I've got $80k burning a whole in my pocket, what should I do with it?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
pierremonfrere
Posts: 157
Joined: Tue Jun 23, 2015 7:34 pm

I've got $80k burning a whole in my pocket, what should I do with it?

Post by pierremonfrere »

I am a newly minted MD just getting ready to start my internship. I was “lucky” enough to get to go to the Caribbean for medical school so unfortunately my wife was unable to work for couple years and we were living completely off loans, but we both had decent jobs for a few years before medical school and she started working again about 18 months ago. We each started a Roth IRA when we were younger but didn’t contribute while we were living on loans. We have always been pretty good at saving money, but put investing on the back burner because we didn’t know what to do. Now that my loans are going to start repayment soon we decided it was time to educate ourselves and get our financial house in order. This is our current situation:

Emergency funds: Available
Debt: Approximately $300k in Federal Student loans at 6.9%, $100k mortgage; no credit card, auto, etc.
Tax Filing Status: Most likely Married Filing Separately (to minimize student loan payments in hopes of PSLF later on)
Tax Rate: 10-15% Federal, 0% State
State of Residence: NV
Age: 31
Desired Asset allocation: 80% stocks / 20% bonds

Size of your current total portfolio: Roughly $150k-200k (including emergency funds)
Taxable
45% cash (for investing – do not include emergency funds)
His Roth IRA at Fidelity
25% Freedom Fund 2040 (FFFFX) (0.75)
His Rollover IRA at Fidelity
5% Freedom Fund 2050 (FFFHX) (0.75)
Her Roth IRA at Fidelity
25% Freedom Fund 2040 (FFFFX) (0.75)

Contributions
New annual Contributions
$3038 his 403b (with an equal employer match. I think it’s in a Vanguard fund through TIAA-Cref, but haven’t been given details yet) ?
$5500 his IRA/Roth IRA ?
$5500 her IRA/Roth IRA ?

As a new resident I’ll make about $49k and my wife makes roughly double what I do (for now, hopefully we will have kids in the next year or two, and she doesn’t know if she will want to work after that). We plan to live off my salary and bank hers as best we can. My residency/fellowship will be at least 6 years, before we start making “real” money. I’ve thought about refinancing my student loans, but don’t want to take PSLF off the table, even though the probability is low that I will qualify.

Questions:
1. How should we invest $75k-80k that is currently sitting in a savings account? I think we will want to have access to it in 6 years, so if we don’t qualify for PSLF we can put a big lump sum towards my student loans.
2. Should we try max out our Roth IRA contributions, even though we will only qualify for a few more years?
3. Is it worth contributing to a 403b for one year? I get a 6.2% match which is about $3000, but I’ll be moving next July to a new residency program.
4. I was also thinking about moving our IRA’s from fidelity over to Vanguard to lower our fees and consolidate. I’m thinking we will open a Vanguard account for our future investments. Any advice on that front is appreciated.

Wow, my first post was much longer than I anticipated. Thanks for sticking with me. Your advice is much appreciated. (And a shout out to the White Coat Investor for getting me interested in my own finances)
jaap24
Posts: 18
Joined: Wed Feb 08, 2012 8:48 pm

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by jaap24 »

1) 6.9% guaranteed return. I wish I could get that now. No brainer, pay it off now. PSLF/IBR/PAYE is a mind game that will hurt you in the long run
2) I would skip the roth and add to the student loans, but others may disagree
3) I would absolutely get the match, max out to get the 6.2, free money
4) no opinion
User avatar
BL
Posts: 9874
Joined: Sun Mar 01, 2009 1:28 pm

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by BL »

Find the F Freedom INDEX XXXX funds to save some money on ERs.
Buy Roth IRAs and at least meet the match at work.
Plan on using the rest to get rid of student loans when ready.
DTSC
Posts: 1194
Joined: Mon Oct 20, 2008 9:47 am
Location: Illinois

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by DTSC »

Emergency fund.
Pay down debt.
Pay down debt.
Pay down debt.

BTW it is "hole in my pocket"
User avatar
StormShadow
Posts: 1005
Joined: Thu Feb 09, 2012 5:20 pm

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by StormShadow »

$300,000 @6.9%/yr x 6 years = $124,200 of interest. Food for thought.

My advice?
Set aside whatever you need for the emergency fund.
403(b) to the match. (MAYBE consider a Roth, personally I would and have done it. No regrets, though others clearly may disagree for good reason.)
All the rest, I would throw at the student loans.
Sell your taxable investments and throw that at the student loans.

To me, PSLF is a gamble that I wouldn't bet on. But go ahead and try, sign up for income based repayment anyhow from day one of residency.
bloom2708
Posts: 9859
Joined: Wed Apr 02, 2014 2:08 pm

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by bloom2708 »

I would work on paying off the hole student loan at 6.9%.

