Young professionals face barriers to saving for retirement

UTICA — Young professionals hear the message early and they hear it often — start saving for retirement as soon as possible.

While the message is a good one, the tough economic times of the past few years have changed the playing field in a way that doesn’t always make that the best option for some young professionals, says Michelle Shauger, a Utica–based regional vice president with Primerica Financial Services.

A recent story on www.usatoday.com says that the amount of student loans taken out in 2011 crossed the $100 billion mark and the total loans outstanding will exceed 

$1 trillion for the first time ever this year. The Federal Reserve Bank of New York and the U.S. Department of Education report that Americans now owe more on student loans than on credit cards.

That scenario is the result of both traditional young students as well as older, non-traditional students returning to school, often after they were laid off during the recession, the story said.

Whoever the debt-holder is, the problem remains the same, Shauger says. People are graduating from college and entering the work force with crippling amounts of debt. The USA Today story noted that full-time undergraduate students borrowed an average of $4,963 in 2010. Multiply that times the four years it takes to achieve a bachelor’s degree and those students are graduating with close to $20,000 in debt. 

“The largest issue is that debt-to-income ratio is so large, it doesn’t enable people to save in a significant way to accomplish their goals and dreams,” she says. Even if those graduates are lucky enough to land a job right away, their debt is strangling their income, she adds.

On top of that, student-loan interest rates have risen from a once favorable low rate of about 2 percent to rates in the 5 to 6 percent range, Shauger says. That means it’s taking people longer and longer to pay off this debt as they are borrowing larger amounts at a higher rate.

So how do people who’ve practically grown up hearing they need to start saving for retirement as soon as they start working manage to actually save for retirement? The answer could be to steer away from that typical “American Dream” scenario of go to college, graduate, get a job, buy a car, get married, buy a house, Shauger says.

Maybe renting is a better option over buying a house, she says. Also, consider buying a used car instead of a new one, or use public transportation. The goal, Shauger says, is to work on keeping your expenses down as much as possible to free up money to pay off that college debt. Otherwise, she says, people end up struggling to meet all their expenses, relying on credit cards to bridge the gap, and still aren’t saving any significant money towards retirement.

“People build their [financial] house all wrong,” she says. “Then they have to tear it down and start all over again.”

The message to focus on paying off debt and delay saving for retirement goes against everything people are typically told, Shauger says, but if people do it right, they can still save up plenty towards retirement.

Take for example a client who is 25 and has $1,000 in monthly debt. If he sets aside $100 a month towards retirement over the next 40 years, he will save over $637,000, Shauger says. But if that same client first spent time focusing on paying off that debt, and then once free of that debt, began putting that $1,000 a month towards retirement, he would save more than $765,000 in half the time.

Whichever option someone chooses, he/she needs to maintain that focus on paying off debt until it’s gone, Shauger says. Students also have some options before they enter college to try and offset some debt.

Prospective students need to be proactive, she says, researching college options and seeking out aid opportunities. These days, students are also encouraged to apply to many schools so that any admission packages can be used as bargaining chips with other colleges, she says.

Recent graduates should research whether or not their student loans can be forgiven — a practice that is common in some fields — or look into consolidating their debt into one loan if they can find an attractive option. 

“The student loan forgiveness is typically in human-service careers where there is need,” Shauger says. Examples include teachers in inner-city schools, doctors in low-income areas, or social workers in urban areas. “Students can be proactive and research this before choosing a major and where they are going to live,” she says. “It’s never too late to look up their information and see if their loans qualify.”

 “People just need to become good consumers,” Shauger says.

Employer role

Employers also have a role to play, Shauger notes. The most effective thing employers can do to help their employees get ahead on retirement planning and debt management is to provide information and education.

“Something as simple as a 45-minute lunch-and-learn opportunity could be the answer,” Shauger says. “Employers could give their employees a $10,000 a year raise, but without education they will be no better off a year later.”

Organizations that host such events are helping their employees learn and change their futures. “What the employee does with it is up to them,” she says. “It’s literally like teaching the people to fish instead of giving them a fish. And you know what happens then? They eat forever.”

Founded in 1977, Duluth, Ga.–based Primerica is a financial-services marketing company with more than 90,000 licensed representatives that provide life insurance, mutual funds, annuities, and other financial products. The company insures more than 4.3 million people and has about 2 million investment clients. Primerica trades on the New York Stock Exchange under the PRI ticker symbol.