9 Unexpected Ways Debt in Your 20s and 30s Affects Your Retirement Years
Written by
Laura Beck
Edited by
Molly Sullivan
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A tough pill to swallow but true: The financial decisions you make in your 20s and 30s can have far-reaching consequences, especially when it comes to debt.
While some debt can be strategic, others can significantly impact your retirement years in ways you might not expect. GOBankingRates spoke to financial experts to find out the unexpected ways debt in your 20s and 30s can affect your retirement years.
Also see things Gen Zers can do to deal with debt.
The ‘Million Dollar Mistake’
Dr. Barbara O’Neill, CFP, owner and CEO of Money Talk, highlighted what she calls the “million dollar mistake.” This refers to the opportunity cost of prioritizing debt repayment over saving for retirement.
“I lost the opportunity to save more than $1 million by starting my 403(b) account at age 34 instead of 25 and losing nine early years of compound interest that could have compounded for 50 plus years,” O’Neill said.
Essentially, you should start retirement savings as early as possible, even while managing debt.
Less Money To Save
The more money diverted to debt repayment in early adulthood, the less you can save for retirement.
O’Neill illustrated this with a stark example. “If someone age 25 saves $50 biweekly in a retirement account earning a 6% return for 40 years, the account would grow to $215,745. If the biweekly savings is $200 instead, the account would grow to $862,979.”
Higher Interest Rate Loans
If you’re an overextended borrower with a fair credit score, you might be paying higher interest rates on your debt. “This means that their monthly payments are higher and they have less money to save,” O’Neill said.
This cycle can significantly impact long-term financial health — and is one worth tackling while you’re younger and it’s more manageable.
Delayed Homebuying
“Young adults who are focused on repaying debt may get a delayed start in the housing market, which can reduce the amount of equity that they are able to accumulate,” O’Neill explained.
This delay can affect retirement plans, as home equity is often a significant source of retirement wealth.
The Need for Trade-Off Strategies
O’Neill warned that insufficient savings due to early-life debt can force retirees into catch-up strategies with significant trade-offs.
These might include “working longer than planned [age 70 instead of 67], working part-time during retirement, downsizing to a smaller home, selling possessions, relying on help from family members or government aid, and moving to a less expensive location.”
Missed Opportunities for Compound Growth
Marguerita M. Cheng, CFP and expert at Annuity, emphasized the importance of early saving: “Individuals who start saving for retirement in their 20s are building wealth for their future.”
She said people should start small and be consistent because even small contributions can grow significantly over time due to the magic and glory of compound interest.
Impact on Life-Cycle Consumption
Economics Prof. Stephen M. Miller of UNLV referenced the life-cycle model of consumption, which divides a person’s financial life into three phases. He said debt in the early phase can significantly impact the middle and retirement phases.
“Households smooth consumption relative to income by using debt and credit. That is, income has more volatility than consumption,” Miller said.
The Double-Edged Sword of Debt
Dutch Mendenhall, a financial entrepreneur and founder of RAD Companies, offered an interesting view of debt. While he acknowledged that frivolous debt can make a person less financially stable, he also sees potential in strategic debt use.
“Debt doesn’t have to be a burden,” he said. “It can be a powerful wealth-building tool if used right.”
He added that using debt for investments has the potential to boost earnings and grow wealth — just make sure to do it responsibly.
The Impact on Critical Financial Decisions
Josh Richner, founder of FaithWorks Financial, pointed out how early debt can delay important financial milestones.
“If you’re constantly paying off these debts, you may delay critical financial decisions like purchasing a home until your 40s,” he said. “This delay can mean carrying mortgage payments into your retirement years, reducing your financial flexibility and potentially increasing stress.”
Strategies To Mitigate the Impact
- Start saving early: Even small amounts can grow significantly over time – so consult with a financial professional and get started today.
- Prioritize retirement contributions: “Take advantage of your employer-sponsored retirement plan and contribute enough to receive the full match,” Cheng said.
- Use debt strategically: Consider Mendenhall’s advice to use debt for investments that can generate returns, rather than for lifestyle expenses.
- Balance debt repayment with saving: Don’t focus solely on debt at the expense of saving for retirement.
- Consider long-term implications: Embrace the long-term growth mindset of preparing for the future rather than paying for the past.
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