Saving For Retirement Versus Paying Off Student Loans: Which Should Be Your Priority?

Student loans are a huge problem in our country, with the national student loan debt reaching a record-breaking $1.6 trillion.

But, at the same time, pensions are becoming less and less common and the Social Security system is seeing new and worsening problems. Retirement income planning is shifting from the three-legged stool model (combining pensions, social security benefits and savings) to the YOYO model (you’re on your own).

So how do we know what to prioritize moving forward?

What we can’t borrow for.

There is a loan for almost everything in this world—college, houses, cars, weddings, vacations—but the one thing that we cannot borrow for is retirement.

If you put off saving for retirement in order to pay down other debts, you’re going to reach the age of retirement and realize you don’t have the financial wherewithal to actually retire.

If you’re in your early twenties or thirties, you may be thinking, “why should I be worried about retirement now?” Retirement seems like it’s a lifetime away, and in some ways it is. But if you don’t start now, you can’t take advantage of factors like compound interest that can make a huge difference in your future.

If you have student loan debt and are trying to max out your payments to get rid of them quicker, consider making the minimum payments and putting that extra money into a Roth IRA or your HSA. Future you will thank you.

The airplane safety lecture.

Sometimes, the student loans we pay aren’t even our own. Funding our children’s education is great if you’re able to do it, but if it interferes with your ability to save for your own future, it may be time for junior to take over the payments.

When you board an airplane, they always give the same safety lecture. If pressure in the cabin drops, facemasks will fall from the ceiling. Secure your own masks before helping children and those around you.

That sounds unnatural to put yourself before your kids, but you’re not able to help them if you’re unconscious.

The same goes for finances. If you help pay for your kids’ education in lieu of saving for your future, you better hope they get a good job with a nice house because you’ll be living with them when you retire.

The lesson:

Retirement saving comes first.

If you reach financial independence and have long-term savings and investments that have grown to a point where you can live on the earnings, that will allow you to do anything you choose with that money—including paying off student loans or paying towards education.

There are certainly exceptions, as there are some onerous student loans and other situations where cash flow would improve by getting rid of a student loan debt first. But my feeling generally is that retirement comes first. Everything else—the things you can borrow for if needed—comes second.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regards to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.

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