Invest or Pay off Student Loans

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Topic Author
tbxavier
Posts: 30
Joined: Wed Aug 22, 2018 2:00 pm

Invest or Pay off Student Loans

Post by tbxavier »

This is driving me crazy. Here's my situation:
Me 36, Wife 35 No kids Married filing separately (for student loan purposes)
Salary: Me: $120,000 Wife: $59,000 annual
Student loans: Me $140K fixed at 5.1% IR 10 yrs
Wife $80K fixed at 5% IR (10 yrs) private & $90K government (wife's government loan
enrolled in PSLF program so most of that will be forgiven after 8 years. So were paying
the minimum of $190/M on that)
Currently paying $1400/M on my loans and $650/M on my wife's private loans)
We currently have a house mortgage $300K (IR 3.875%). With insurance and taxes we pay around $2100/M
Car loans: $11,500 Payment listed at $238/M x 4 yrs, however I pay $322/M
Retirement: Me: 401 K I contribute 6% to get employer match
Wife is a teacher so she has some form of pension at retirement. Also have the option of doing a
457B or a 403b (investing in annuities) through her school district
Has $30K we need to rollover to another retirement account

I recently picked up an extra job, where I can make $1800 extra before taxes. I am conflicted as to what to do with this money. Initially, my idea was to double up on my student loan payments and clear them in 4 yrs, but I keep changing my mind. So my questions are below:

1. Should I focus on clearing my student loan debt first by doubling up on my student loan payments and pay of in 4 years VS 10 yrs. (My concern here is that it's hard to dish out so much money and forgo missing out on cumulative interest if I invest). But I am thinking that if I can free up $1400 per month, I could do a lot with that.

2. Should I focus on retirement savings or regular investments instead and max out my 401 K instead ? Am only paying 6% (which roughly equals to around $9K with employee additions). In my ideal world of course it would make sense to max out my 401K and also retirement account for my wife. But given our situation, am just trying to figure out what makes best sense.

3. Should I rollover my wife's 30K in the 403B or 457B that's offered and contribute the max also ? Or should I just make contributions we can afford? Or just roll it over and hold off on contributions until our debts are paid?

4. Is the 'backdoor ROTH' an option and does it make sense tax wise for me and/or her given our situation? Right now we don't qualify for a regular roth. (This may be a topic for another thread because i have more questions related to this)

5. Should I just knock out that car loan within a year by paying $1000/M and just get rid of it?

6. Should I just do a combination, some towards loans, some towards the car and some towards savings? towards loans?

I welcome advice, debate and discussion. I appreciate your time and wisdom.
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Invest or Pay off Student Loans

Post by PFInterest »

tbxavier wrote: Wed Aug 22, 2018 3:19 pm This is driving me crazy. Here's my situation:
Me 36, Wife 35 No kids Married filing separately (for student loan purposes)
Salary: Me: $120,000 Wife: $59,000 annual
Student loans: Me $140K fixed at 5.1% IR 10 yrs
Wife $80K fixed at 5% IR (10 yrs) private & $90K government (wife's government loan
enrolled in PSLF program so most of that will be forgiven after 8 years. So were paying
the minimum of $190/M on that)
Currently paying $1400/M on my loans and $650/M on my wife's private loans)
We currently have a house mortgage $300K (IR 3.875%). With insurance and taxes we pay around $2100/M
Car loans: $11,500 Payment listed at $238/M x 4 yrs, however I pay $322/M
Retirement: Me: 401 K I contribute 6% to get employer match
Wife is a teacher so she has some form of pension at retirement. Also have the option of doing a
457B or a 403b (investing in annuities) through her school district
Has $30K we need to rollover to another retirement account

I recently picked up an extra job, where I can make $1800 extra before taxes. I am conflicted as to what to do with this money. Initially, my idea was to double up on my student loan payments and clear them in 4 yrs, but I keep changing my mind. So my questions are below:

1. Should I focus on clearing my student loan debt first by doubling up on my student loan payments and pay of in 4 years VS 10 yrs. (My concern here is that it's hard to dish out so much money and forgo missing out on cumulative interest if I invest). But I am thinking that if I can free up $1400 per month, I could do a lot with that.

2. Should I focus on retirement savings or regular investments instead and max out my 401 K instead ? Am only paying 6% (which roughly equals to around $9K with employee additions). In my ideal world of course it would make sense to max out my 401K and also retirement account for my wife. But given our situation, am just trying to figure out what makes best sense.

3. Should I rollover my wife's 30K in the 403B or 457B that's offered and contribute the max also ? Or should I just make contributions we can afford? Or just roll it over and hold off on contributions until our debts are paid?

4. Is the 'backdoor ROTH' an option and does it make sense tax wise for me and/or her given our situation? Right now we don't qualify for a regular roth. (This may be a topic for another thread because i have more questions related to this)

5. Should I just knock out that car loan within a year by paying $1000/M and just get rid of it?

6. Should I just do a combination, some towards loans, some towards the car and some towards savings? towards loans?

I welcome advice, debate and discussion. I appreciate your time and wisdom.
- you need to pay off the car (a loan on a depreciating asset isnt great)
- you need to pay off the private loan
- why would you pay extra to the loans when you are already going through the trouble of MFS to lower the potential payment?
- you need to start maxing retirement accounts and rIRAs.
b42
Posts: 379
Joined: Thu Apr 11, 2013 7:00 pm

Re: Invest or Pay off Student Loans

Post by b42 »

Welcome to the forums!

Your first goal should be to pay down some debt. I see about $180k in yearly income, but over $621,500 in debt, almost 3.5x you income. Pretending the average interest rate is 4% for everything, that's almost $25k a year in interest.

I would keep your 401k contributions as-is to get the match. Also, which retirement system is your wife enrolled in? The details of that are important since the pension could end up being an extremely valuable asset.

