Pay Debt or Invest @ 30 y/o?

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FlightBoy
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Pay Debt or Invest @ 30 y/o?

Post by FlightBoy »

I would assume many people have asked this question. But is it better to pay off debt or save for retirement?

My wife and I are 30. We have a total of $65k in student loan debts (interst rates range from 3.1% to 3.5%). Our household taxable income of about $110k. Total we have about $35k in savings, mostly all in our Roth's, (we started late). and we are saving for a downpayment on a home, so our savings account for the home and emergect fund totals $105k.

After we buy a home and put aside our emergency fund, do we use excess money to pay down debt or invest? And as years go by, do we pay off our mortgage early or invest for retirement first?
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thedayisbrave
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Re: Pay Debt or Invest @ 30 y/o?

Post by thedayisbrave »

Paying down debt is always a good idea. It might help if you give us an idea of what your monthly expenses are. The only debt I would not pay down unless I had extra cash that I had nothing to do with would be the mortgage - you get a lot of tax benefits from having a mortgage. A mortgage is the only "good" debt out there, provided you don't go in over your head and buy more house than you need/can afford.

The general rule of thumb is to contribute to retirement accounts (you will never get this space back), then put any extra toward paying down the debt... ie, don't contribute to any taxable investments until your debt is paid down. Basically what you're doing is 'investing' with a guaranteed 3%-3.5% rate of return.
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FlightBoy
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Re: Pay Debt or Invest @ 30 y/o?

Post by FlightBoy »

thedayisbrave wrote:Paying down debt is always a good idea.....
thedayisbrave wrote: The general rule of thumb is to contribute to retirement accounts (you will never get this space back), then put any extra toward paying down the debt....

I'm not sure I understand. Should I pay extra onto debt or contribute to my IRAs?

Do mortgages (I never had one) offer more tax advantages than student loans (interest paid can be a deduction I think)?
cmr86
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Re: Pay Debt or Invest @ 30 y/o?

Post by cmr86 »

thedayisbrave wrote: The general rule of thumb is to contribute to retirement accounts (you will never get this space back), then put any extra toward paying down the debt...
Depends on the situation.
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pennstater2005
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Re: Pay Debt or Invest @ 30 y/o?

Post by pennstater2005 »

Here are some good reads regarding this subject:

http://www.bogleheads.org/wiki/Paying_d ... _investing


http://www.bogleheads.org/forum/viewtop ... 2&t=136385 (these are higher interests student loans then yours but a good thread nonetheless)
Last edited by pennstater2005 on Tue Jun 03, 2014 3:47 pm, edited 1 time in total.
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Twins Fan
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Re: Pay Debt or Invest @ 30 y/o?

Post by Twins Fan »

People have asked... and they always get answers from both sides of the fence.

Your interest rates are not too bad, so some would say to make sure and try to fill all tax advantaged space first then pay off debt.

More debt averse folks will say to make sure and get any company match in a 401k and start knocking out the debt.

I don't think either way is wrong. I am more ofa debt averse type though. With the combined income for you guys I would be anxious to knock out the student loans. Just me though.

It's a personal decision really.
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Re: Pay Debt or Invest @ 30 y/o?

Post by assumer »

Twins Fan wrote:It's a personal decision really.
I agree.

There may be some small mathematical advantage to one or the other, depending on the interest rates and the variance of the investment in question.

But at the end of the day, in 30 years from now, I doubt it will really matter.

What really matters is how little you spend. If you are spending less, whether the excess savings goes towards debt or an investment, the end result will likely not be too different. And even if it would be different, it's tough to know that ahead of time after adjusting for risk.
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Re: Pay Debt or Invest @ 30 y/o?

Post by TSR »

I feel very strongly that the answer is "as much of both as you can do." In the past seven or so years, I've paid off around $70,000 in student-loan debt and I've saved more than $200,000 toward retirement. I'd be happy with either, but I'm MUCH happier with both. Psychologically, it is kind of lame to crawl your way back to zero and realize that you're still at zero. Remember also that your tax-advantaged retirement space is use-or-lose -- right now you can pocket 25% tax savings for your 401k contributions (you did not specify whether you have access to one or more 401k's). I'd focus on that and use your savings to pay extra on the student loans.

Best of luck!
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Re: Pay Debt or Invest @ 30 y/o?

