non-retirement priorities: pay off loan vs 529 vs other

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

non-retirement priorities: pay off loan vs 529 vs other

Postby mombo » Sat Aug 31, 2013 8:02 pm

We're still relatively new to BH and want to pick your brains about how to allocate some extra non-retirement money.

(about us:
ages: 34 and 35
taxes: 33% federal, almost 10% state (CA)
emergency: 5 months of expenses
debt: student loan of $52 at 3.25%, home loan of $775 at 4.25%
retirement is under good control: 401K and IRAs maxed out, 1/3 bonds, 2/3 stocks)

Each month, we have an extra $4000 and need help figuring out where to put it. We've been putting money into various pots but have no idea whether we should be doing things differently.

Our upcoming needs/options are:
1) fund our vanguard 529
2) pay off a student loan of $52K at 3.25% (we're putting in about $500/month, which is more than the minimum $300/mo).
- Should we be thinking of loans as negative bonds and sell bonds to pay off the loan?
3) put extra toward the principal on our home loan
4) saving for our next car which might need replacing in about 5 years
5) in 9 years we have a $100K loan that will be due (it's a 0% interest loan)
6) saving our next vacation!

Right now, we're allocating for these things as follows (I know it's not tax efficient but we were trying to keep things simple since we're beginners at this):
$1000/month to a VG lifestrategy moderate growth fund (for the $100K loan that will be due in 9 years)
$1000/month to the 529 (it's in the moderate age-based option: VG growth portfolio -- we probably should have been more aggressive since we have 17 years on this one)
$1000/month to a target retirement 2015 (this has $30K in it and is supposed to be for paying off the student loan and saving for the next car)
$500/month to the student loans
$500/month toward vacation savings (this just sits in a checking account)

Questions:
1. should we sell some bonds to just pay off the student loan (in the vein of treating a loan as a negative bond)
2. should we stop funding the 529 and instead put the money toward the student loan?
3. at what point should we start making extra payments to our home? (I was thinking maybe once the school loan is gone that money could go to the home)
4. are we making any egregious oversights?

Thanks!

Mombo
Last edited by mombo on Sun Sep 01, 2013 9:02 pm, edited 1 time in total.
mombo
 
Posts: 8
Joined: Sat Dec 31, 2011 10:34 pm

Re: non-retirement priorities: pay off loan vs 529 vs other

Postby Grt2bOutdoors » Sat Aug 31, 2013 9:13 pm

mombo wrote:We're still relatively new to BH and want to pick your brains about how to allocate some extra non-retirement money.

(about us:
ages: 34 and 35
taxes: 33% federal, almost 10% state (CA)
emergency: 5 months of expenses
debt: student loan of $52 at 3.25%, home loan of $775 at 4.25%
retirement is under good control: 401K and IRAs maxed out, 1/3 bonds, 2/3 stocks)

Each month, we have an extra $4000 and need help figuring out where to put it. We've been putting money into various pots but have no idea whether we should be doing things differently.

Our upcoming needs/options are:
1) fund our vanguard 529
2) pay off a student loan of $52K at 3.25% (we're putting in about $500/month, which is more than the minimum $300/mo).
- Should we be thinking of loans as negative bonds and sell bonds to pay off the loan?
3) put extra toward the principal on our home loan
4) saving for our next car which might need replacing in about 5 years
5) in 9 years we have a $100K loan that will be due
6) saving our next vacation!

Right now, we're allocating for these things as follows (I know it's not tax efficient but we were trying to keep things simple since we're beginners at this):
$1000/month to a VG lifestrategy moderate growth fund (for the $100K loan that will be due in 9 years)
Hello and welcome to the forum.
Not the most tax-efficient as it holds Total Bond Market Index and throws off taxable income every quarter. The closer to your target payoff date you want to hold less equity and more stable fixed income, as risk tends to show up just as you need the money. Or just use a plain old FDIC insured savings account - $1K * 108 months (9 years) puts you above your goal with zero risk of loss. The same can not be said of holding equity or bond funds.

$1000/month to the 529 (it's in the moderate age-based option: VG growth portfolio -- we probably should have been more aggressive since we have 17 years on this one) If you continue with the growth portfolio, and the same contribution amount, you should accumulate a large sum of monies for higher education.
$1000/month to a target retirement 2015 (this has $30K in it and is supposed to be for paying off the student loan and saving for the next car)
$500/month to the student loans
$500/month toward vacation savings (this just sits in a checking account)

Questions:
1. should we sell some bonds to just pay off the student loan (in the vein of treating a loan as a negative bond)
2. should we stop funding the 529 and instead put the money toward the student loan?
3. at what point should we start making extra payments to our home? (I was thinking maybe once the school loan is gone that money could go to the home)
4. are we making any egregious oversights?

Thanks!