For the $30k, is rolling this balance over to an IRA an option? that way you would have more control. Sometimes teacher 457b or 403b accounts aren't very good. I'd ignore the annuities.

I'd put as much as you can towards one loan and work towards paying them off. You are losing returns in the market, but you are also paying a ton in interest costs.
delamer
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Re: Invest or Pay off Student Loans

Post by delamer »

Continue to contribute enough to your 401(k) to get the match.

Otherwise, at 5.0% interest rates, prioritize paying off your (non-PSLF) student loans.

The only exception would be if the car loan is at an even higher rate. If so, prioritize paying that off.

If your student loan rates were at 3% or lower, then there might be an argument for investing instead. But not at 5%.
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grabiner
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Re: Invest or Pay off Student Loans

Post by grabiner »

Paying down the 5% loans is a risk-free, tax-free 5% return. This is better than any investment except contributing enough to your employer plan to get the full match.

When the loans are gone, you will have more money available to contribute to your IRA and 403(b).
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camillus
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Re: Invest or Pay off Student Loans

Post by camillus »

I recommend the Dave Ramsey show, on youtube, via podcast, etc. What you need is a lot of motivation to do what you have to do. After contributing to 401k match, you need to throw everything you have at the auto loan. What you need is focus. Each month, seeing how much you can pay towards the car. When that is gone, take that extra cash and pay off the 5% student loans. You will make it, but you need focus and enough willpower to reduce your standard of living in order to make progress.
6. Should I just do a combination, some towards loans, some towards the car and some towards savings? towards loans?
Nope, pick one thing. Focus! The lever you need to start pulling on is your saving rate. Every time you eat out, you are taking out a loan for the meal at the highest rate of your debt.
Last edited by camillus on Wed Aug 22, 2018 6:43 pm, edited 2 times in total.
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Topic Author
tbxavier
Posts: 30
Joined: Wed Aug 22, 2018 2:00 pm

Re: Invest or Pay off Student Loans

Post by tbxavier »

b42 wrote: Wed Aug 22, 2018 6:07 pm Welcome to the forums!

Your first goal should be to pay down some debt. I see about $180k in yearly income, but over $621,500 in debt, almost 3.5x you income. Pretending the average interest rate is 4% for everything, that's almost $25k a year in interest.

I would keep your 401k contributions as-is to get the match. Also, which retirement system is your wife enrolled in? The details of that are important since the pension could end up being an extremely valuable asset.

For the $30k, is rolling this balance over to an IRA an option? that way you would have more control. Sometimes teacher 457b or 403b accounts aren't very good. I'd ignore the annuities.

I'd put as much as you can towards one loan and work towards paying them off. You are losing returns in the market, but you are also paying a ton in interest costs.
My wife is enrolled in teachers retirement system of texas (TRS). I think it's possible to rollover that 30K to an IRA, but it would be one in which we opened ourselves. Maybe a traditional? I was wondering if that would make sense given that at some point we would want to consider doing a backdoor ROTH? I really didn't like the idea of the 457b given the overall cost to manage the funds. It doesn't really offer a lot of low cost options.
gvsucavie03
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Re: Invest or Pay off Student Loans

Post by gvsucavie03 »

Pay off debt. You have a great income and it won't take long. We don't regret it, you won't either.
megabad
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Re: Invest or Pay off Student Loans

Post by megabad »

I agree with other posters and with your initial idea of paying down the non-PSLF loans. Make sure you keep impeccable records for wife's loans and make 100% sure she has and maintains eligibility. At a minimum, keep and submit Employment Verification Form every year. Otherwise PSLF will end up costing you more than if you had just paid off the loans normally (filing separately you are likely paying more in taxes).
tbxavier wrote: Wed Aug 22, 2018 6:42 pm My wife is enrolled in teachers retirement system of texas (TRS). I think it's possible to rollover that 30K to an IRA, but it would be one in which we opened ourselves. Maybe a traditional? I was wondering if that would make sense given that at some point we would want to consider doing a backdoor ROTH? I really didn't like the idea of the 457b given the overall cost to manage the funds. It doesn't really offer a lot of low cost options.
Not a fan of TRS? Gosh it has one of the lowest expenses of any 403b/457 I have ever seen. Even offers Vanguard Inst Index in the 457 (fidelity in the 403b). It isn't perfect, but I suspect many other teachers would be jealous. Personally, I would roll the 30k over into the 403b/457 in a heartbeat.
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jimb_fromATL
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Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Invest or Pay off Student Loans

Post by jimb_fromATL »

tbxavier wrote: Wed Aug 22, 2018 3:19 pm This is driving me crazy. Here's my situation:
Me 36, Wife 35 No kids Married filing separately (for student loan purposes)
Salary: Me: $120,000 Wife: $59,000 annual
Student loans: Me $140K fixed at 5.1% IR 10 yrs
Wife $80K fixed at 5% IR (10 yrs) private & $90K government (wife's government loan
enrolled in PSLF program so most of that will be forgiven after 8 years. So were paying
the minimum of $190/M on that)
Currently paying $1400/M on my loans and $650/M on my wife's private loans)
We currently have a house mortgage $300K (IR 3.875%). With insurance and taxes we pay around $2100/M
Car loans: $11,500 Payment listed at $238/M x 4 yrs, however I pay $322/M
Retirement: Me: 401 K I contribute 6% to get employer match
Wife is a teacher so she has some form of pension at retirement. Also have the option of doing a
457B or a 403b (investing in annuities) through her school district
Has $30K we need to rollover to another retirement account

I recently picked up an extra job, where I can make $1800 extra before taxes. I am conflicted as to what to do with this money. Initially, my idea was to double up on my student loan payments and clear them in 4 yrs, but I keep changing my mind. So my questions are below:

1. Should I focus on clearing my student loan debt first by doubling up on my student loan payments and pay of in 4 years VS 10 yrs. (My concern here is that it's hard to dish out so much money and forgo missing out on cumulative interest if I invest). But I am thinking that if I can free up $1400 per month, I could do a lot with that.

