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When student loan and 401(k) compete

Shelly  Gigante

Posted on October 25, 2022

Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
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Explain why you must save for retirement alongside paying down your debt. 

Warn why being too conservative too young can make it harder to reach your long-term financial goals. 

Offer insight on ways to tackle multiple financial priorities at once. 

Younger workers who are saddled with student loans may be motivated to pay their tuition balance off quickly, but they are doing their financial future no favors if it comes at the expense of their retirement savings.

Indeed, recent grads who hope to retire while they are young enough to enjoy it must chip away at their outstanding loan balance, while simultaneously funneling part of their income to their 401(k) plan or Individual Retirement Account (IRA), said Kevin Reardon, president of Shakespeare Wealth Management in Pewaukee, Wisconsin.

They should also set aside dollars in a liquid, interest bearing savings account for emergencies, like an unexpected job loss or medical bills (three to six months' worth of living expenses is widely recommended), and more immediate financial goals, like buying a car, purchasing a home or saving for their child’s education.

Those are a lot of competing interests for a starting salary, to be sure, but it is doable if they keep their financial priorities where they belong.

“Saving money early in life provides incredible choices later in life, when the choices become more meaningful or important, like helping our children or grandchildren, helping our parents, or donating to charitable causes we believe in,” said Reardon, noting he and his wife did without glam vacations, brought brown-bag lunches to work, and kept their cars together with duct tape during the first five years they were married to pay off his wife’s then-six figure student loan. “Hard work pays off.”

A large number of millennials, however, are still underfunding their retirement account by a wide margin, which could come back to bite them as they age. (Calculator: Retirement income calculator)

Fully 81 percent of adults with student loans say they’ve had to delay one or more key life milestones because of their debt, with 40 percent postponing plans to invest in stocks, 38 percent putting off saving for retirement, and 33 percent pushing their goal of homeownership further down the road, according to one survey.1

Another study by personal finance website NerdWallet also found the average college graduate will need to work until age 72 — more than a decade longer than their grandparents did — due to high student debt and lack of saving.2

It found, too, that student debt can potentially cost college graduates far more than just the loan payments, in forgone retirement savings during the years they prioritize paying back their student loan. For example, by starting to save at age 25 and saving $100 a month into a retirement account with a hypothetical average annual return of 8 percent, that person would have an account balance of $311,000 by age 65—the sum total of their $48,000 in contributions and $263,000 in earnings.

By waiting until age 35 to start saving instead, and doubling their monthly savings to $200, that person would have contributed more, but earned less. Their account would total about $272,000, a combination of $72,000 in contributions and $200,000 in earnings.


“The student loan crisis is not only affecting new graduates’ immediate financial situation, it is making their retirement prospects dwindle,” said NerdWallet investing manager Kyle Ramsay in a company statement.

The average federal student loan balance in 2022 was $37,667, but the total average balance including private loan debt may be as high as $40,274 , according to

Assuming a 4 percent interest rate and a standard 10-year repayment term, that equates to a monthly payment of roughly $400, according to the SmartAsset loan calculator.

It’s not just student loans, however, that have kept millennials from socking money away.

Most came of age during the Great Recession and watched their parents lose their savings (and possibly their jobs) when Wall Street and the housing market hit the skids. Scarred by their experience, they are more likely to keep their money on the sidelines, or be overly conservative (relative to their age) in their investment choices – a potentially huge opportunity cost.

A Bankrate survey found that three in 10 of millennials declare cash to be their preferred asset class.4

Missing out on potential returns from equity and bond investments could cost them extensively over the course of their lifetimes. According to Bankrate, a 22-year-old worker planning to retire at age 67 who saves 10 percent of his $50,000 salary into his 401(k) would accumulate $359,000 by investing in money market funds (or another cash equivalent) yielding 2 percent by the time he retires. By investing in a hypothetical portfolio of stocks and bonds instead, and assuming an 8 percent rate of return, he could have amassed $1.9 million.

Financial balancing act

The challenge is determining how best to allocate what little disposable income they have.

Should they send extra payments to their student loans, or contribute more to their 401(k) plans and IRAs?

To help, MassMutual has developed a simple "5-10-15-20” concept to help savers prioritize their financial goals and visualize their potential outcome.

In effect, it encourages savers to increase their annual income by at least 5 percent annually, save 10 percent of their income each year, target a retirement nest egg of roughly 15 times your annual income, and plan to have your debt (minus your mortgage) paid down within 20 years.

Reardon said millennials who are eligible for a 401(k) company match at work should at least contribute enough to get the match, lest they leave free money on the table.

Beyond that, they will need to take into consideration whether the interest rate they pay on their student loans might be higher or lower than the interest rate on their investments and decide upon a repayment strategy that makes sense for them.