Mombo
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 10227
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: non-retirement priorities: pay off loan vs 529 vs other

Postby JamesSFO » Sat Aug 31, 2013 10:20 pm

My $0.02 is to pay down debt, especially the student loans. I mean why have $30K sitting in 2015 fund vs. just pay off your student loans? You could be rid of your student debt in like 6 months (4K*6 = 24) after putting the $30K against the $52K... Then build up a bit more emergency fund and then see what you feel the priorities are.
User avatar
JamesSFO
 
Posts: 2082
Joined: Thu Apr 26, 2012 11:16 pm

Re: non-retirement priorities: pay off loan vs 529 vs other

Postby dickenjb » Sun Sep 01, 2013 8:52 am

Calculate your after tax cost on the mortgage loan and student loans. Use that to decide whether to put extra money towards mortgage or student loans.

Balanced funds in taxable make no sense in your 33% bracket. You want to own bonds in tax deferred and equities in taxable.
Philly Chapter Coordinator
dickenjb
 
Posts: 2940
Joined: Tue Jan 05, 2010 2:11 pm
Location: Philadelphia PA

Re: non-retirement priorities: pay off loan vs 529 vs other

Postby grabiner » Sun Sep 01, 2013 9:46 am

dickenjb wrote:Calculate your after tax cost on the mortgage loan and student loans. Use that to decide whether to put extra money towards mortgage or student loans.


The student loan is not tax-deductible in the 33% bracket, so it has a lower effective rate. In addition, it has a shorter term, so you get the benefit of paying it off earlier. If you pay off either loan early, the student loan should be paid off first.

And what are the terms of the $100K loan which will be due in 9 years? Is it worth paying off early? If not (say it is at 0%), then the appropriate way to invest to plan to pay it off is in bonds with a similar duration. Given your tax situation, that would be CA Long-Term Tax-Exempt, or you could dedicate a portion of your 401(k) to intermediate-term bonds and hold a stock fund in taxable, then plan to sell the stock to pay off the loan and move the bonds in your 401(k) into stock.

The same strategy would be appropriate for paying off the student loan, except that you can get rid of it in a year, and the loan interest is much higher than the rate on one-year munis.
David Grabiner
User avatar
grabiner
Advisory Board
 
Posts: 13178
Joined: Wed Feb 21, 2007 12:58 am
Location: Columbia, MD

Re: non-retirement priorities: pay off loan vs 529 vs other

Postby mombo » Sun Sep 01, 2013 9:02 pm

Thanks everyone for the advice! It sounds like we should pay off the student loan first. In terms of how to do it (and how to get rid of the Life Cycle and target retirement funds), should we just pick a day and sell the life cycle and target retirement funds? Or do people tend to sell some fraction each month to sort of "dollar cost average" (so that we don't accidentally sell on a bad market day)?

As far as the 100K loan, it's a 0% interest loan so we're planning to pay it off only when it's due and will use CA tax-exempt bonds to save up.

Thanks again!

Mombo
mombo
 
Posts: 8
Joined: Sat Dec 31, 2011 10:34 pm

Re: non-retirement priorities: pay off loan vs 529 vs other

Postby Grt2bOutdoors » Sun Sep 01, 2013 9:06 pm

I sell when I need the money, irrespective of up or down days. You can't time when the market rises or falls.
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 10227
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: non-retirement priorities: pay off loan vs 529 vs other

Postby grabiner » Sun Sep 01, 2013 9:17 pm

mombo wrote:Thanks everyone for the advice! It sounds like we should pay off the student loan first. In terms of how to do it (and how to get rid of the Life Cycle and target retirement funds), should we just pick a day and sell the life cycle and target retirement funds? Or do people tend to sell some fraction each month to sort of "dollar cost average" (so that we don't accidentally sell on a bad market day)?


When you are reducing your risk (selling stocks to buy bonds or pay off loans), or keeping the same risk (selling stock funds to buy an equal amount of stock elsewhere), you don't need to dollar-cost average; dollar-cost averaging is done for the psychological benefit of increasing risk gradually, or done necessarily because you make investments from every paycheck.

You might want to wait to sell stock funds if you have substantial short-term gains and waiting until you have held them more than a year will make the gains long-term.
David Grabiner
User avatar
grabiner
Advisory Board
 
Posts: 13178
Joined: Wed Feb 21, 2007 12:58 am
Location: Columbia, MD

Re: non-retirement priorities: pay off loan vs 529 vs other

Postby JamesSFO » Sun Sep 01, 2013 9:18 pm

mombo wrote:...

As far as the 100K loan, it's a 0% interest loan so we're planning to pay it off only when it's due and will use CA tax-exempt bonds to save up.

...


Just make sure to shorten your duration over time since the CA Intermediate Tax-exempt will stay at approx 5-7 yr duration but as you get closer to year 9-10 you will absolutely need the money so over time you will need to migrate more of the money to shorter duration bond funds.
User avatar
JamesSFO
 
Posts: 2082
Joined: Thu Apr 26, 2012 11:16 pm

Re: non-retirement priorities: pay off loan vs 529 vs other

Postby mombo » Sun Sep 08, 2013 1:57 am

Sorry to be away for a while. I just wanted to say thanks to everyone for the advice!
mombo
 
Posts: 8
Joined: Sat Dec 31, 2011 10:34 pm


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: Bing [Bot], cfs, investwherewhat123, Michael_Fisher1, nashirak, outrnm, ruralavalon, s0me0nesmind1, Woodshark and 68 guests