2. Should I focus on retirement savings or regular investments instead and max out my 401 K instead ? Am only paying 6% (which roughly equals to around $9K with employee additions). In my ideal world of course it would make sense to max out my 401K and also retirement account for my wife. But given our situation, am just trying to figure out what makes best sense.

3. Should I rollover my wife's 30K in the 403B or 457B that's offered and contribute the max also ? Or should I just make contributions we can afford? Or just roll it over and hold off on contributions until our debts are paid?

4. Is the 'backdoor ROTH' an option and does it make sense tax wise for me and/or her given our situation? Right now we don't qualify for a regular roth. (This may be a topic for another thread because i have more questions related to this)

5. Should I just knock out that car loan within a year by paying $1000/M and just get rid of it?

6. Should I just do a combination, some towards loans, some towards the car and some towards savings? towards loans?

I welcome advice, debate and discussion. I appreciate your time and wisdom.
Knowing what I know now, I'd contribute more to the retirement plans.

You cannot make up for lost time in earning compound interest. Plus, any contributions to a tax-deferred retirement plan will let you avoid paying taxes in your highest bracket now. But with the standard (or itemized deduction) and graduated steps in tax brackets, chances are you'll pay less tax on your retirement income than you're getting to defer now.

Even if you pay off your loans early, the limits for contributions to tax deferred plans will usually prevent you from being able to make up for the time you lost for earning compound interest on the taxes you pay prematurely and the compound interest you'll never earn.

So … when you spare money in your budget, and assuming your debts are manageable, you're more likely to come out a lot better in the long run to contribute the maximum allowed to any available tax-advantage retirement accounts like 401(k)s and IRAs before you pay any extra on debts like mortgages and student loans … which are really short term compared to the rest of your life -- with any luck at all.

Here are some links to several threads where my posts show examples of how delaying your tax-advantaged retirement investing and paying taxes prematurely in order to pay down manageable debts too fast can --depending on your age, income and tax brackets -- literally cost anywhere from tens to hundreds of thousands to sometimes millions of dollars out of your future retirement income in exchange for saving only a tiny fraction as much interest on the relatively short term debts.

By the way, is that $1800 per month, or per year? If it's per month, all the more reason to invest more for retirement as higher priority over paying down the debts. IMO you also need to have at least 6 months to a year of living expenses in savings (including Roth IRAs when possible) before paying down manageable debts too fast.

jimb
Topic Author
tbxavier
Posts: 30
Joined: Wed Aug 22, 2018 2:00 pm

Re: Invest or Pay off Student Loans

Post by tbxavier »

jimb_fromATL wrote: Wed Aug 22, 2018 7:05 pm
tbxavier wrote: Wed Aug 22, 2018 3:19 pm This is driving me crazy. Here's my situation:
Me 36, Wife 35 No kids Married filing separately (for student loan purposes)
Salary: Me: $120,000 Wife: $59,000 annual
Student loans: Me $140K fixed at 5.1% IR 10 yrs
Wife $80K fixed at 5% IR (10 yrs) private & $90K government (wife's government loan
enrolled in PSLF program so most of that will be forgiven after 8 years. So were paying
the minimum of $190/M on that)
Currently paying $1400/M on my loans and $650/M on my wife's private loans)
We currently have a house mortgage $300K (IR 3.875%). With insurance and taxes we pay around $2100/M
Car loans: $11,500 Payment listed at $238/M x 4 yrs, however I pay $322/M
Retirement: Me: 401 K I contribute 6% to get employer match
Wife is a teacher so she has some form of pension at retirement. Also have the option of doing a
457B or a 403b (investing in annuities) through her school district
Has $30K we need to rollover to another retirement account

I recently picked up an extra job, where I can make $1800 extra before taxes. I am conflicted as to what to do with this money. Initially, my idea was to double up on my student loan payments and clear them in 4 yrs, but I keep changing my mind. So my questions are below:

1. Should I focus on clearing my student loan debt first by doubling up on my student loan payments and pay of in 4 years VS 10 yrs. (My concern here is that it's hard to dish out so much money and forgo missing out on cumulative interest if I invest). But I am thinking that if I can free up $1400 per month, I could do a lot with that.

2. Should I focus on retirement savings or regular investments instead and max out my 401 K instead ? Am only paying 6% (which roughly equals to around $9K with employee additions). In my ideal world of course it would make sense to max out my 401K and also retirement account for my wife. But given our situation, am just trying to figure out what makes best sense.

3. Should I rollover my wife's 30K in the 403B or 457B that's offered and contribute the max also ? Or should I just make contributions we can afford? Or just roll it over and hold off on contributions until our debts are paid?

4. Is the 'backdoor ROTH' an option and does it make sense tax wise for me and/or her given our situation? Right now we don't qualify for a regular roth. (This may be a topic for another thread because i have more questions related to this)

5. Should I just knock out that car loan within a year by paying $1000/M and just get rid of it?

6. Should I just do a combination, some towards loans, some towards the car and some towards savings? towards loans?

I welcome advice, debate and discussion. I appreciate your time and wisdom.
Knowing what I know now, I'd contribute more to the retirement plans.

You cannot make up for lost time in earning compound interest. Plus, any contributions to a tax-deferred retirement plan will let you avoid paying taxes in your highest bracket now. But with the standard (or itemized deduction) and graduated steps in tax brackets, chances are you'll pay less tax on your retirement income than you're getting to defer now.

Even if you pay off your loans early, the limits for contributions to tax deferred plans will usually prevent you from being able to make up for the time you lost for earning compound interest on the taxes you pay prematurely and the compound interest you'll never earn.

