Class of 2018 Money Outlook

New college graduates face big challenges, like finding a good job, covering household bills while paying off student loan debt and saving for long-term financial goals that are decades off. But the future doesn’t have to be bleak for the Class of 2018.

Graduates of the Class of 2018 could retire by age 72 with careful budgeting and relatively modest retirement savings, according to a NerdWallet analysis. Savvy efforts could also make new graduates homeowners by age 36 — sooner if they’re willing to make a down payment that’s less than the traditional 20% of a home’s value. But it won’t come easy. Paying off their student debt and stashing away savings must begin as soon as they enter the workforce if they want to make these ambitious dreams a reality.

“Young people shouldn’t feel demoralized,” says Brianna McGurran, NerdWallet student loans expert. “Retiring, owning a home and achieving all the other trappings of adulthood is possible. New grads are in the best position of all: They have the chance to save smart from the beginning.”

NerdWallet analyzed the most recent data and projected numbers concerning new graduates, and commissioned a survey, conducted online by The Harris Poll in March 2018 of U.S. adults ages 18 and older. Among poll respondents, about 20% of the 1,542 who had pursued a degree beyond high school received their undergraduate degree or took their last undergraduate course within the past five years. This group is referred to throughout this report as “recent undergraduates.”

For a young adult, 72 is a long way off, and about six years older than the current average retirement age, according to the Organisation for Economic Co-operation and Development.

But since the late 1990s, adults have been staying in the workforce longer. That’s in part due to changes in Social Security benefits and economic necessity, but also because the aging population has more education than in generations past. Workers with more education tend to work longer, according to The Brookings Institution. The Bureau of Labor Statistics anticipates this trend will continue, projecting the number of civilian workers ages 75 and older will grow 6.7% each year from 2016 to 2026, faster than any other age group.

Based on the average salary of last year’s graduating class, new graduates would need to see steady but modest pay increases each year, invest 6% of their salary in a retirement account and keep other debts and spending at reasonable levels to reach our benchmarks.

Key findings

• Graduates of the Class of 2018 could retire by age 72 with diligent budgeting. This could come as a shock, as recent undergraduates cited a median anticipated retirement age of 63, according to the survey. For a few, however, the news could be encouraging: 11% said they don’t believe they’ll ever be able to retire.

• Nearly half of recent undergraduates (45%) have student loan debt, and 39% of those with debt don’t think it’s likely they’ll be able to pay it off within 10 years — even though a 10-year repayment plan is the most common for federal student loans.

• Homeownership is well within reach for the Class of 2018, who could save enough to put 20% down on their first home by age 36. For some, this could be a surprise, as recent undergraduates who have yet to buy a home said they anticipate being able to do so at age 31, on average, according to the survey.

• Those who wish to buy a home sooner could save a 10% down payment by age 30. Taking out a mortgage with less than 20% down would result in potentially higher monthly payments, with mortgage insurance tacked on.

What it would take to meet these goals

For this analysis, NerdWallet assumed graduates would find employment making an average salary, have access to an employer-subsidized retirement account, and make lifestyle and budgetary decisions that align with long-term financial goals. In determining the possible goal attainment ages of an entire graduating class, many assumptions must be made. The results are not exact projections for all members, but can provide a high-level view of what the cohort can expect.

To simplify the methodology and provide new grads with a saving and spending framework, we used the 50/30/20 budget, in which 20% of income goes toward savings and debt repayment. For the Class of 2018, we assumed student loans are the only major debt load they carry. We also assumed retirement and homeownership funds as their sole savings plans.

“Even with some credit card debt or a car payment, new grads can reach these goals at a reasonable age,” McGurran says. “They can bump up retirement savings every time they get a raise, buy a used car rather than new and comparison-shop for insurance. They can regularly review their spending to ensure it truly reflects what matters to them. All of these habits can mean more monthly savings.”

Generally, living on 80% of your salary in retirement should provide financial security. We assumed graduates will land a job with a moderately generous employer — one that would match 50% of employees’ 401(k) contributions up to 6% of their salary, a common offering among employers with retirement benefits. Retiring at 72 requires taking full advantage of this match by investing 6% of each paycheck until they stop working.

Under a standard 10-year repayment plan, the default repayment plan for federal student loans, graduates need to budget a decent chunk of their income for paying down this debt. We estimate the average student loan debt load of 2018 bachelor’s degree recipients at $28,446, based on data from The Institute for College Access & Success. Once this is paid off, a greater portion of their income can go toward a down payment fund.

Grads may also be able to refinance their student debt once they’ve built good credit and have a steady income. Refinancing could get them a lower student loan interest rate, which means more room to save for retirement or a home.

NerdWallet’s 2018 Home Buyer Report found 82% of millennials, ages 18 to 34, believe buying a home is a priority, despite popular sentiments that some would rather rent, travel or squat indefinitely. For our analysis, annual down payment fund savings is based on 20% of income earmarked for savings and debt repayment, minus student loan payments and retirement contributions. By saving for a 20% down payment, graduates can be in a national median-priced home by age 36. This down payment results in a smaller loan with lower payments.

Achieving goals sooner

Recent undergraduates cite age 30 as the median age at which they anticipate being able to purchase their first home, and nearly 3 in 10 (28%) believe they’ll be able to retire before age 65. Both goals are lofty, but not impossible to achieve.

