I planned to pay off my student loans before anything else, but a financial planner told me there's something more urgent: retirement
- My husband and I went to a financial planner with about $80,000 in student loans and an aggressive plan to prioritize paying it off.
- However, the planner told us that we don't need to be so aggressive - since the interest rates on our loans are low, we'd be better served putting extra money toward retirement savings rather than loans.
- That's because the amount of money we'll need for retirement is huge, and we'll need as much time as possible to save it.
- After talking to him, we tweaked our financial strategy to pay the minimum on our loans and contribute more to our future. Once we're back on track with retirement savings, we'll re-evaluate.
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Once my husband paid off our credit card debt, taking care of our student loans seemed like the natural next step. We have about $80,000 in loans left between us, and it doesn't feel good to owe someone money. We've always been taught that being "debt free" is the main way to be financially stable, but what if the push to pay off debt comes at the expense of contributing to our future?
During our second appointment with our new financial planner, Tom Canale, CFP®, ChSNC®, ChFC®, CLU®, Wealth Management Adviser with The Canale Financial group with Northwestern Mutual, we brought our game plan to the table. We felt proud that we were so motivated to move our financial lives from the red to the black, so we could begin to build our net worth.
That's why we were surprised when he told us to consider another route and focus on investing in our retirement funds instead.
Student loans can feel more emotional than retirement savings
First, Canale acknowledged that our desire to reduce debt was a good one. Since student loan companies are constantly sending reminders of what borrowers owe, it's easy to invest finances and emotional energy toward that debt. It's not quite the same for retirement savings. "There's a statement every month saying you owe $200,000, but there's no monthly picture of the $2.5 million you need for retirement," Canale says.
He reminded us that not all debts are the same, and that the drive to pay down lower-interest student loan debt can often be an emotional, not logical, one, especially since we haven't contributed much to my husband's 401(k).
"The emotional action is to check a box and say it's done - we just want that debt off our shoulders," he told me in an interview. "But it may be better to pay that off on time rather than ahead of time, if you aren't on track to accumulate what you need for retirement."
Here are a few reasons he recommended we change our focus from aggressively paying off student loan debt to investing more in our future.
Retirement will always be more expensive than student loans
One reason Canale encouraged us to slow down our student loan payments and instead contribute more to our retirement funds: The money needed for retirement is likely a bigger "bucket" than the money already invested in someone's education.
For example, a person might have $200,000 in student loan debt from undergrad and law school, but Canale says most people plan to need around $2 million to $2.5 million for retirement. It's a lot harder to save $2.5 million dollars than it is to pay off $200,000, so the sooner people can start, the better.
"Retirement is just a bigger, more intangible obstacle," he says. "Most people need to accumulate 10 to 15 times the scale of what they owe in student loans."
You can't know when you'll need to retire
Uncertain timing is another reason Canale recommends people remain intentional about their 401(k) contributions in spite of student loan debt. Someone can plan for retirement at 65, but what if they don't have ample savings in the event of a job loss or an unexpected medical event before that age? We really have no idea how soon we'll need the money we've been saving, he says.
"If you have a stroke at 58, you won't have the savings you need," he says. "The unknown timing should create more pressure than the benefit of paying off a student loan."
A low interest rate on loans makes them less urgent
My husband and I have low interest rates on our student loans - an average of 4% between the four loans we're paying off (three federal loans and one private loan I refinanced at a lower interest rate). A laser focus on student loans just for the sake of "paying off debt" could cause us to miss the opportunity to grow our nest egg in the stock market. The extra money we planned our putting toward our loans would grow faster in investments for the future.
"The interest rate on most student loans is generally low, and it can be outperformed over the long term in the stock market as you accumulate savings at up to an 8% rate," Canale says. "I would rather accumulate at 8% than focus on paying off debt at 6%."
Everyone's balance is different
For anyone who wants to figure out the ideal balance of paying down debt and saving for the future, Canale recommends talking to a financial planner for guidance - everyone's financial situation is unique and may require an equally unique approach.
For us, we now plan to pay the minimum payment on our student loans while my husband increases his 401(k) contribution and I contribute to a Roth IRA. Because the interest rates are so low on our loans, we'd rather focus on more aggressive contributions to our retirement. Once our financial planner tells us we are on track for the future we want - and we have more discretionary income - we might consider paying more on our student loans again.
For someone else with credit card debt or even an auto loan, which are unsecured debts that usually come with high interest rates, a financial adviser would probably advise hammering down that debt before contributing more to a retirement fund. The same might be true for higher-interest student loans. The important thing is to enlist an expert who can help ensure a secure financial future.
"If people can get the information they need about their finances sooner, they'll benefit sooner," Canale says.
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