Should you save for retirement or pay off loans first?


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If you’re in your early 20s, you might be struggling with a common financial planning question: Should you be saving money for retirement, or should you first pay off your debts, specifically your student loans?


Of course, the answer to this question could vary depending on your individual circumstance. Still, we discussed this conundrum with Andy Smith, Senior Vice President of Financial Planning with Financial Engines and co-host of the Financial Engines Investing Sense radio show. Here’s what he had to say.

College grad looking at student loans

Should You Start Saving for Retirement Before Paying Off Student Loans?

Save for retirement. What’s the next question? Just kidding. Seriously, though, you absolutely should be saving as much as you can for as long as you can.


Consider this scenario:


Maria and Connor are 27-years-olds who work for the same company. Maria immediately started saving $300 a month in her 401(k). Connor started saving $300 a month in his 401(k) starting at age 37. They both saw 6% annual returns over their investing lifetimes and reinvested all their earnings.


But at age 67, Maria had over $250,000 more in savings than Connor because she saved earlier and could take advantage of the power of compounding interest (assuming a $1,000 starting balance and all earnings reinvested in the tax-deferred account. Remember, you’ll have to pay taxes when the money is distributed, and your annual returns could be lower or even higher.)


Those first 10 years when Maria was saving were worth nearly twice as much as Connor’s total investments.


This means that if you start early, you’re putting yourself in a situation where you could have a lot more money than if you wait. So, don’t wait.

Where Should You Invest Retirement Savings?

If you have a job where your employer offers a 401(k) (or any type of retirement-savings account), enroll in the 401(k) today. Try to save 10% of your income. If 10% is too much, shoot for 5%, but at least try to save enough to get the full employer match on what you save (many employers provide a match up to a certain percentage of pay; I’ll touch on that below). And if any of that just isn’t possible, save 1%.


1% may sound silly, but it’s not. Even if you start small and increase your contributions by just 1% each year with an auto-escalation feature (up to 10%), you could end up with a sizable 401(k) over time. Want proof? At the end of 20 years of saving, it would mean the difference between having around $65,000 in your account versus having nearly $171,000, almost a $105,000 difference.


$105,000 isn’t anything to sneeze at. Saving money in your 401(k) is always a smart move.

How Does an Employer Match Work?

Now, about an employer matching contribution: This is just the amount of money your company chooses to put into your retirement savings account on your behalf as you participate in its plan (at least up to a certain amount). These matching dollars are in addition to any of your salary-deferral contributions.


Again, you should be trying to save enough to get the full employer match on your contributions. A surprising number of people, sadly, don’t even do that. Financial Engines studied the saving records of 4.4 million retirement plan participants at 553 companies, and we found that 25% of employees miss out on receiving the full company 401(k) match by not saving enough.


That’s right: People don’t even save the bare minimum to get more money from their employer. The result is that people are basically leaving an average of $1,336 on the table each year, or roughly 2.4% of extra annual income. Plus, with compounding, this money people are leaving on the table could amount to as much as $42,855 over 20 years.


For most people, that question about whether to save or pay down your student loans has an easy answer. Don’t walk away from $105,000 by not starting to save today. And don’t walk away from possibly another $42,000 over your lifetime by not taking advantage of your employer 401(k) match.


The bottom line?


Start saving and investing as much as you can for as long as you can. Your future self will thank you and will think your current self was a financial genius.


This article originally appeared on and was syndicated by


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How to determine your retirement goals


The median retirement account balance for all working Americans is $0, and half of those households are over age 55 (not a typo). But it’s not just a problem for the Boomers. Research has also uncovered that 95% of Millennials are not saving enough for retirement. (Also not a typo.)

It’s a bleak picture, to be sure. But when reality hits hard, motivation can follow. And no one wants retirement to just become one of those things that our parents and grandparents used to enjoy, back in the day.

On average, Americans spend 20 years in retirement. If you earn $75,000 a year when you retire and want to keep the same salary, you’ll need a total of $1.5 million squirreled away.