So … when you spare money in your budget, and assuming your debts are manageable, you're more likely to come out a lot better in the long run to contribute the maximum allowed to any available tax-advantage retirement accounts like 401(k)s and IRAs before you pay any extra on debts like mortgages and student loans … which are really short term compared to the rest of your life -- with any luck at all.

Here are some links to several threads where my posts show examples of how delaying your tax-advantaged retirement investing and paying taxes prematurely in order to pay down manageable debts too fast can --depending on your age, income and tax brackets -- literally cost anywhere from tens to hundreds of thousands to sometimes millions of dollars out of your future retirement income in exchange for saving only a tiny fraction as much interest on the relatively short term debts.

By the way, is that $1800 per month, or per year? If it's per month, all the more reason to invest more for retirement as higher priority over paying down the debts. IMO you also need to have at least 6 months to a year of living expenses in savings (including Roth IRAs when possible) before paying down manageable debts too fast.

jimb
Thank you for your reply, I truly appreciate it. I will definitely check out those links. You offer a different perspective one which I will think about at times and struggle with. However, does it really make that big of a difference to sacrifice 4 yrs to pay the student loans off vs 10 years which seems like a lifetime?
megabad
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Re: Invest or Pay off Student Loans

Post by megabad »

tbxavier wrote: Wed Aug 22, 2018 7:35 pm Thank you for your reply, I truly appreciate it. I will definitely check out those links. You offer a different perspective one which I will think about at times and struggle with. However, does it really make that big of a difference to sacrifice 4 yrs to pay the student loans off vs 10 years which seems like a lifetime?
I was going to post this, but you beat me to it. I think over a few years the impact (if there is one) might be a little less dramatic. Especially with higher interest debt. But who knows what the future holds. I think continuing to invest up to the match and the fact that you have a pension coming your way can also help reduce the impact of temporarily reduced retirement savings.
Topic Author
tbxavier
Posts: 30
Joined: Wed Aug 22, 2018 2:00 pm

Re: Invest or Pay off Student Loans

Post by tbxavier »

megabad wrote: Wed Aug 22, 2018 7:02 pm I agree with other posters and with your initial idea of paying down the non-PSLF loans. Make sure you keep impeccable records for wife's loans and make 100% sure she has and maintains eligibility. At a minimum, keep and submit Employment Verification Form every year. Otherwise PSLF will end up costing you more than if you had just paid off the loans normally (filing separately you are likely paying more in taxes).
tbxavier wrote: Wed Aug 22, 2018 6:42 pm My wife is enrolled in teachers retirement system of texas (TRS). I think it's possible to rollover that 30K to an IRA, but it would be one in which we opened ourselves. Maybe a traditional? I was wondering if that would make sense given that at some point we would want to consider doing a backdoor ROTH? I really didn't like the idea of the 457b given the overall cost to manage the funds. It doesn't really offer a lot of low cost options.
Not a fan of TRS? Gosh it has one of the lowest expenses of any 403b/457 I have ever seen. Even offers Vanguard Inst Index in the 457 (fidelity in the 403b). It isn't perfect, but I suspect many other teachers would be jealous. Personally, I would roll the 30k over into the 403b/457 in a heartbeat.
Thank you for your reply. I am a fan of TRS. TRS just deals with the pension in which teachers are automatically enrolled. The 403B and 457B are separate plans (not administered by TRS) that she is eligible to participate in by virtue of her being a full time employee of the school district. If you go to tcgservices.com select my account and CLICK on plan information. Type in FORTBEND ISD, click on 457B then click on the summary plan description. Let me know what you think about those fees. And those fees does not include the fees for the investment plan. If you go to 1st quarter review under resources heading, yo can see the individual plans. Let me know what you think of it. They do offer Vanguard Total Stock Mkt Idx Inv (VTSMX). But that's about it i guess.
CrazyCatLady
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Re: Invest or Pay off Student Loans

Post by CrazyCatLady »

:beer
Last edited by CrazyCatLady on Wed Aug 22, 2018 10:14 pm, edited 1 time in total.
mortfree
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Re: Invest or Pay off Student Loans

Post by mortfree »

Stop paying extra on the car loan. Assuming less than ~3% interest.

(4 years times 18,500) minus (4 years times current contribution of 7200). About $45000 - That is how much you are missing out on towards 401k retirement.

I think the other complication is your age. Mid 30’s and in this debt position and retirement timing for much needed accumulation.

What does the rest of your budget look like?
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jimb_fromATL
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Re: Invest or Pay off Student Loans

Post by jimb_fromATL »

tbxavier wrote: Wed Aug 22, 2018 7:35 pm
jimb_fromATL wrote: Wed Aug 22, 2018 7:05 pm
tbxavier wrote: Wed Aug 22, 2018 3:19 pm Currently paying $1400/M on my loans and $650/M on my wife's private loans)

Knowing what I know now, I'd contribute more to the retirement plans.

yada...yada...yada etc.
Thank you for your reply, I truly appreciate it. I will definitely check out those links. You offer a different perspective one which I will think about at times and struggle with. However, does it really make that big of a difference to sacrifice 4 yrs to pay the student loans off vs 10 years which seems like a lifetime?
Yes, it really can make all that big a difference. I haven't looked up the tax bracket for married filing separately but I'm pretty sure your top bracket is at 24% for the feds. What is your top bracket for the feds, and do you have a state income tax?

Here's an example for the difference between your 6% and maxing your 401(k), and using a relatively conservative estimated earnings rate of 7% ... when the long term averages for typical funds and portfolios have actually been somewhat higher over long periods.
  • If you stopped contributing $7,200 per year ($600.00 per month) to a 401(K) and if your top tax brackets were 24% federal and 6.% state for a total of 30.% then you would pay $180.00 per month more in taxes, leaving $420.00 to pay on the debt.

    That $180.00 is money that won't pay bills, buy necessities, earn compound interest for the rest of your life, or pay down debt either if you don't contribute to the tax-deferred retirement plan.