Post by assumer »

TSR wrote:Remember also that your tax-advantaged retirement space is use-or-lose -- right now you can pocket 25% tax savings for your 401k contributions
This is a good point to consider.
TSR wrote:Psychologically, it is kind of lame to crawl your way back to zero and realize that you're still at zero.
This makes no logical sense to me. The only number that matters at the end of the day is your cumulative net worth, and how the decisions you make (interest rates, risk, liquidity, etc.) will affect that, not whether you "trick" yourself to think you're at 0 for assets or 0 for debts, or whatever.
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jimb_fromATL
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Re: Pay Debt or Invest @ 30 y/o?

Post by jimb_fromATL »

FlightBoy wrote:I would assume many people have asked this question. But is it better to pay off debt or save for retirement?

My wife and I are 30. We have a total of $65k in student loan debts (interst rates range from 3.1% to 3.5%). Our household taxable income of about $110k. Total we have about $35k in savings, mostly all in our Roth's, (we started late). and we are saving for a downpayment on a home, so our savings account for the home and emergect fund totals $105k.

After we buy a home and put aside our emergency fund, do we use excess money to pay down debt or invest? And as years go by, do we pay off our mortgage early or invest for retirement first?
You're paying 25% federal income taxes in your top tax bracket. That money is not buying necessities, paying bills, paying down debts, or earning compound interest for the rest of your life for retirement.

So ... if you have any tax-deferred retirement plans available, and are not maxing them and your Roth IRAs you'll come out best in the long run to contribute the maximum you're allowed to those tax-advantaged retirement accounts -- at least 15% to 20% of your income since you're starting late-- before you pay any more than the minimum payments on the student loan debts or a mortgage.

Do you have any employer-sponsored tax-deferred retirement plans such as a 401(k), 403(b), TSP, etc available?
And if so, how much are you contributing to them?

You mention Roth IRAs. Are you contributing the maximum you're allowed every year to both of them?

Will you have a pension coming from any employer?

How much are the minimum payments on the student loans?

Do you have state income tax? And if so, do you get to defer taxes for contributions to 401(k) and other retirement plans?

THIS THREAD is one of several where you'll see differing opinons about investing versus paying down debt.

There are more reasons and differing opinions and feelings expressed in this thread ... along with some relatively objective numeric examples I've put there to consider.

My post in THIS THREAD also shows an example illustrating how losing even a short time for investing and compounding can cost a lot of money.

Here's another example

If you'll take the time to read those threads and my numeric examples, it may help you make the decision whether you want to put your money to its best use by paying yourself first to build the most wealth and security for your future, or if you just want to feel good about paying off the debt faster -- even though it can cost you a lot more in taxes and probably cost you an astounding amount of money out your future lifetime retirement in exchange for saving only a tiny fraction as much interest on the relatively short-term debts.

Given a few of the answers to the questions above and an idea of how much you have to spare to either invest or pay down debts faster, we can make a better estimate of how much it could cost you to rob your retirement in the future in order to pay down the debt faster in the present.

jimb
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ruralavalon
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Re: Pay Debt or Invest @ 30 y/o?

Post by ruralavalon »

FlightBoy wrote:I would assume many people have asked this question. But is it better to pay off debt or save for retirement?

My wife and I are 30. We have a total of $65k in student loan debts (interst rates range from 3.1% to 3.5%). Our household taxable income of about $110k. Total we have about $35k in savings, mostly all in our Roth's, (we started late). and we are saving for a downpayment on a home, so our savings account for the home and emergect fund totals $105k.

After we buy a home and put aside our emergency fund, do we use excess money to pay down debt or invest? And as years go by, do we pay off our mortgage early or invest for retirement first?
Do either of you have a 401k, 403b other employer-based plan offered at work?

If so, is there an employer match offered in it? How much?

If there is an employer-based plan, what are the lowest expense ratio funds (fund names, tickers & expense ratios) offered in the employer plan?

What i your marginal tax rate, both federal and state?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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FlightBoy
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Re: Pay Debt or Invest @ 30 y/o?

Post by FlightBoy »

jimb_fromATL wrote: Do you have state income tax? And if so, do you get to defer taxes for contributions to 401(k) and other retirement plans?
Thank you jimb


You gave me a lot of information to digest and many links to read. I didn't yet get to all that info but I hope you or someone else can help me with this quote above.
I live in PA and yes we have state tax. Does anyone know if I can defer state taxes as well as federal for 401k's?
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Re: Pay Debt or Invest @ 30 y/o?

