When picturing their life in retirement, most people see themselves relaxing—maybe on a beach, maybe with a cool beverage in hand. Few will imagine themselves still trying to make ends meet; unfortunately, many people appear headed that way.
According to a survey conducted by American Student Assistance® (ASA) (Salt's parent company), 31% of working Americans don't have any retirement savings. In addition, a T. Rowe Price survey found that 44% of parents who took on student loan debt for their children said that the loans negatively impacted their ability to save for retirement.
Since many financial planners believe that Social Security payments alone won't be enough to cover a person's expenses in retirement, borrowers need to find ways to save for retirement and pay for their student loans. Here are some strategies that could help you.
Saving For Retirement
Experts generally recommend that you save between 10% and 15% of your salary annually for retirement. Don't feel disheartened if you can't contribute this much. It may sound like a lot, but you can break it into manageable chunks in a few different ways.
Auto-debit: Most employers allow you to put a percentage of your income per paycheck (before and after taxes) directly toward a retirement account, such as a 401(k), 403(b), or an Individual Retirement Account (IRA). By doing this automatically, you won't "skip" saving.
Employer match: Some employers will match the retirement plan contributions you make. If your employer contributes 3% of your salary to a 401(k) as long as you contribute 3%, that's 6% right there—and only half of it is your own money. Always take advantage of this offer. Otherwise, you'll just leave money on the table.
Plan ahead: If you can't afford to deduct money from your paycheck right now, start your contributions later. For instance, when you receive a raise—annually or otherwise—put that increase toward retirement. You can continue to live off your prior pay amount, while using the new money as your contribution.
Lower Student Loan Payments
Saving for retirement may be easier if you didn't have student loans to repay, right? Well, federal student loans offer income-driven repayment options that may make saving for retirement much easier. You could even get a payment as low as $0.
Income-based repayment (IBR), income-contingent repayment (ICR), and Pay As You Earn can lower your payments to 10% to 20% of your disposable income if you qualify. Plus, after making payments under these plans for 20 or 25 years, your remaining balance would be forgiven (but that amount would be taxable). This can open up room in your budget to save more for retirement.
For example, let's say you have $30,000 in federal student loans (about the average for the class of 2014) at a 4.7% interest rate and an annual salary of $45,000 (about the median salary for right out of college). Under the standard 10-year plan, your payments would be $314. However, if you qualified for New IBR or Pay As You Earn, your payments drop to $228. That's $86 per month you could put toward your retirement savings—or $1,032 per year.
To save 10% of your salary for retirement ($4,500), you'll need another $3,468. If you break that up between every paycheck, assuming you get paid biweekly, that's around $134 per check. But if your employer contributes just 3% to your retirement account, you'll only need to contribute $2,118 to meet your goal—or just $81 per paycheck.
Payments In Retirement
Once they're in retirement, most people's taxable income will be less than when they worked full time. So, if you’re repaying under an income-driven repayment option, your payments will likely drop.
To continue our example, someone who makes $45,000 per year will likely receive $1,697 per month from Social Security benefits if they retire at 67 years old. If this is this person's entire income, these benefits will likely not be taxable. You can learn how to calculate if your retirement income will be taxable or not here.
The less taxable income that you have, the smaller your payments on an income-driven repayment plan will be. Given this example, your monthly payments under New IBR or PAYE would be $23—even if all of your Social Security benefits per month were taxable income. With those lower payments, you will likely have more disposable income to use for things that are more fun than repaying student loans.