    A loan balance of $140,000 at 5.1% with 130 months remaining has a payment of $1400.00 per month for P&I. The total interest will be $42,679.
    .
    Not contributing to the 401(k) and and adding the $420 per month remaining after tax to the loan payment will pay off the debt in 93.3 months with $29,897 in interest. So you save $12,782 in interest and 37.1 months time on the debt.

    Sounds good at first, but notice that during that 93.3 months you've paid an extra $16,803 in taxes that you could have invested for yourself in order to save that $12,782 in interest.

    If you did not delay your contributions, the investment of $600.00 per month earning 7% for the first 267 months and then a conservative estimated average of 7% would grow to $731,983 by retirement time 30. years from now.

    Just a 93.3 months delay in contributions while paying down the debt will cause it to grow to only $382,207 in the remaining 266.7 months. That's a loss of $349,775 at retirement in exchange for saving $12,782 in interest on the debt.

    You won't get to defer any taxes, but you were to re-invest the 37.1 freed-up payments of $1400 in an after-tax account with no delay starting after month 93.3, at 7.% it would grow to $57,862 by the end of the original 130 months

    With no more contributions, that portion would grow to $219,865 by retirement in 30. years. Added to the $382,207 you would have from the delayed $600 contributions, your total at retirement would be $602,072.

    That is still a loss of $129,911 at retirement for exactly the same money out of pocket.

    But those losses are only the tip of the iceberg. Many people seem to overlook that because of compounding, you will usually earn more interest after retirement than you did during your years of contributions.

    If you were to earn a conservative 4% after retirement, that $349,775 that you won't have at retirement if you don't reinvest the payments could have paid you an extra $1165.92 per month without even touching the principal. ( At 3% inflation for 30 years, that would be equivalent to an extra $480/mo. in income today.)

    So if you lived another 30 years, you would have lost the $349,775 that you won't have at retirement, plus the $419,730 of interest it won't earn after retirement, for a total loss of $769,506 in the long term in exchange for saving $12,782 in interest on the short-term debt.

    That's a cost of $60 out of your future retirement income for every dollar you saved on the debt, or $20,722 for every month you cut from the debt.
Even if you religiously reinvested the freed-up payments, then at 4% after retirement, the extra $129,911 that you won't have could have paid you an extra $433 in interest every month without touching the principal.
  • If you lived another 30 years that would be another $155,893 for a total lifetime loss of $285,803 in exchange for saving $12,782 on the short-term debt.

    That's still losing $22 out of your future retirement for ever dollar of interest saved on the debt, or $7,696 for every month you cut from the debt.
Given more details about your top tax brackets, we can plug in numbers for an even closer estimate.

jimb
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Nate79
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Re: Invest or Pay off Student Loans

Post by Nate79 »

+1 to those that recommend to pay down the debt. That is A LOT of debt on that income and a risk free after tax return of the interest rate may in fact beat equity return over the duration of the loan terms. This would also reduce RISK for which you have a boat load right now.

I would not borrow money to invest just to maybe barely beat the return with stocks. Think of it this way. Borrowing at 5% to invest in equities which may return 0-7% over the next decade is very high risk, especially at today's stock valuations.
Topic Author
tbxavier
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Re: Invest or Pay off Student Loans

Post by tbxavier »

camillus wrote: Wed Aug 22, 2018 6:40 pm I recommend the Dave Ramsey show, on youtube, via podcast, etc. What you need is a lot of motivation to do what you have to do. After contributing to 401k match, you need to throw everything you have at the auto loan. What you need is focus. Each month, seeing how much you can pay towards the car. When that is gone, take that extra cash and pay off the 5% student loans. You will make it, but you need focus and enough willpower to reduce your standard of living in order to make progress.
6. Should I just do a combination, some towards loans, some towards the car and some towards savings? towards loans?
Nope, pick one thing. Focus! The lever you need to start pulling on is your saving rate. Every time you eat out, you are taking out a loan for the meal at the highest rate of your debt.
Thank you for your insight and encouragement. I appreciate it
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tbxavier
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Re: Invest or Pay off Student Loans

Post by tbxavier »

jimb_fromATL wrote: Wed Aug 22, 2018 8:18 pm
tbxavier wrote: Wed Aug 22, 2018 7:35 pm
jimb_fromATL wrote: Wed Aug 22, 2018 7:05 pm
tbxavier wrote: Wed Aug 22, 2018 3:19 pm Currently paying $1400/M on my loans and $650/M on my wife's private loans)

Knowing what I know now, I'd contribute more to the retirement plans.

yada...yada...yada etc.
Thank you for your reply, I truly appreciate it. I will definitely check out those links. You offer a different perspective one which I will think about at times and struggle with. However, does it really make that big of a difference to sacrifice 4 yrs to pay the student loans off vs 10 years which seems like a lifetime?
Yes, it really can make all that big a difference. I haven't looked up the tax bracket for married filing separately but I'm pretty sure your top bracket is at 24% for the feds. What is your top bracket for the feds, and do you have a state income tax?

Here's an example for the difference between your 6% and maxing your 401(k), and using a relatively conservative estimated earnings rate of 7% ... when the long term averages for typical funds and portfolios have actually been somewhat higher over long periods.
  • If you stopped contributing $7,200 per year ($600.00 per month) to a 401(K) and if your top tax brackets were 24% federal and 6.% state for a total of 30.% then you would pay $180.00 per month more in taxes, leaving $420.00 to pay on the debt.

    That $180.00 is money that won't pay bills, buy necessities, earn compound interest for the rest of your life, or pay down debt either if you don't contribute to the tax-deferred retirement plan.

    A loan balance of $140,000 at 5.1% with 130 months remaining has a payment of $1400.00 per month for P&I. The total interest will be $42,679.
    .
    Not contributing to the 401(k) and and adding the $420 per month remaining after tax to the loan payment will pay off the debt in 93.3 months with $29,897 in interest. So you save $12,782 in interest and 37.1 months time on the debt.

