Striking the Right Balance: Managing Student Loans while Saving for Retirement Managing your student loans while saving for retirement can feel like an uphill battle. Although it can be a long and complex process, there are many ways to fast-track it....

Managing your student loans while saving for retirement can feel like an uphill battle. Although it can be a long and complex process, there are many ways to fast-track it. If you make the right choices, you can boost your savings and work toward eliminating your debt for good.

Why Prioritize Paying and Saving Simultaneously?

It's essential to prioritize paying and saving simultaneously when you have student loan debt to pay off because both are long-term, time-sensitive goals. Plus, you don't want to skip out on managing your repayments properly because you'll stack debt and potentially push your retirement further out.

As the federal pause on interest accumulation ends and payments begin again, coming up with a plan is essential. If you want to secure your future financial stability and create a strong safety net, managing your loans while saving for retirement is necessary. Once you find the right balance, you can watch as your savings grow.

How Much Do You Need to Save?

While the amount you need to save for retirement depends on your lifestyle, location, and existing savings, you can base your goal on the average. Generally, it costs upwards of $1.8 million to retire. That number might seem impossible to reach given how student loans eat at your potential savings, but it's more than possible with the right approach and mindset.

Most experts agree you should save 20% of each paycheck and keep the rest for yourself. A good rule of thumb is to listen to the classic 50-30-20 rule, which recommends you put 50% toward needs and 30% toward wants. Even if you aren't able to put one-fifth of your earnings into your savings account, you should try to get as close as possible.

How Does Your Student Loan Type Affect You?

The kind of student loan you have affects how you should repay it and save for retirement. The four types include subsidized, unsubsidized, PLUS, and private. Since each accumulates interest at different points, your first step should be to find out which you have.

Direct subsidized and unsubsidized loans are very common because they're available through the free application for student aid form. Although interest accumulates differently for each, you don't have to start making payments on them as long as you stay enrolled in school. They also make you eligible for a host of assistance programs and plans.

If you have private loans, you'll have to take a much different approach to student debt management. Most importantly, you aren't eligible for federal programs that could help you limit interest, pause payments, or lower your monthly bill. They often have higher interest rates and start generating interest immediately, so you want to pay them off quickly.

How Can You Save while Managing Your Loans?

To save for retirement while managing your student debt, you have to determine your cash flow and interest rates. Since you already know the average amount you need for retirement is around $1.8 million, you must figure out how to balance everything to meet that goal.

Figure out how much student loan debt payments will take out of your paycheck to see how much you can save each month. After subtracting necessities like utility bills or groceries, you can decide how much you want to put into your savings or investment accounts.

You can calculate how much you'll need to save each month to break down your goal into reasonable chunks. Starting with the amount you want to save for retirement, subtract your existing savings and add your estimated student debt cost. Divide that number by your monthly savings, then divide again by 12 to see how many years it will take you to reach your objective.

If you want to retire in fewer years than your calculation shows, you have to increase the amount you save each month. You must consider enrolling in retirement plans if you can't afford to take any more money directly out of your paycheck.

What Retirement Plans Should You Consider?

Since most of your earnings go toward your student loan debt, you have to boost your income elsewhere if you want to save while paying it off. Employer-sponsored retirement plans are one of the best ways to go about this since they offer a variety of tax benefits.

A 401k puts some of your pre-tax earnings from your paycheck into a special account. Your employer can match your contributions, dramatically increasing your savings over time. Since it's automatic, you don't have to work it into your budget continuously or remember to put money into it.

The government even passed legislation to tie your 401k to student loan debt. The SECURE 2.0 Act lets employers make matching contributions when you make a payment on it. While it won't go into effect until 2024, it will give you a fantastic way to save during repayment.

If your employer doesn't offer a 401k or you work independently, an individual retirement account (IRA) is still an option for you. The amount you can put into it annually is lower, but you have more freedom. Whichever you choose, making contributions as frequently as you can will maximize the amount you save.

Even plans that don't directly relate to retirement can help you save for it. For example, a Health Savings Account lets you save for medical expenses with your pre-tax earnings. Your contributions are tax-deductible, health-related withdrawals are tax-free and your funds roll over annually. Plus, you can take money out for any reason once you reach 65.

Ways to Save While Paying off Your Loans

Here are some of the best ways to save for retirement while managing your student loan debt.

1. Try Low-Stakes Investments

Low-stakes investments are ideal when you're saving for the long term. While you can take higher-risk approaches and maximize your earnings early on, they're not nearly as secure. You don't want to lose your current savings while pursuing your future financial security.

There are plenty of investment options if you want a low risk and solid reward. For example, a fixed annuity guarantees a set interest rate, securing a steady income stream for you. On top of being one of the safest investments, it ensures you get a payment. Even though it doesn't provide an enormous cash flow, it's an excellent choice.

2. Use the SAVE Plan

When the Supreme Court struck down sweeping student loan debt forgiveness, the Biden administration created the Saving on a Valuable Education Plan. It's similar to an income-driven repayment plan, where your earnings determine your monthly payments.

If your individual income is less than $32,800 annually, you won't have to pay anything at all. Even if you make more, you'll save thousands of dollars annually. Plus, interest won't accumulate on this plan. Although it won't go into effect until July 2024, you can apply for it now.

3. Always Pay the Minimum

Always make the minimum monthly payment when repaying your student loans to prevent interest from accumulating. You can only save for the future if you work on reducing the amount you owe. Even though it's best to pay off as much at once to get the principal down quickly, you at least want to meet the lowest requirements.

4. Use an IDR Plan

An income-driven repayment plan is a federal debt forgiveness program. The government knows it can be challenging to pay off your student loan when it's such a large amount and interest accumulates so quickly, so they offer this as an alternative.

An IDR plan is beneficial because it lowers your monthly payments and gives you a set date for forgiveness. Although it takes about 10 to 25 years, it gives you much more flexibility with retirement savings and lets you save money in the meantime.

If you lower your adjusted gross income on your tax return, you can secure lower monthly payments and pay less in taxes. Every contribution to a 401k or an IRA reduces it, so putting in as much as possible grows your retirement savings and shrinks your bills.

5. Become Financially Literate

Many people feel like they can't look out for their future selves while simultaneously dealing with the pressure of student loan debt. Around 67% of people feel like they can't properly save for retirement because of it. Even though it can feel like a lot to handle, becoming financially literate can make it easier.

Around 15% of Americans lost $10,000 or more in 2022 because they weren't financially literate enough. To maximize your earnings and savings, you need to understand the mechanics of student loan debt and retirement. You should also learn everything you can about your situation to ensure you make the right choices during repayment.

Save for the Future

If you use federal programs, make secure investments, or enroll in a retirement plan, you can save more money for retirement and simultaneously pay off your student loan debt. Even though it might take a while to see progress, you'll feel much more confident in your future if you start as soon as possible.

Featured Image Credit: Christina Morillo; Pexels; Thank you!

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