Whether it’s you, your kids, your friend’s kids, or your kid’s friends, it’s likely that someone around you is facing student debt. In fact, 55% of households ages 21-29 have student debt as of 2013¹, and that number is increasing. Student loans outstanding have almost tripled in the last ten years, with a current balance of $1.319 Trillion at the end of 2015.¹ A recent study² from the Center for Retirement Research at Boston College tells us that the massive growth of student debt can have a significant impact on retirement for millennials.
The increase in student loan balances means that young people are waiting to purchase homes, and pushing their retirement savings until later. Couple that with the disappearance of defined benefit pension plans previous generations have seen, and the likelihood of a much smaller or even non-existent Social Security benefit, and it’s easy to see the risk of not being ready for, or running out of money during retirement is increasing.
The February 2016 study uses a metric called the National Retirement Risk Index (NRRI) to measure how growing student debt impacts retirement security. According to the study, “Calculating the NRRI involves three steps:
1. Projecting a replacement rate – retirement income as a share of pre-retirement income – for each household;
2. Constructing a target replacement rate that would allow each household to maintain its pre-retirement standard of living in retirement; and
3. Comparing the projected and target replacement rates to find the percentage of households ‘at risk.’”
The study applies the current student debt rates to previous generations and assigns the same percentages of lower home ownership and reduced retirement savings, and the increase in NRRI is 4.6%, from 51.6% to 56.2%.² That might not seem like a significant increase, but as of March of this year, the total civilian labor force was just over 159 million people,³ and 4.6% of 159 million means an increase of over 7 million people at risk of running out of money during retirement.
What to Do?
The elections have provided a significant sounding board for the importance of this issue. All of the current candidates realize that this is top of mind, especially for young voters.
While we don’t have a crystal ball for who the next president will be, or what types of policies will actually be put into place, it’s important to remember that small changes can have a big impact. Students, look into refinancing student loans, small changes in interest rates can mean big savings over time. Also, it’s important to make retirement savings a top priority, saving in your 20’s might seem inconsequential (especially if you don’t have much to save), but compounding growth is a benefit that outweighs the cost of waiting. Parents, talk to your kids about these issues, and if you have questions, we’re here to help.