For most of today’s college graduates, 73 is the realistic retirement age due to college loan payments, according to a study released today.
NerdWallet examined the financial profile of a typical college graduate with a median debt of $23,300 and found that yearly loan repayments prevent retirement savings contributions.
The study created retirement projections for three different financial profiles: the median graduate, with median debt and salary; the struggling graduate, with high debt and a below-average salary; and the well-off graduate, with low debt and an above-average salary.
According to NerdWallet:
• $23,300 is the median debt for a student at graduation.
• 18 percent of students are unemployed at graduation.
• $45,327 is the median starting salary for those who do have jobs.
• 10 years is the standard loan repayment plan.
• $2,858 is the average yearly loan repayment.
• Over 7 million college graduates are currently estimated to be in default.
For the median college graduate with a debt of $23,300, the study found 73 to be the projected age of retirement. The main reason for this is that seven percent of a student’s earnings go toward yearly college loan payments for the first 10 years of his or her career. By age 33, when the loan is typically paid off, they have saved just $2,466 for retirement. This creates a serious opportunity cost, says NerdWallet, as the money could have been earning a compounded rate of return every year for those 10 years if instead the money had been invested for retirement. At the projected retirement age of 73, the lost savings directly attributable to a median student debt of $23,300 is $115,096.
The well-off graduate can expect to retire at age 67. The reduced debt load and above-average salary results in $40,406 that this graduate is able to save for retirement during the first 10 years of her career, resulting in a $446,452 difference in retirement savings by age 73.
For the struggling graduate, the retirement outcome isn’t dramatically different from the median graduate. They can expect to retire at age 75, relying more heavily on Social Security to finance retirement. However, a substantial reduction in Social Security benefits or the disappearance of the program altogether would significantly alter that retirement equation.
Being conscious of this problem and tailoring financial and career planning accordingly can go a long way toward achieving retirement objectives, says NerdWallet. Making above-average yearly contributions to a retirement account, working for an organization with a 401(k) match, and making sure to invest money in index tracking mutual funds are three ways to help add years to retirement, it says.