It is a big whole you are throwing money into.

:mrgreen:
JDot
Posts: 372
Joined: Fri Apr 24, 2015 10:15 pm

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by JDot »

As this forum goes, I'm usually pretty far to one side when it comes to student loans. That is, at 4% or 5%, I'd consider paying them off more slowly than others would advise. At 6.9%, I gotta say you need to pay those off.

EDIT: I basically want to retract this post. I also do not know enough about the PSLF to provide advice. I should have read OP more closely.
Last edited by JDot on Wed Jun 24, 2015 9:06 am, edited 1 time in total.
stan1
Posts: 14246
Joined: Mon Oct 08, 2007 4:35 pm

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by stan1 »

OP is hoping for Public Service Loan Forgiveness (PSLF). I don't know enough about that program to offer advice on whether to pay down the loan now or not.
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
User avatar
midareff
Posts: 7711
Joined: Mon Nov 29, 2010 9:43 am
Location: Biscayne Bay, South Florida

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by midareff »

JDot wrote:As this forum goes, I'm usually pretty far to one side when it comes to student loans. That is, at 4% or 5%, I'd consider paying them off more slowly than others would advise. At 6.9%, I gotta say you need to pay those off.

Either the student loans or your mortgage. I can't warm up to borrowing $300K and then looking for ways to avoid paying it back.
yellowgirl
Posts: 179
Joined: Sun Feb 08, 2015 9:12 pm
Location: Texas

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by yellowgirl »

Off topic, not sure if this is true but I heard doctors that studied at Caribbean medical schools are usually not good or less than average?
z3r0c00l
Posts: 3808
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by z3r0c00l »

yellowgirl wrote:Off topic, not sure if this is true but I heard doctors that studied at Caribbean medical schools are usually not good or less than average?
http://www.nytimes.com/2014/08/03/educa ... .html?_r=0
70% Global Stocks / 30% Bonds
OatmealAddict
Posts: 1195
Joined: Fri Sep 27, 2013 4:03 pm

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by OatmealAddict »

Guess I'll be the lone wolf who's going to advise you to pay only the bare minimum on the student loans if you're * POSITIVE * you will qualify for and utilize PSLF, especially in conjunction with Income-based repayment.

Many here will say that PSLF is risky, and to their point, there is an element of risk there, however I've done the research and I haven't come across a legislative precedent that would make it likely that the government would renege on its program for qualified PSLF applicants retroactively.

If you're comfortable with the risk and understand the intricacies of the program, I'd highly recommend it. We're slated to have my wife's $250K in loans forgiven tax-free in seven more years. In the meantime, we're maxing out my 401k, maxing out her 403b, in the process of doing a refi to get into a 3% 15 year fixed on our mortgage, and will be throwing any and all excess into backdoor Roths. All this is WITH having a 14-month old and paying $1,000/month in child care.

As for the $80k, definitely max that 403b out as it will lower your AGI and thus reduce your loan payment under IBR. The rest, throw into taxable.
Topic Author
pierremonfrere
Posts: 157
Joined: Tue Jun 23, 2015 7:34 pm

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by pierremonfrere »

Thanks for the input everyone. If PSLF works out my $300k loan will cost $170k. I feel like I need to wait until at least 2017 when the first people are due to get their loans forgiven and see what happens. But saving that kind of money would even entice me to find a job in a location I wouldn't normally consider for a few years. Meanwhile we will be savings north of 60% of our income to pay those loans down as quick as possible if it doesn't work out.

As far as Caribbean medical school goes its pretty much always plan b. And while there can be a lot of variability, most people who go are just as smart as their or smarter then their U.S. colleagues. I scored in the 85th percentile on USMLE step 1 (the main test to help you get a residency) and got into my first choice of residency (which in the end is all anyone cares about, not where you went to medical school).
JDot
Posts: 372
Joined: Fri Apr 24, 2015 10:15 pm

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by JDot »

Edited my last post.
User avatar
market timer
Posts: 6535
Joined: Tue Aug 21, 2007 1:42 am

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by market timer »

Without PSLF, I'd advise you to pay down your loans with this money if the loans had an interest rate of roughly 4% or higher. PSLF makes things more complicated. You're basically paying an extra 2.9% vs. what I'd be comfortable paying (i.e., 6.9% vs. 4%). Let's say it takes you 5 years to figure out whether you will qualify for PSLF, so you will accrue an extra 15% in interest vs. a hypothetical 4% interest rate. The key question is what you view as your probability today of qualifying for PSLF, call it p. You should pay down the loans if p * 100% < (1-p) * 15%, or p < 13%. This inequality comes from the fact that if you qualify for PSLF and do not prepay, you'll be better off by 100% of every dollar you would have prepaid today (this amount being forgiven in 10 years); if you do not qualify for PSLF and prepay today, you'll have avoided paying 15% in what I consider "excess" interest vs. carrying the balance and hoping for PSLF.
Topic Author
pierremonfrere
Posts: 157
Joined: Tue Jun 23, 2015 7:34 pm

