By Ben Klundt
Don’t get me wrong, being financially confused is not exclusive to the “youth,” it’s spans every generation. It’s nothing to be embarrassed about, I don’t know how to do heart surgery (or a lot of much simpler things for that matter). And just because I have a heart doesn’t mean I should know how to perform surgery on it any more than having money means you are financially sophisticated.
Today, I want to talk about confusion around the 401k vs. Student Loan dilemma that comes up often with younger clients and prospects. Just because you have them doesn’t mean that you automatically know, or have ever been told, how to approach the task of balancing saving and debt reduction.
Get out your scalpel and let’s get to it!
You may have noticed that I’ve made some reference to healthcare in the intro, this issue in no way exclusive to any particular industry. There are many professions that struggle with finding the balance between saving for retirement and paying down debt.
Let’s start with the one that feels like the greatest pressure … Student Loan Debt. I know this can feel like a cloud that just hangs above you and never stops raining, but it will and it will be awesome. A few key things to consider on your path to that sunny place:
1. Have interest rates changed since I first took out these loans? It may be time to look at refinancing your student loan debt. We’re in one of the lowest interest rate environments ever. Look at companies like So-fi or Earnest.
2. Should I look for employment with a company that helps with student loan pay off? Many major corporations will help with student loan pay off or they have a forgiveness program like some municipal entities do after working for them for 10 years.
3. Do I have equity in a home I could use to do a cash out refinance to pull out cash and pay off the student loan debt? This could lower your payments by extending the term and doing so at a lower interest rate in many cases.
4. Don’t sacrifice saving for the future entirely as you seek to pay down debt. This is especially true if you have a match on your employer’s retirement plan – that’s “free” money to you. But note, many times an employer only offers a match if you defer your own capital. It can also be true if your interest expense on your debt is far below a reasonable expected rate of return.
Now that we have a general idea of the direction you may want to go with regard to your student loan debt and hopefully been able to secure the lowest cost of borrowing, let’s talking about saving some money! There will come a point when you’re saving more into your investment accounts than you’re paying to student loan debt. A few key things to consider:
1. You should be saving 10-20% of your gross income over a 30 year period of time to be in the ball park of what you’ll need retirement with an account invested in an age appropriate allocation. This is your goal, it doesn’t mean you have to be there now.
2. Take full advantage of the match on your employer’s retirement plan if you have one. Many plans have a match (i.e. you put in 5% and they’ll match you that as well up to 4%) there are many different types of matches and contributions and they’re plan specific so know your match.
3. If you’re behind on your saving and need to play catch up you can defer up to $19,500 (2021 deferral amount) and if over age 50 can defer an additional $6000 annually. The employer match/contribution is in addition to these numbers.
4. If you’re a high earner and maxing your 401k, there’s the prospect that’s not enough and you’ll want to look at “back door Roth contributions,” maxing spouses retirement programs and/or a general brokerage account. When the time comes, connect with an advisor and get ahold of which plan is best for you.
It can certainly be a hard thing to know what’s right but at the end of the day, you’re paying down debt and/or saving for the future. Both are good. Keep grinding, keep saving and keep paying that debt down. Live within your means. If you have any questions feel free to reach out, I’m here to help and share value.