information regarding these plans and nontraditional investments. Even better, they provide client education at no cost! Check out our helpful videos to get the basics, use our Starter Kits to open a self-directed IRA, or contact Next Generation for assistance: NewAccounts@NextGenerationTrust.com or 1.888.857.8058.