    Sounds good at first, but notice that during that 93.3 months you've paid an extra $16,803 in taxes that you could have invested for yourself in order to save that $12,782 in interest.

    If you did not delay your contributions, the investment of $600.00 per month earning 7% for the first 267 months and then a conservative estimated average of 7% would grow to $731,983 by retirement time 30. years from now.

    Just a 93.3 months delay in contributions while paying down the debt will cause it to grow to only $382,207 in the remaining 266.7 months. That's a loss of $349,775 at retirement in exchange for saving $12,782 in interest on the debt.

    You won't get to defer any taxes, but you were to re-invest the 37.1 freed-up payments of $1400 in an after-tax account with no delay starting after month 93.3, at 7.% it would grow to $57,862 by the end of the original 130 months

    With no more contributions, that portion would grow to $219,865 by retirement in 30. years. Added to the $382,207 you would have from the delayed $600 contributions, your total at retirement would be $602,072.

    That is still a loss of $129,911 at retirement for exactly the same money out of pocket.

    But those losses are only the tip of the iceberg. Many people seem to overlook that because of compounding, you will usually earn more interest after retirement than you did during your years of contributions.

    If you were to earn a conservative 4% after retirement, that $349,775 that you won't have at retirement if you don't reinvest the payments could have paid you an extra $1165.92 per month without even touching the principal. ( At 3% inflation for 30 years, that would be equivalent to an extra $480/mo. in income today.)

    So if you lived another 30 years, you would have lost the $349,775 that you won't have at retirement, plus the $419,730 of interest it won't earn after retirement, for a total loss of $769,506 in the long term in exchange for saving $12,782 in interest on the short-term debt.

    That's a cost of $60 out of your future retirement income for every dollar you saved on the debt, or $20,722 for every month you cut from the debt.
Even if you religiously reinvested the freed-up payments, then at 4% after retirement, the extra $129,911 that you won't have could have paid you an extra $433 in interest every month without touching the principal.
  • If you lived another 30 years that would be another $155,893 for a total lifetime loss of $285,803 in exchange for saving $12,782 on the short-term debt.

    That's still losing $22 out of your future retirement for ever dollar of interest saved on the debt, or $7,696 for every month you cut from the debt.
Given more details about your top tax brackets, we can plug in numbers for an even closer estimate.

jimb
Wow..... I like your breakdown and it does make some sense, however, are you assuming that I wouldn't be contributing the 6% to my 401 K? I would never do that. My dilemma is centered around what to do with the extra $1800 cash I am making. Increase contributions to retirement, pay of car bill, double up on my loans or do a combination of both? I am in the 24% tax bracket. I live in texas so no state taxes.
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Re: Invest or Pay off Student Loans

Post by jimb_fromATL »

[/quote]
Nate79 wrote: Wed Aug 22, 2018 8:45 pm +1 to those that recommend to pay down the debt. That is A LOT of debt on that income and a risk free after tax return of the interest rate may in fact beat equity return over the duration of the loan terms. This would also reduce RISK for which you have a boat load right now.
I agree that you can't beat the guaranteed return for paying down most debts with after-tax money in taxable accounts. But there's seldom any advantage in guaranteeing to pay taxes in your highest tax brackets several decades earlier than necessary, when most middle income folks who don't expect to have HUGE pensions or other income after retirement are not likely to pay as much tax on their retirement withdrawals as they get to defer and invest in 401(k) and other tax deferred plans.

In states like GA where I live, you also get to defer 6% state tax and will pay little or no state income tax on a substantial amount of the withdrawals. The same would apply for someone who pays state income tax now but might move to GA or some other state where they would pay little or no state income tax on retirement income later.

It's important to understand that the tax advantage of deferring taxes or no tax on earnings in a Roth have yearly limits for contributions. So it's use-it-or-lose it. If you can afford to pay down debts really fast, then you're almost surely in a tax bracket high enough to make it more important to defer the taxes now and put that money to use for you instead of whatever the heck the gubbament will do with it for the next 40-50 years.

As for low return predictions for the stock market, don't overlook that all the technical indicators and formulas we have for predicting how the market might perform are based on how the market has done in the past. So lacking a working crystal ball, we might as well go by the actual historical results.

Here are a few examples for the time it might take to pay off a long debt like a student loan:

S&P 500 index fund
In 33 rolling 10 year periods from 1977 through 2018 a lump sum of $10,000 in VFINX has averaged being worth about $28,635 but has varied from $8,630 to $57,151. For DCA contributions of $5000 per year, the $50,000 conributions have averaged growing to $99,551 but as low as $40,753 and as high as $166,162.

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VFINX Growth of $10,000  lump in 33 rolling  10 yr periods [1977-2018]					
       ---	      CAGR	       $10,000=	         period		
    latest	     14.2%	        $37,735	 2009-2018		
   average	    11.09%	        $28,635	          		
      best	    19.04%	        $57,151	 1989-1998		
     worst	    -1.46%	         $8,630	 1999-2008		
VFINX DCA $5000  per yr  in 33 rolling 10 year periods [1977-2018]					
       ---	       APY	$5,000 per yr= 	         period		
    latest	    13.18%	       $105,151	 2009-2018		
   average	    11.28%	        $99,551	          		
      best	    21.12%	       $166,162	 1989-1998		
     worst	    -3.76%	        $40,753	 1999-2008		



BogleHeads 3 fund portfolio
In 23 rolling 10 year periods from 1987 through 2018 a lump sum of $10,000 in BH_3 has averaged being worth about $21,298 but has varied from $12,056 to $31,391. For DCA contributions of $5000 per year, the $50,000 conributions have averaged growing to $79,079 but as low as $51,111 and as high as $114,403.