This is the part where many people might utter the word “impossible.” But if you start saving for retirement now, and make your retirement contributions just as mandatory as your electric bill, that number can start to look a little less intimidating.

In fact, just using a retirement calculator can put you in a better position than many Americans — fewer than half of them have done the math. And once you have your own enormous number, it can get easier to break it down into smaller, more attainable goals along the way.

To be sure, though, the road to retirement is paved with homework and sacrifice. It’s estimated people need 70% to 90% of their pre-retirement income to maintain the same standard of living after they stop working.

So perhaps more than any other financial decision you’ll make, reaching personal retirement goals takes diligence, preparation, planning for the “what if’s” and lots of willpower.

It may seem overwhelming, but it can help to start by determining your retirement objectives. Then you can find your own personal way to crush them. Everyone’s financial situation is different, and this plan is not the only solution out there, but here is one possible way you might go about determining your goals.

Related: When can I retire? This formula will let you know


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One step you can take to determine your future is to get a solid picture of your present — somewhat like a personal audit. A careful inventory of your current expenses, income, taxes and savings can give you an honest picture of where you are, as well as a realistic look at where your money is going each month.

Once you’ve determined your day-to-day financial picture, you can create a list of any current retirement savings you already have, such as 401(k) accountsIRAs, or high-yield savings accounts. Total up that number, because you’ll be able to subtract it from your goal.




A retirement calculator can help you figure out your overall, 20-year lump sum goal by working with variables such as your current age, salary and savings, your desired retirement age and how much you save per year.

Here’s where you can change up the numbers and consider several scenarios. If you were to retire at 67, for example, how much money will you need? What would happen if you were able to up your yearly savings by just 3%? You might even calculate the amount of money you’d need to save to retire early.


Take a deep breath. Then plan on.


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One possibly helpful way to tackle anything large is to break it down into digestible chunks. To do this, you could subtract your current age from your intended retirement age, then divide that number by the total. That’s your yearly goal. If it’s still overwhelming, you might divide that number by 12 for your monthly goal. Go as far as you need to make it palatable — those “for as little as 3 dollars a day” commercials make it sound easy, right?

For example, if your total number is $800,000 and you’re 30 years from retirement, that breaks down to around $75 a day. But that doesn’t mean you have to put that much into the bank by yourself. A next step you could take is finding the retirement savings plans that will do the most to grow your money.




With the drastic decline in the traditional, company-provided pension and the uncertain future of Social Security, a number of different individual retirement savings plans, each with specific benefits, have stepped in to take their place.

If your employer offers a 401(k) matching plan, one of the easiest ways to grow your retirement nest egg is to contribute the max amount of money each paycheck that your employer is willing to match.

The contributions are automatically deducted from your paycheck pre-tax, and since you never see the money, it can be much easier to just pretend like it was never there to begin with.

For the self-employed, or for diversification, traditional or Roth IRAs are also specifically designed to help your savings grow.

The biggest advantages of 401(k) and IRA plans are their potential tax savings. However, they can come with yearly contribution limits that don’t mesh with your retirement objectives.

In this case, a general investment account is another possible consideration for growing your wealth. While it likely doesn’t come with tax advantages, it doesn’t come with contribution limits, either.

If investing in the market leaves you feeling wary, or you don’t like the idea of not having access to your money until you reach a certain age, another option to consider is a high-yield savings account.

It’s a cash-based account that has as much flexibility as a regular checking or savings account, but instead of the paltry 0.09% interest offered by some traditional banks, your money can potentially earn 2% or more.


gmast3r / istockphoto


You’ve calculated your retirement goal. You’ve determined a plan to reach it. And now it’s time for arguably the hardest part — sticking to the plan.

For as many investment or retirement accounts as possible, you might consider setting up automatic contributions to withdraw every payday. The more you can automate, the less you’ll be tempted to move things around.

Learn more:

This article originally appeared on and was syndicated by

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