I recently discovered both this site and the Bogle theory on index fund investment. I am just now taking my retirement finance management seriously. I will be getting married in the near future and it has had a sobering effect on my life goals. (Not that I was ignoring my future; I do have a considerable bit of retirement savings that I managed to build up before grad school.) I have learned a lot from the postings here and I am looking forward to learning more. Based on what I have found searching this forum, I think my question is a no-brainer but, as my SO would say, I need to be validated. Additionally, I have been searching for math that will make my understanding of the Boglehead viewpoint on paying down debt vs. investing crystal clear - or approximately so.
- Income tax bracket: ~31% + ~9% = 40% (This assumes no 2013 tax cut extension and CA income tax.)
- student loan debt ~200k
- component of student loan debt @8.5% interest ~43k (BTW, I will be telling my kids not to go to private schools if they can help it)
- the rest of my student loan debt is < 6.9% (and given the large 8.5% component, the rest of my loans are inconsequential to my immediate dilemma)
- emergency fund: ~6k (approx 6 months of expenses)
- my employer has a 401(k) starting Jan. 1 2013, no match
- I have another ~ 25 years before I am required to start my 401(k) withdrawals.
Question: Should I pay down my 8.5% debt or invest in 401(k) or some mix?
My answer based on what I have read on the forums: Pay down the damn debt. (Am I wrong here?)
Math Question: How can I relate my 8.5% debt to a pre-tax 401(k) investment so that I can compare numbers?
- the 8.5% debt is, worst case, 25 years in repayment. Compounding can be avoided if I do my paperwork right...I think.
- I understand that I can translate debt repayment into a bond equivalent for math purposes.
- I still don't understand how to compare this to a similar pre-tax (40% savings in my case) equivalent investment, assuming the 25 year worst-case scenario (and I can't figure out intermediate scenarios either). I am interested in understanding the comparison of the debt to risk-averse investment alternatives in:
1) the short term; and
2) the long term (i.e. once I need to withdraw, taxes will impact this)
I realize that (2) requires me to make some assumptions about the future. So, I am approaching it as 'all things being equal years from now' (probably not accurate; corrections welcome)
I also realize that 8.5% guaranteed is unheard of. My concern is with the impact of the use of pre-tax dollars.
Ultimately, I think I know the answer to my practical question. The issue I am having is understanding the math that gets me to that point.
I would love to hear any thoughts on either portion of this.
(A side-note: I am so happy to finally find a forums that deals in unhyped objective long-term goals. I just bought my brother a Bogleheads book for Christmas.)
Thanks in advance for any feedback