Congrats, millennials. You’re much better off now than you were a few years ago, according to a new report from the Center for Retirement Research at Boston College.
Older millennials (those born from 1981-1991) lagged behind Gen Xers (those born 1969-1979) and late boomers (those born 1954-1964) in retirement preparedness in 2016, according to the report.
But new data for 2019 shows that “millennials are catching up in the labor market and in getting married and buying houses.”
The bad news? “Despite also having similar retirement savings, millennials’ huge student debt burden still leaves them well behind prior cohorts in wealth accumulation, the authors of the report noted. “This slower wealth buildup is of particular concern as millennials will need more than prior cohorts due to longer lifespans and less support from Social Security.”
How bad is the student debt burden, and what can millennials do to dig themselves out of the hole? According to the report, 40% of millennial households ages 28-38 are burdened by student debt and, among these households, the outstanding loan balance amounts to more than 40% of income.
Do Two Things at Once
Haley Tolitsky, a financial planner with Cooke Capital, says millennials need to accomplish two goals at the same time. Pay down their student loans while saving for retirement — and that especially so given a future with longer lifespans and less support from Social Security.
“The key is for millennials to start saving for retirement now,” she said. “The younger you are, the more time you have for your investments to grow, so get started today.”
Others agree. “Invest early, invest often,” says Claire Thornton, a certified financial planner with Inspired Financial. “And know it’s for the long haul.”
But before millennials start saving for retirement, Tolitsky says they ought to first fully fund an emergency fund (typically 3 to 6 months of living expenses) and pay down high-interest debt, such as credit cards.
Tolitsky also believes that millennials should “make saving for retirement a priority” and make sure they are getting at least the full employer match on their retirement plan. And if you don’t have a workplace retirement plan, she recommends opening an IRA or Roth IRA (depending on your tax situation) and setting up monthly contributions.
Thornton also recommends that as you start earning more in your career, instead of upgrading your lifestyle, increase what you put towards your retirement account.
Start With a Budget
“Having a solid budget and allocation of a specific dollar amount each month toward your student loan payments and saving for retirement will allow you to accomplish both goals,” says Tolitsky. Read Five Easy Ways to Create a Budget.
Thornton shares that point of view. “It’s imperative to create a budget,” she says. “Nobody likes the word, but how successful you are in paying off your student loans hinges on how closely you stick to a cashflow game plan.”
As for student loans, Tolitsky says millennials should learn the specifics of the various student loan repayment options, such as private refinancing, income-based repayment, pay-as-you-earn, and the like, and “choose the right solution for you.”
She recommends taking the time to evaluate your options “as this is an important decision that will affect the rest of your life” and reaching out, if need be, “to a financial planner or student loan expert if you need guidance.”
Thornton says millennials should view student loan debt as a marathon and not a sprint.
And if you have a “mountain of debt” she recommends creating an Excel spreadsheet with columns including the following: who you owe, how much you owe, each interest rate, and add a further details column to record what options are available to you for the different loans. Are you, for instance, eligible for an income-based repayment plan on any of them?
“If you have several loans with high interest rates, it may be worthwhile to consolidate,” says Thornton. “However, there are a few tripwires to consider with consolidating.”
For instance, never consolidate private and public together, and know what flexibilities you will lose out on by consolidating your federal loans).
Of note, Federal loan payments and interest have been suspended until Sept. 30, 2021 “so now is a great time to reevaluate your strategy and make a plan,” Tolitsky said.
If you have experienced a job loss or reduced income, use your student loan payment to pay necessary expenses, such as rent/mortgage, utilities, groceries, and minimum debt payments, she says.
And if this does not apply to you, make sure your emergency fund is fully funded and pay off high-interest debt, such as credit cards. “Once you are comfortable with your savings and debt payments, increase your retirement contributions and/or continue to pay off your student loans during this time,” says Tolitsky. “Don’t get to September of this year without a plan for repayment of your loans.”
Another avenue to paying down your student loan debt is your workplace. “Now it’s time to work hard in your job,” says Thornton. “You might not be able to control your large student loan debts, but this you can.”
So, if you’re eligible for a bonus, ask if your employer can put it towards your student loans. Under the CARES Act, employers can make tax free contributions up to $5,250 towards employee student loans, according to Thornton. “The big bonus here is that Congress has decided to extend this provision until 2025; that could be up to $26,250 towards your debt — all tax-free,” she said.