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 Dear
Dr. Don,
I am a 25-year-old college graduate and I start my first
real job next week. I will have approximately $1,100 extra each month to
invest. I have no credit card debt but I do have $26,000 in student loan
debt, consolidated at 5.1 percent. I have $4,000 in savings but no retirement
account set up. I plan on opening a 401(k) the day I start work.
My company does not match contributions but rather gives bonuses after the first
year of employment.
My question is: "Should I focus on paying
down my student loan while making smaller contributions to a 401(k),
or should I make large contributions to the 401(k) and take longer
to pay off my student loans?" This is a big area
of disagreement between my boyfriend and me. I think I should focus on building
a good retirement base first, and then focus on the loan, he thinks the opposite. I
can't find an answer to this situation anywhere.
-- Sarah Stash  Dear
Sarah,
There's no one right answer. Personal finance
is called that because it's making financial decisions
that are right for you. That said, I'm with you.
Start early in your career, making investing for
your retirement a priority. Since your company
isn't matching contributions, you should consider
other investment alternatives to the 401(k),
namely the Roth IRA, as a potential first choice
for retirement savings in your 20s.
Fidelity.com has a retirement work
sheet, "Which
IRA is Right for You?" that helps you
decide between a Roth IRA and a traditional IRA.
If the work sheet points you toward a Roth IRA
account then put the 401(k)
on the back burner. If the work sheet points you
to the traditional IRA then keep with your plan
to open the 401(k) account.
The contribution limit on a Roth IRA for the 2007
tax year for people under age 50 is $4,000. You
estimate that you'll have $1,100 per month or $13,200
per year to either invest or use to pay down the
student loan. If it makes sense to fund a Roth IRA
you still have $9,200 to put to work. I'd suggest
splitting the money, putting two-thirds in the 401(k)
and using the other third, plus year-end bonus money,
to pay down the student loan.
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