Post by jimb_fromATL »

FlightBoy wrote: I live in PA and yes we have state tax. Does anyone know if I can defer state taxes as well as federal for 401k's?
From what I've read, PA is one of the rare states that does not go by the Federal guidelines, and does not allow you to defer taxes for contributions to a 401(k) or TSP or other similar retirement plans. They don't tax your withdrawal, but there's no extra advantage with respect to taxes at the state level for now. But the 25% deferral for the feds is still an opportunity that you shouldn't pass up if you do have a 401(k)-type plan available.

(In GA where I live, you get to defer state taxes now and never pay them on retirement withdrawals either ... which makes it even better to max out the tax-deferred retirement plans. Down here it makes no sense at all to pay state income taxes that you can avoid before retirement, when you'll never have to pay it after retirement.)
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Meg77
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Re: Pay Debt or Invest @ 30 y/o?

Post by Meg77 »

Invest for retirement first!!! While you will get answers from both sides of the fence in general (for instance, when a middle aged person who is already maxing out retirement accounts asks whether to invest a 6 figure windfall or pay down a mortgage), it's pretty much a no brainer for a younger person such as your self to contribute to retirement accounts before paying off low interest rate debt. Your retirement accounts are exceedingly likely to earn more than what you are paying on student loans and what you are likely to pay on a mortgage over the next 50 years - and that doesn't even take into account the tax advantages of contributing to retirement accounts (remember your mortgage is tax deductible too, so once you account for taxes it REALLY makes more sense to invest first). Heck, money market accounts were paying 4% just a few years ago (and likely will again in another few).

Here is the usual order of operations, in order of importance (move on to the next step as you can afford to):

1. Invest enough in 401ks to get the company match (if you don't do this you are passing up a free 50% - 100% return usually)
2. Pay off high interest rate credit card debt
3. Establish an emergency fund
4. Simultaneously contribute to Roth IRAs and accelerate payments on moderately high rated debt such as student loans over 7-8% (the average expected long term stock market return)
5. Direct extra money toward saving for a home purchase (if applicable)
6. Max out Roth IRAs, 401ks, HSAs and any other tax deferred vehicle available. Contribute to ESPP if available.
7. Pay off all non tax-deductible consumer debt such as car loans and student loans.
8. If necessary, invest further in taxable accounts in order to meet retirement goals (if your income needs are higher than maxing out retirement accounts will facilitate)
9. Save for your children's college education (if applicable).
10. Accelerate debt repayment on low interest rate tax advantaged loans such as mortgages (and student loan debt, possibly), only after padding emergency reserves with at least 1 year of expenses.

Basically, if you've reached every other goal - or if you make enough to be doing everything at once - then it's ok to direct extra cash to low interest rate debt. Or if you are just super debt averse and owning money keeps you up at night. But you should at LEAST be contributing 15% of your income toward retirement (or maxing out all retirement accounts, whichever is less) before paying extra on a loan under 5%, in my opinion.
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FlightBoy
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Re: Pay Debt or Invest @ 30 y/o?

Post by FlightBoy »

jimb_fromATL wrote:
Do you have any employer-sponsored tax-deferred retirement plans such as a 401(k), 403(b), TSP, etc available?
And if so, how much are you contributing to them?

You mention Roth IRAs. Are you contributing the maximum you're allowed every year to both of them?

Will you have a pension coming from any employer?

My wife's company offers a small match which we do max out.
I am self employed and don't yet have an account but plan to open a solo 401k or a SEP ira this year (would you contribute to either, both or neither before paying extra on our debts?).

we do max our roths.

we do not get pensions.
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FlightBoy
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Re: Pay Debt or Invest @ 30 y/o?

Post by FlightBoy »

Meg77 wrote: 7. Pay off all non tax-deductible consumer debt such as car loans and student loans.

thank you meg, your list was very helpful. i never had a mortgage so i do not understand the tax-deductions it offers. but is it not true that student loan interest paid could also be a deduction? I do not have the numbers on me, but we pay somewhere between $1,800-3,000 in student loan interest in a year.
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Re: Pay Debt or Invest @ 30 y/o?

