College Debt: Kiss Your Retirement Goodbye

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The burden of student loans is felt long after students leave the classroom. Many graduates are familiar with the obstacles of finding a well-paying job or affording daily living expenses, but the true financial impact of debt is a compounding problem for Millennials hoping to retire one day.

With the college debt bubble growing larger than $1 trillion in total outstanding loans, more harmful side effects are being realized each school year. A new report from NerdWallet finds that while retirement is not impossible, most students will have to wait until their early to mid 70s compared to the current average retirement age of 61. The delay comes from many students spending the first ten years or more of their careers paying down college debt, instead of saving or investing those funds and receiving the benefits of compounded returns.

“Far more than their parents, Millennials will have to rely upon proactive financial management to achieve their retirement goals,” explains strategy analyst Joseph Egoian from NerdWallet. “Each generation is afflicted with distinctive financial ills, but the challenge of college debt is unique to Millennials. The decline of pension plans, the uncertainty surrounding social security, and the college debt epidemic have placed the onus on graduates to make conscious, forward-thinking decisions about their retirement.”

The report creates projections based on three different financial profiles: the struggling graduate with high debt and below average salary; the median graduate with median debt and salary; and the well-off graduate with low debt and an above-average salary. As the chart below shows, the well-off graduate is estimated to retire at age 67 with $804,706 in total savings, while the median graduate is projected to retire six years later with only $428,950 in savings.

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A struggling graduate with $40,000 of college debt and a starting salary of the same amount is expected to delay retirement until age 75, with a mere $343,392 in savings. Given an average life expectancy of 84, this only allows for about nine years of retirement. The struggling graduate is able to have a retirement age just two years later than the median graduate because of the benefits from social security, but that program is questionable at best in the long-run.

With student loans being handed out like candy, it’s more important than ever for borrowers to consider the consequences of debt. Being aware of the situation and taking early action to prepare for retirement can have significant effects.

“There are many factors that influence the ultimate age at which people are able to retire, but there are a few variables that have a particularly large impact,” explains Egoian. “Making above-average yearly contributions to a retirement account, working for an organization with a decent 401k match, and making sure to invest money in index tracking mutual funds are three ways to help add years to retirement.”

Placing money aside for retirement may seem like a daunting task, but needs must win over wants. The study projects a 6 percent annual post-tax contribution for the median graduate. However, increasing the contribution to 10 percent reduces the expected age of retirement from 73 to 69.

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