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by pierremonfrere »

market timer wrote:Without PSLF, I'd advise you to pay down your loans with this money if the loans had an interest rate of roughly 4% or higher. PSLF makes things more complicated. You're basically paying an extra 2.9% vs. what I'd be comfortable paying (i.e., 6.9% vs. 4%). Let's say it takes you 5 years to figure out whether you will qualify for PSLF, so you will accrue an extra 15% in interest vs. a hypothetical 4% interest rate. The key question is what you view as your probability today of qualifying for PSLF, call it p. You should pay down the loans if p * 100% < (1-p) * 15%, or p < 13%. This inequality comes from the fact that if you qualify for PSLF and do not prepay, you'll be better off by 100% of every dollar you would have prepaid today (this amount being forgiven in 10 years); if you do not qualify for PSLF and prepay today, you'll have avoided paying 15% in what I consider "excess" interest vs. carrying the balance and hoping for PSLF.
If I invest the money and earn a 2.9% return will I basically break even in this scenario, as far as excess interest is concerned? I think the probability of getting PSLF is between 10-15%.
User avatar
market timer
Posts: 6535
Joined: Tue Aug 21, 2007 1:42 am

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by market timer »

pierremonfrere wrote:
market timer wrote:Without PSLF, I'd advise you to pay down your loans with this money if the loans had an interest rate of roughly 4% or higher. PSLF makes things more complicated. You're basically paying an extra 2.9% vs. what I'd be comfortable paying (i.e., 6.9% vs. 4%). Let's say it takes you 5 years to figure out whether you will qualify for PSLF, so you will accrue an extra 15% in interest vs. a hypothetical 4% interest rate. The key question is what you view as your probability today of qualifying for PSLF, call it p. You should pay down the loans if p * 100% < (1-p) * 15%, or p < 13%. This inequality comes from the fact that if you qualify for PSLF and do not prepay, you'll be better off by 100% of every dollar you would have prepaid today (this amount being forgiven in 10 years); if you do not qualify for PSLF and prepay today, you'll have avoided paying 15% in what I consider "excess" interest vs. carrying the balance and hoping for PSLF.
If I invest the money and earn a 2.9% return will I basically break even in this scenario, as far as excess interest is concerned? I think the probability of getting PSLF is between 10-15%.
You'd need to earn 4%/year in the scenario described above to be indifferent at the five-year mark, assuming a 13% probability of forgiveness. This example, including the numbers used, is similar to what White Coat Investor describes in his refinance example.
User avatar
Watty
Posts: 28859
Joined: Wed Oct 10, 2007 3:55 pm

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by Watty »

Maxing out the Roth and getting the 403B match is an easy choice.

I would suspect that you will be moving in about five years or so. If so then what I would do is to just pay off the $100K mortgage since the cash will be free up when you sell the house and move. You can then invest your "mortgage payment" each month.

One thing to look at is that while you are in the 15% tax bracket then you pay 0% on LONG TERM capital gains up to the top of the 15% tax bracket. You should look at selling enough stocks with gains to get to the top of the 15% tax bracket. That might have an impact on your loan forgiveness so you would want to look at that too.
BW1985
Posts: 2079
Joined: Tue Mar 23, 2010 6:12 pm

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by BW1985 »

I had no idea there were dozens of medical schools in the Caribbean.
Chase the good life my whole life long, look back on my life and my life gone...where did I go wrong?
User avatar
midareff
Posts: 7711
Joined: Mon Nov 29, 2010 9:43 am
Location: Biscayne Bay, South Florida

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by midareff »

BW1985 wrote:I had no idea there were dozens of medical schools in the Caribbean.

I wonder if it's anything like the all the post graduate schools offering masters and doctoral degrees depending on your income? Without offense to the OP I recently had my eyes checked by a technician (in a licensed ophthalmologist's office) who was a licensed ophthalmologist in Cuba. He had spend near 16 years post bachelor's to get his license and practice there and figured he needed six to seven years of study to take the test to be able to practice here. I'm kind of picky about who treats me and I like to see all the USA certifications and memberships on the wall.
User avatar
PoeticalDeportment
Posts: 124
Joined: Mon Jan 21, 2013 2:44 am
Location: Amundsen's Tent

Re: I've got $80k burning a whole in my pocket, what should I do with it?

Post by PoeticalDeportment »

You don't need to move from fidelity to vanguard necessarily, but you should at least move from Fidelity Freedom Funds to Fidelity Freedom Index Funds which should lower your expense ratios significantly.
Post Reply