The Growing Impact of Student Loan Debt on Retirement Security

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Gregory Higgins
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1 The Growing Impact of Student Loan Debt on Retirement Security Women s Institute for a Secure Retirement June 28, 2016 James Mahaney, Vice President Strategic Initiatives

2 Younger Households Already at Greater Risk 60% National Retirement Risk Index* 59% 58% 56% 54% 52% 52% 50% 48% Overall NRRI Households *The National Retirement Risk Index (NRRI) is produced by The Center for Retirement Research at Boston College. The results are as of February Prudential is the exclusive sponsor of the NRRI. 2

3 More are Borrowing 80% 70% 60% Percentage of Graduates with Student Loan Debt 54% 71% 50% 40% 30% 20% 10% 0% Source:. Mark Kantrowitz, Who Graduates With Student Debt?, December,

4 More is Being Borrowed $40,000 $35,000 Average Amount of Student Loan Debt $35,051 $30,000 $25,000 $20,000 $15,000 $10,000 $11,491 $5,000 $ Source:. Mark Kantrowitz, Who Graduates With Student Debt?, December,

5 Retirement Contributions are Being Delayed Half (of survey participants) say they delayed contributions to retirement accounts, a 22 percent jump from American Institute of CPAs survey of Americans with student loans May,

6 There are Long-Term Repercussions Paying off student loans versus contributing to a 401(k) plan Potentially, a four-part loss: Employee contributions Investment earnings on employee contributions Employer matching contributions Investment earnings on employer matching contributions 6

7 Example: The Four Components of Financial Loss Recent college graduate Age 22 $45,000 starting salary Employer matches 50% of every $1, up to 6% of salary $31,000 in student loans $318 monthly loan repayment based on ten-year standard repayment plan $225 monthly (6% of initial salary) is not contributed for first ten years What is the effect over time? 7

8 Example: The Four Components of Financial Loss Contributions $450,000 Lost 401(k) Wealth at Age 67 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 $27,000 $27,000 Without Match With Match 8

9 Example: The Four Components of Financial Loss Contributions Lost 401(k) Wealth at Age 67 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 Assuming investments would have earned 6% annually $150,000 $246,534 $246,534 $100,000 $50,000 $0 $27,000 $27,000 Without Match With Match 9

10 Example: The Four Components of Financial Loss Contributions $450,000 Lost 401(k) Wealth at Age 67 $400,000 $350,000 $300,000 $250,000 $13,500 $200,000 $150,000 $246,534 $246,534 $100,000 $50,000 $0 $27,000 $27,000 Without Match With Match 10

11 Example: The Four Components of Financial Loss Contributions $450,000 Lost 401(k) Wealth at Age 67 $400,000 $350,000 $123,267 Assuming investments would have earned 6% annually $300,000 $250,000 $13,500 $200,000 $150,000 $246,534 $246,534 $100,000 $50,000 $0 $27,000 $27,000 Without Match With Match 11

12 Example: The Four Components of Financial Loss Contributions $450,000 $400,000 $350,000 Lost 401(k) Wealth at Age x $410,300 $123,267 $300,000 $250,000 $273,534 $13,500 $200,000 $150,000 $246,534 $246,534 $100,000 $50,000 $0 $27,000 $27,000 Without Match With Match The calculations are for illustrative purposes only 12

13 Conclusion 401(k) contributions - especially up to the maximum employer match are very valuable to young employees Families should become educated on financial aid options and future loan repayment options prior to selecting a college New employer benefit solutions are emerging 13

14 For more information or to explore original research and insights, visit us at research.prudential.com. To join our mailing list, contact us at The Prudential Insurance Company of America and its affiliates, Newark, NJ

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