Dear Alpha Consumer,
My husband and I are both in graduate school and are living off grants and loans. We both have 401(k) plans from our previous life in the working world but are no longer contributing to them. Since we will both be in school for some time before being in the workforce again, it's going to be a long time until we start contributing to them again. Would it make sense for us to contribute to it now, even if it's on borrowed money? How would we figure out how much to contribute?
That is a great question, and something I also struggled with while I was in grad school. It's hard enough to meet all your expenses without a steady income — and avoid racking up credit card debt — much less save for retirement. But when you go to grad school after working for several years, as so many people do, it can feel strange to forget about retirement altogether.
Since I had recently interviewed Carmen Wong Ulrich, author of Generation Debt, on young people and money, I asked for her perspective. She says that while her first response is that it might be a good idea mathematically, because you may be able to earn more on your retirement accounts than you are paying to borrow money (if your student loans carry low interest rates), the answer is more complicated than that.
One issue is taxes. Ulrich says that because loan and grant money doesn't qualify as earnings, you may not be able to put it into a tax-friendly retirement savings account. But if you took a part-time job (or held one over the summer), then you could direct those earnings to a Roth IRA, which is for post-tax earnings.
She also says not to worry too much. Even if you delay retirement savings while you're in school, you can catch up once you start working again as long as you make a commitment to putting away as much as possible. Check out usnews.com's free retirement calculators here and here as well as at Dinkytown.net to help you plan.
The safest bet? "Manage those loans well now, lock in the lowest rates possible, get part-time jobs for income and to open an IRA, and post-graduate school, make a commitment to investing aggressively for retirement," says Ulrich.