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BH_3 Growth of $10,000  lump in 23 rolling  10 yr periods [1987-2018]					
       ---	      CAGR	       $10,000=	         period		
    latest	    10.38%	        $26,852	 2009-2018		
   average	     7.85%	        $21,298	          		
      best	    12.12%	        $31,391	 1991-2000		
     worst	     1.89%	        $12,056	 1999-2008		
BH_3 DCA $5000  per yr  in 23 rolling 10 year periods [1987-2018]					
       ---	       APY	$5,000 per yr= 	         period		
    latest	       9.%	        $82,806	 2009-2018		
   average	     7.89%	        $79,079	          		
      best	    14.65%	       $114,403	 1991-2000		
     worst	       .4%	        $51,111	 1999-2008		

VG Wellington
In 50 rolling 10 year periods from 1930 through 2018 a lump sum of $10,000 in VWELX has averaged being worth about $24,337 but has varied from $9,880 to $47,227. For DCA contributions of $5000 per year, the $50,000 conributions have averaged growing to $88,017 but as low as $44,391 and as high as $131,832.

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VWELX Growth of $10,000  lump in 50 rolling  10 yr periods [1930-2018]					
       ---	      CAGR	       $10,000=	         period		
    latest	    10.49%	        $27,115	 2009-2018		
   average	      9.3%	        $24,337	          		
      best	    16.79%	        $47,227	 1980-1989		
     worst	     -.12%	         $9,880	 1965-1974		
VWELX DCA $5000  per yr  in 50 rolling 10 year periods [1930-2018]					
       ---	       APY	$5,000 per yr= 	         period		
    latest	     9.25%	        $83,969	 2009-2018		
   average	     9.47%	        $88,017	          		
      best	    17.11%	       $131,832	 1980-1989		
     worst	    -2.18%	        $44,391	 1965-1974		

Fidelity Balanced fund (FBALX)
In 23 rolling 10 year periods from 1987 through 2018 a lump sum of $10,000 in FBALX has averaged being worth about $23,520 but has varied from $14,120 to $34,340. For DCA contributions of $5000 per year, the $50,000 conributions have averaged growing to $83,367 but as low as $53,421 and as high as $107,515.

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FBALX Growth of $10,000  lump in 23 rolling  10 yr periods [1987-2018]					
       ---	      CAGR	       $10,000=	         period		
    latest	    11.14%	        $28,756	 2009-2018		
   average	     8.93%	        $23,520	          		
      best	    13.13%	        $34,340	 1989-1998		
     worst	     3.51%	        $14,120	 1999-2008		
FBALX DCA $5000  per yr  in 23 rolling 10 year periods [1987-2018]					
       ---	       APY	$5,000 per yr= 	         period		
    latest	     9.46%	        $85,001	 2009-2018		
   average	      8.9%	        $83,367	          		
      best	    13.57%	       $107,515	 1989-1998		
     worst	      1.2%	        $53,421	 1999-2008		


A balance of 60/40 US stocks and bonds rebalanced annually
In 23 rolling 10 year periods from 1987 through 2018 a lump sum of $10,000 in 60_40 has averaged being worth about $22,599 but has varied from $12,696 to $38,145. For DCA contributions of $5000 per year, the $50,000 conributions have averaged growing to $81,898 but as low as $53,098 and as high as $116,654.

Code: Select all

60_40 Growth of $10,000  lump in 23 rolling  10 yr periods [1987-2018]					
       ---	      CAGR	       $10,000=	         period		
    latest	    10.07%	        $26,094	 2009-2018		
   average	     8.49%	        $22,599	          		
      best	    14.33%	        $38,145	 1989-1998		
     worst	     2.42%	        $12,696	 1999-2008		
60_40 DCA $5000  per yr  in 23 rolling 10 year periods [1987-2018]					
       ---	       APY	$5,000 per yr= 	         period		
    latest	     8.88%	        $82,241	 2009-2018		
   average	     8.44%	        $81,898	          		
      best	    14.99%	       $116,654	 1989-1998		
     worst	     1.09%	        $53,098	 1999-2008		
With so many 10 year rolling averages being in the range of 8-9% and more, I don't think it's unreasonable to expect 7% … and NOT to give up the tax advantage on the off-chance that we might have another bad period that just happens to coincide with our debt payoff schedule and plan.
I would not borrow money to invest just to maybe barely beat the return with stocks. Think of it this way. Borrowing at 5% to invest in equities which may return 0-7% over the next decade is very high risk, especially at today's stock valuations.
Neither would I. But the OP -- and most folks -- borrowed the money to get an education so they can earn more money. NOT to invest it in the stock market. And if they can afford to pay off those big debts faster, they'll still come out better to put more money to use for themselves than to pay taxes in their highest brackets literally decades sooner than necessary.

With that in mind, let's take a quick look at the potential long term loss for giving up the tax advantage and Time Value Of Money to pay off a debt that is a higher rate than our anticipated earnings in our 401(k).

Using the OP's debt and guesstimated tax brackets:
  • A debt balance of $140,000 at 7.% with a payment of $1085.42 per month will be paid off in 240 months.

    Let's look at two choices: (1) Investing the max of $18,500 ...$1541.67 per month... in a 401(k) or other tax-deferred retirement account and paying $1085 per month to pay off a loan balance of $140,000 at 7.% in 240 months.

    Or (2) Don't do the extra $1541.67 per month contributions and pay an extra $462.50 per month in taxes (30.% total for 24% federal and 6% state) then use the remaining $1079.17 per month to pay off the loan faster.

    The extra amount will pay the loan off in 81.4 months and save $84,224 interest. However, that is in exchange for paying $37,664 more in taxes that you won't be investing during that time.
    Once the debt is paid off we can resume the $1541.67 per month pre-tax contributions for the remaining 158.6 months of the original loan period.

