4 Keys to the Millennial Lawyer’s Balancing Act of Paying Off Student Debt and Saving for The Future

The financial puzzle for millennial lawyers: What’s the best way to pay off student debt while saving toward retirement? Here are four steps toward a sustainable plan.

Millennials, in general, really like the idea of retiring early. In fact, when CNBC surveyed millennials aged 16–25, the average age at which they expect to retire was 59 (although this is a US stat, one would expect a similar response here in Canada). That is a whole eleven years earlier than the current CPP full retirement benefit eligibility and several years earlier than the average retirement age.

Realistically, based on the average millennial’s saving patterns, this goal of retiring early is not likely to be achieved. According to various Canadian studies, approximately 33% of people aged 18–34 have nothing saved for retirement.? By not starting early enough, it appears many will not be on track to retire in their early 60s.? For young lawyers, this inability to save early is compounded by the fact that they enter the workforce a couple of years after those in other careers.

Yet another challenge facing this generation, especially lawyers, is the inordinate amount of student debt that they are shouldering. Essentially, they face a perfect storm: large amounts of student debt, a delay in when they start getting paid, along with unrealistic expectations and a lack of preparation regarding their future responsibilities.

What should millennial lawyers be aware of when saving for retirement?

According to research from LendEDU, more than 25% of millennials aged 22–37 spend more on coffee?(Starbucks, anyone?) than they save for retirement. Unfortunately, this decision to put off saving for retirement may have drastic consequences in the future. Because although retirement may be decades away for millennials, they are not creating habits that lead to long–term financial success.

Adding to this the recent uncertainty in the economy (thanks, still, in large part to COVID and other world events), millennials already have an uphill battle to climb when it comes to saving for retirement. For instance, people aged 25–35 possess less wealth relative to their income than their baby boomer and Gen X forerunners did at those ages. Additionally, millennials need to be extra careful when planning for retirement in comparison with their predecessors because they can expect to live longer, meaning their money will need to last them for a longer time.

Compound this with the fact that few employers offer defined benefit retirement plans, and the threat of future medical expenses possibly not covered by Provincial health plans costing tens or hundreds of thousands of dollars, and millennials need to realize that they will have more responsibility for generating their own retirement security than prior generations. We discuss below the four things that every millennial should be thinking about.

1. The big dilemma: Should millennial lawyers pay off their student debt or save for retirement? Answer: Yes!

One of the biggest dilemmas that millennials face when planning for their financial futures is the choice between saving for retirement and paying off student debt. With outstanding student loan debt in Canada affecting 1.7 million borrowers and totalling approximately $22 Billion, student loan debt is a huge obstacle when it comes to securing a sound financial future.

According to some studies on the subject, millennials without student loans have saved nearly two times as much for retirement by age 30 as college graduates who have taken out student loans. This results in $18,200 in retirement savings for college graduates without loans at age 30, compared to $9,100 in retirement savings for college graduates with an average student loan balance of $16,230 at age 30. While these are US figures, the reality for Canadian lawyers is often worse, as the average debt load held by the end of law school is $71,400 (according to Lawyers Financial)!

Interestingly, even if they’re lucky enough that the debt is small and the student loan payments are manageable, the mere existence of the debt can be enough to curb saving. In short, this means that many millennials with student debt are prioritizing paying off the entirety of their student debt before saving for retirement, which is not always the smartest choice.

In fact, because student loan debt often has relatively low interest rates compared to other kinds of debt, it can be smarter to both pay off the debt and save for retirement by making the minimum payment on student loans every month while also contributing toward retirement savings. This way millennials can both pay off their student loans and benefit from the power of compounding through investing.

2. Millennial lawyers should consider refinancing their student loans.

Over 1.7 million Canadians hold student debt, and many may benefit from refinancing that debt. Refinancing student debt means swapping government-sponsored or private student loans for a private loan with a lower interest rate. This helps millennials because refinancing student debt for a lower interest rate decreases the total amount of money they would pay over the lifetime of their loans.? Even in this climate of rising interest rates, certain millennial lawyers can still benefit from refinancing.

However, there are also some detriments to refinancing that candidates must weigh before deciding to refinance. For instance, government-sponsored loans allow candidates to provide smaller payments with more flexibility if they cannot make payments. Switching to a private program will remove that safety net.

Therefore, people who do decide to refinance with a private lender should make sure that they have a small safety net of their own in the form of an emergency fund that could cover all their bills, including student loans, for a year. You really should weigh benefits (like an interest rate reduction) against detriments (like income-based repayment) when deciding whether to refinance.

3. Millennials should try to maximize their contributions to their TFSAs

In general, millennials should contribute the maximum amount of their income possible, ideally at least 10%, to some sort of savings (look to start with a TFSA). Although the exact number and percentage will differ from person to person, at the very least, millennial lawyers should ensure that they are contributing enough to maximize their annual, allowable TFSA contribution.? And then, as they get raises and bonuses, the extra income should be designated immediately topping off any unused to a retirement savings account. You won’t spend it if you don’t have it!

In 2024, the contribution limit for a TFSA has been increased to $7,000.? Meanwhile, the maximum for those that were eligible to open a TFSA since their introduction in 2009 could contribute $90,000 up until the end of this year.? This strategy makes more sense than contributing to an RRSP for many young lawyers because they are not likely in the top tax-bracket (when it is best to deduct those contributions).? Contributing to a TFSA also allows for greater flexibility in the event that funds are needed for an emergency.

4. Millennials should plan to have 10 times their final salary in savings.

A good goal for millennial lawyers is to, ultimately, have 10 times their projected final salary in savings (assuming retirement at age 70). Assuming that a person saves 15% of their income annually beginning at age 25, invests more than 50% on average of their savings in equities, here is a general scorecard for how much they should have accumulated:

• By age 30: Have the equivalent of your starting salary saved
• By age 40: Have three times your salary saved
• By age 50: Have six times your salary saved
• By age 60: Have eight times your salary saved
• By age 70: Have ten times your salary saved

Although every person is different when it comes to planning for retirement, this basic plan provides a simple guide for millennial lawyers to go by. The how and when to start utilizing an RRSP will be the subject for a future article.

Millennial lawyers, the road to a financially secure future is filled with unique challenges. While retiring at 60 might seem like a distant dream, achieving a stable and prosperous retirement is very much within your reach. The key is to start planning and investing now, following the straightforward steps outlined. Don't let uncertainty delay your financial progress. If you're ready to begin shaping your financial future today, reach out to Lamont Wealth Strategies. Let's arrange a Virtual Coffee Chat to discuss how we can help turn your retirement aspirations into achievable goals.