The Broke Millennial: Don't Forfeit Your Retirement While Paying Off Debt!

User be warned: one more trap all too many fall into is the illusion that you should pay off debt before you start saving for retirement. The (not actually broke) Broke Millennial and countless other financial advisors warn that this is a myth, and here’s why: compound interest.

Imagine this: if it takes you 15 years to pay off your student loans, and you graduated at 22, you’ll be 37 with 30 years or less until retirement. That’s 15 years where your investments could have been compounding, but you’ve lost that opportunity. 

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So, why do some people in the personal finance community preach that you must achieve debt freedom before you start building wealth and working toward other financial goals? It’s wrong! The key is to start early and balance your financial goals wisely. 

Here’s proof that a small amount plus time equals success: 

If you start contributing $400 a month to a retirement account at age 23, by the time you’re 65, assuming a 7% return on investments, you’ll have over $1.1 million. 

If, instead, you pay off student loans until age 36 and then start contributing $900 a month with the same 7% interest rate, by age 65, you’ll have just under $950,000, with more than double the contributions late in life.

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Better yet, suppose you start contributing $400 a month at age 23 and then increase to $900 a month when you pay off your student loans at age 38. In this example, you’d have over $1.64 million. 

Interestingly, you’d only have about $135,000 by age 38. But if you contributed nothing more, you’d still have $839,140, close to what you’d have, contributing more than double for longer closer to retirement (assuming a 7% interest rate).

In all these examples, a small amount, say $400 a month, invested for 40 years beats any bigger amount invested for a shorter time, such as 30 years. 

See Also: IRS Finalizes 10-Year Rule For Retirement Withdrawals, Making Things ‘Even More Insanely Complicated’

Here are the key takeaways to ensure you have enough by retirement:

• Plan to invest for retirement and pay off debt, if necessary.
• Invest enough to get the full amount if you have an employer match.
• Consistency and time are more important for long-term wealth than big contributions.
• If you’re playing catch-up, focus on contributing as much as possible, so it has time to grow. 

And remember, if your debt is overwhelming, consider ways to earn more income, create a budget, or refinance to lower interest rates. Saving even a little bit now can have a big impact long-term. A $100 monthly over 40 years could be nearly $250,000 with 7% interest. It’s never too early to start!

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