Post by TSR »

assumer wrote:
TSR wrote:Remember also that your tax-advantaged retirement space is use-or-lose -- right now you can pocket 25% tax savings for your 401k contributions
This is a good point to consider.
TSR wrote:Psychologically, it is kind of lame to crawl your way back to zero and realize that you're still at zero.
This makes no logical sense to me. The only number that matters at the end of the day is your cumulative net worth, and how the decisions you make (interest rates, risk, liquidity, etc.) will affect that, not whether you "trick" yourself to think you're at 0 for assets or 0 for debts, or whatever.
Fair complaint. I guess I meant that I find myself very happy to have simultaneously paid DOWN debt while also paying UP savings, especially because all of the savings has been use-or-lose tax-advantaged space. Although I could have done it in a shorter period of time, I am glad I didn't spend all of my "extra" money on my debt only to look back and see $60k or so worth of savings I could have accumulated tax-free and didn't. I will also note that I'm in the weird position of having enough in my Roth that I could take out my contributions immediately and pay down my student loans in a pinch. I would do that in an emergency (which negates that constant threat about student loans being bad because they are non-dischargeable in bankruptcy), but as it is right now I am happy to have used that space for investment purposes and will stay the course. (My "course" involves agressive over-payment of my student loans and always has.)
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Re: Pay Debt or Invest @ 30 y/o?

Post by jimb_fromATL »

FlightBoy wrote: My wife's company offers a small match which we do max out.
I am self employed and don't yet have an account but plan to open a solo 401k or a SEP ira this year (would you contribute to either, both or neither before paying extra on our debts?).

we do max our roths.

we do not get pensions.
Under those circumstances, and at your age I'd suggest contributing at least 15% to 20% of your total income to some combination of her 401(k) plus a tax-deferred plan for you. If I were self-employed, I'd also want a really big cash reserve. In your case you might want to consider keeping some of your Roths in conservative funds to preserve the principal until you have at least 6 months to a year or more of savings in more liquid assets.

At those low rates on the student loans, and in the 25% tax bracket for the feds, and if the entire history of the stock market is any indicator at all, you'll come out far better to contribute as much as possible to your tax deferred retirement accounts (and to continue maxing the the Roths) than to pay any more than the minimum payments on the student loans -- assuming that's for no more than perhaps 10 years to 15 years.

Here's an example to illustate why:
  • Assuming income taxes totaling 25% that could be deferred;
    a 401(k) plan earning a relatively conservative average APY of 7% for 35 years until retirement, then 4% after retirement;
    debts totaling $65,000 at 3% with minimum payments of $627.64 and 120 months remaining:

    If you were to postpone contributing $500 per month to the 401(k) and pay the extra $125 taxes, then applying the remaining after-tax $375 to pay down the debt will pay it off in 71 months and save $4,313 interest and 49 months in debt. That is in exchange for paying an extra $8,852 in taxes now instead of deferring it.

    If you resume the contributions to the 401(k) after the 71 month delay but don't reinvest the freed-up payments, then the loss of compound interest for the time and money paid in taxes would cause you to come up short by $332,965 at retirement time.

    If you lived another 30 years you would then lose the $1110 per month interest that it could have earned every month without touching the balance. The $332,965 you won't have plus the $399,558 it won't be there to earn would be a total of lifetime loss of $732,523 That is 170 times as much as the interest you saved on the debt.

    If you're not maxing your tax-deferred options and have enough room, then If you religiously reinvested the pre-tax amount of $837 for the freed-up payments with no delay for the remainder of the loan period, earning the same rate, you'd come up short by $60,941 at retirement time.

    Then the $203 per month interest it would not be there to earn for the next 30 years would add up to a potential lifetime loss of $134,071. That is only 31.1 times as much lost from retirement income compared to the interest you'd save on the debt.
jimb
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Re: Pay Debt or Invest @ 30 y/o?

Post by ruralavalon »

Its good to see that she is contributing enough to get the match in her 401k, getting free money is always the best investment.

What are the lowest expense ratio funds (fund names, tickers & expense ratios) offered in her 401k?

With the student loan interest rates at 3.1% to 3.5%, it probably close to a toss up between more 401k contributions and advance paying the loans. The deciding factor might be the quality of the investments offered.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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