Invest more. By contributing 9% instead of 6% of their income to their 401(k), the Class of 2018 could retire by age 70. Contributing 12% yields retirement at 69. Conversely, by contributing just 3% and not taking advantage of a full employer match, the retirement age climbs to 77.

Choose the right student loan repayment plan. Most graduates will leave college on a standard 10-year repayment plan, the default option, according to the Department of Education. But 39% of recent undergraduates with student loan debt say it’s unlikely they’ll be able to pay off their debt in a decade, according to the survey. If your student loan payments are too high, it could hinder your ability to invest in your retirement“New grads have time on their side,” McGurran says. “Money saved for retirement now will compound, making a huge difference in their financial security later on. That means it’s OK, and even preferable, for new grads to choose student loan repayment plans that give them breathing room so they can start saving for retirement right away.”

Earn more. Most graduates can reasonably expect a 3.5% increase in pay year after year — 2% due to inflation and 1.5% in real wage growth. Some years there will be promotions; others may bring smaller increases. But this is relatively modest growth, and graduates could further boost their earning power by learning new skills, staying competitive in their field and asking for raises.

Make a smaller down payment. For those who want to own a home before age 36, having a smaller down payment is one potential solution. Our analysis shows new graduates could be ready to put 10% down by age 30, the median age at which recent undergraduates anticipate being able to make such a purchase, according to the survey. But down payments of less than 20% come with added costs, like mortgage insurance and a bigger loan.

Pool resources. For this analysis, we assumed one income, since Americans are increasingly delaying marriage, according to U.S. Census data. However, should they decide to share their assets, new grads may be able to allocate more of their income toward their student debt and long-term savings.

Potential slowdowns

More than one-third of all Americans (36%) and 21% of recent undergraduates who haven’t yet purchased a home don’t believe homeownership is in their future, according to the survey. Also, 11% of recent undergrads don’t see retirement in their future. These sentiments are understandable, and real life isn’t as simple as projecting anticipated earnings and savings in a spreadsheet. Financial goals can be derailed both by choices and circumstances beyond our control.

Credit card debt. American households carrying credit card debt from month to month owe an average of $6,081, according to the most recent NerdWallet Household Debt Study. Failing to pay off credit card balances monthly can turn a potentially healthy relationship with credit — building good credit for things like lower interest rates on a mortgage, for example — into bad news.

Assuming an average credit card interest rate of 14.87%, that $6,081 in debt would accrue $904 in interest annually. Applying $904 each year to their retirement savings instead, grads could amass approximately $542,000 more by age 72.

Health care costs. Even with employer-provided health benefits, employees are picking up a larger share of the tab. They’re paying more toward premiums and are likely to be in a plan with a higher deductible than in years past, according to the Kaiser Family Foundation.

High housing costs. Depending on where they live, graduates may have to allocate more of their earnings for housing expenses. In many large cities across America, median rent well exceeds 30% of household income, according to census data. And if home prices in their city of choice are higher than the national median, they may have to save longer to reach their down payment goals.

Having a family. Having children is a decision with many complex considerations, and money is one of them. A 2017 NerdWallet analysis found the first year of a baby’s life can alone cost upward of $21,000, and Americans consistently underestimate these potential expenses.

Unexpected emergencies. A leaky roof, job loss or long-term illness — any one of these could hinder financial goals. New grads may not be able to avoid these speed bumps, but they can (and should) build an emergency fund into their budgets to minimize the impact. Drawing emergency cash from the wrong sources — for example, amassing credit card debt or postponing student loans without exploring all repayment options — can have long-term consequences.

According to data from the Department of Education, 6.5 million of all student borrowers were in either deferment or forbearance in the fourth quarter of 2017, and 4.6 million were in default. Both deferment and forbearance are solid choices when borrowers have a hardship, but there are other options that can make payments easier to handle.

Applying for income-driven repayment plans, extending the repayment term through federal consolidation, or refinancing with a private company are available for those who want to save on student loans. This calculator can help borrowers determine which option is right for them:

Methodology

This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from March 8-12, 2018, of 2,017 U.S. adults ages 18 and older, among whom 321 have received an undergraduate degree or completed their last undergraduate course within the past five years, referred to throughout this report as “recent undergraduates.” This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact [email protected].

NerdWallet’s 2015 New Grad Retirement Report, the last such analysis from NerdWallet, estimated the Class of 2015 would be able to retire at age 78. Methodology in this 2018 analysis removes consideration of increasing rental costs, putting greater emphasis on subjects’ ability to budget for the various costs associated with their housing options, lifestyle and long-term financial goals. In addition, student loan debt is based on more conservative estimates in this most recent analysis.

Income at graduation ($51,022) is based on early estimates for the Class of 2017 bachelor’s degree graduates from the National Association of Colleges and Employers.

Lifetime income is based on a 3.5% annual growth rate, including 2% inflation and 1.5% performance-based pay increases.

Retirement savings are based on modest 6% returns, compounded annually, and a 50% employer match up to 6% of income.

Social Security income assumes 77% of current average Social Security payments, adjusted for inflation.

Retirement income targets are based on current estimated life expectancies from the Social Security Administration for people born in 1995.

Student loan debt at graduation is based on 2016 state-level estimates from The Institute for College Access & Success and may understate true national averages due to voluntary reporting and the absence of data from for-profit institutions.