When you make extra payments on a specific debt, said Reardon, you are essentially getting back value equal to the interest rate on that debt.

Thus, if the interest rate on your student loans is relatively low, as it is for most federal loans, the potential long-term returns earned on your 401(k) might outweigh the benefits of shaving a year or two off your student loans, said Reardon. (Related: Getting out of Parent PLUS loan debt)

By comparison, most financial professionals estimate the average long-term return on stock investments is roughly 7 percent. (That figure is based on returns since 1966 adjusted for inflation and assumes dividend reinvestment. But remember, past performance is not indicative of future results.) In addition, don’t forget that contributions to your 401(k) plan and traditional IRA are also made on a pre-tax basis, so you lower your taxable income in the year you contribute.

In this scenario, your money might work harder if you were to stick to your regular loan payments and increase the contribution to your retirement account, said Reardon.

The inverse may be true if you have private student loans, many of which charge interest of between 9 percent and 12 percent or more, according to, a financial aid website.

But don’t neglect your retirement savings completely.

Due to compounded growth, even a small amount invested in your 20s and 30s can significantly increase the size of your future nest egg. The earlier you start saving the better off you will be. (Related: Saving for retirement in your 20s: Doing the math)

“The two most important things millennials can do is save more and save early,” said Ramsay. “Compound interest is a powerful force that can build a comfortable nest egg.”

Here’s a hypothetical example to illustrate the point: A 23-year-old woman who invests $10,000 at an assumed 6 percent return today would double her money by age 35. Her account would be 20 times larger by the time she reaches age 75. (Note that this example doesn’t reflect any specific investment and does not include any fees or taxes that night apply.)

Financial professionals generally recommend retirement savers sock away 10 percent to 15 percent of their income annually to help ensure a comfortable retirement.

In the interest of protecting their future, they should also consider disability income insurance, which would replace a portion of their income if they should become too injured or ill to work, said Reardon.

“Disability [income] insurance is the most important insurance for a millennial to have, as they are exponentially more likely to become disabled than to die,” he said. “Hopefully their employer provides decent group disability insurance, but if not they should purchase an individual policy.” (Calculator: How much disability income insurance do I need?)

Even if they do not yet have dependents (children of their own), millennials may also wish to consider life insurance if they provide financial support to their parents or carry student loan debt for which a family member has co-signed, said Reardon, noting term life insurance on young, healthy adults “is incredibly cheap.”

Not too late to save for retirement

Millennials who have not yet started to save for their retirement need not stress. Time is on their side.

By increasing their savings rate by even a small percentage, they can potentially amass a far bigger nest egg over the course of their working career and shave years off their retirement date.

According to NerdWallet, a 23-year-old man earning $45,478 who saves 10 percent of his salary annually would have nearly $2.1 million saved by age 90 and would be able to retire at age 73.5

By increasing that savings rate to 15 percent instead, he would have $2.3 million in the bank and could retire comfortably at age 68. He would save roughly $2.5 million by socking away 20 percent of his salary per year, and would be able to retire at age 64.

Saving for retirement can be easier than it seems, especially if you automate. Direct deposits to your work-sponsored 401(k) plan, for example, are an easy way to pay yourself first, before the money lands in your pocket. Annual raises and bonuses can also be applied to your nest egg.

Mobile apps may also be a millennial’s best friend. Acorns, for example, enables users to automatically invest their spare change, which adds up fast.

The app uses a system of rounding up, automatically investing the dimes and quarters leftover after each purchase. A $4.25 purchase at Starbucks, for example, would yield a $0.75 investment.

When it comes to saving and investing, millennials have more choices than prior generations, but they also have more debt.

By being frugal, investing for the long term, and making smart choices about their student loan repayment strategy, however, a comfortable, timely retirement remains well within their grasp.

“We shouldn’t be too hard on millennials, as this issue persisted with Generation X and baby boomers, as well,” said Reardon. “If millennials are going to live to be 100 or 110, and spend 50-plus years in the workforce, then perhaps we need to cut them some slack in the fact that they are growing up more slowly relative to other generations.”

More from MassMutual…

A retirement roadmap for DINKS

Four reasons why your 401(k) may not be enough

Need a financial professional? Find one here

This story was originally published in August 2016. It has been updated.

1 CNBC | Momentive Poll, “Invest in You Student Loan Survey,” 2022.

2 NerdWallet, “Class of 2018 Money Outlook,” 2018

3Educationdata. “Student Loan Debt Statistics,” July 29, 2022.

4Bankrate, “Financial Security Index July 608, 2018.”

5NerdWallet, “Retirement calculator,” 2022.

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