    While I've never known anybody who actually did it, we can also invest the freed-up payments for the remaining 158.6 months until the end of the original loan period.

    The $1541.67 per month invested for the entire 240 months of the original loan earning an average APY of 6.% would grow to $712,313.

    If it's delayed for the 81.44 months it takes to pay off the loan faster, then resumed with no delay, the remaining 158.6 contributions of $1542 averaging 6.% will grow to $371,619 by the end of the original loan period.

    So at that point we're short by $340,694. At an average APY of 6.% that could have compounded to $619,858 at retirement time 120 months (10 years) later.

    At retirement time that $619,858 earning a more conservative 4.% could pay about $2066 per month interest without even reducing the balance.

    So if we lived 30 more years, we'd stand to lose the $619,858 we won't have at retirement time plus the $743,829 in interest that it won't earn for the rest of our life, for a total loss of $1,363,687 of potential retirement income -- in exchange for saving $84,224 on the short-term debt.
What if we really do have the sticktoitivity to reinvest the freed up payments?
  • If the 158.6 freed-up after-tax payments of $1085.42 were reinvested at the same 6.% APY they'd grow to $261,640 by the end of the original 240 month loan period.

    Added to the $371,619 from the delayed contributions, that would give a total of $633,259 after 240 months. That's short by $79,054 in 240 months.

    Earning the same rate with no more contributions, that $79,054 could have grown to $143,830 by retirement time. So we've still lost that amount at retirement.

    And that's still only part of the long-term loss. At 4% earnings after retirement that could pay an extra $479 per month in interest without touching the balance.

    So if you lived 30 more years you would still lose the $143,830 you won't have plus the $172,597 interest it won't earn in the next 30 years for a potential total loss of $316,427 of income during your life in exchange for saving the $84,224 interest on the debt.

If you were to earn more nearly the long-term historical averages of the stock market during your career, the long-term loss could run into some real money.

jimb
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tbxavier
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Re: Invest or Pay off Student Loans

Post by tbxavier »

Nate79 wrote: Wed Aug 22, 2018 8:45 pm +1 to those that recommend to pay down the debt. That is A LOT of debt on that income and a risk free after tax return of the interest rate may in fact beat equity return over the duration of the loan terms. This would also reduce RISK for which you have a boat load right now.

I would not borrow money to invest just to maybe barely beat the return with stocks. Think of it this way. Borrowing at 5% to invest in equities which may return 0-7% over the next decade is very high risk, especially at today's stock valuations.
That makes a lot of sense to me. Thank you for your insight.
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Re: Invest or Pay off Student Loans

Post by grabiner »

jimb_fromATL wrote: Wed Aug 22, 2018 8:18 pm Here's an example for the difference between your 6% and maxing your 401(k), and using a relatively conservative estimated earnings rate of 7% ... when the long term averages for typical funds and portfolios have actually been somewhat higher over long periods.
And this is not a fair comparison, because of risk. Paying down a 5% loan is a 5% risk-free return, and tax-free since you make too much to deduct the student loan interest. A diversified portfolio probably has some stocks which have a high expected return with a lot of risk (I usually use 8% return in examples), and some bonds which have a 3% low-risk return.

So you can decide how much risk you want to take; if you have $40,000 in the stock market, you will lose $20,000 if the stock market crashes. You can then decide separately what to do with money without increasing your risk, either paying down a loan or buying bonds.

If you pay down the loans now (after getting the full employer match), you will free up more money for investing once the loans are paid off, and most of that money can go into the 403(b) and IRAs to make up for money you aren't contributing now. Thus, for a given level of risk, you come out ahead paying down the loans.

One exception: if your portfolio is already 100% stock, you could reasonably decide that you will borrow money at 5% to buy more stock. Now, you don't have the option of easily increasing your risk level if you pay down the loans.
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Re: Invest or Pay off Student Loans

Post by runner540 »

camillus wrote: Wed Aug 22, 2018 6:40 pm I recommend the Dave Ramsey show, on youtube, via podcast, etc. What you need is a lot of motivation to do what you have to do. After contributing to 401k match, you need to throw everything you have at the auto loan. What you need is focus. Each month, seeing how much you can pay towards the car. When that is gone, take that extra cash and pay off the 5% student loans. You will make it, but you need focus and enough willpower to reduce your standard of living in order to make progress.
6. Should I just do a combination, some towards loans, some towards the car and some towards savings? towards loans?
Nope, pick one thing. Focus! The lever you need to start pulling on is your saving rate. Every time you eat out, you are taking out a loan for the meal at the highest rate of your debt.
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Re: Invest or Pay off Student Loans

Post by emoore »

I’d max out your retirement and pay any extra toward the loans. You’ll probably come out ahead in 10 years doing that.
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Re: Invest or Pay off Student Loans

Post by jimb_fromATL »

tbxavier wrote: Wed Aug 22, 2018 9:48 pm

Wow..... I like your breakdown and it does make some sense, however, are you assuming that I wouldn't be contributing the 6% to my 401 K? I would never do that.
IMO it would never make financial sense to take a voluntary cut in pay by giving up the employer match.

Actually, I realize now that for my first example I transposed a couple of numbers when I cranked up my spreadsheet. It's still valid, but not quite like your actual tax and 401(k) contributions.

Your 6% of $120,000 is $7,200 per year. The max for a 401(k) this year is $18,500. So you could contribute $11,300 more per year ($941.67 per month) to your 401(k).

So … here's a little closer summary of how it might work with the $941.67 extra per month. This also reduces your taxes since you're in TX.
  • If you stopped contributing $11,300 per year ($941.67 per month) to a 401(K) and if your top tax brackets were 24% federal and 0% state for a total of 24.% then you would pay $226.00 per month more in taxes, leaving $715.67 to pay on the debt.

    That $226.00 is money that won't pay bills, buy necessities, earn compound interest for the rest of your life, or pay down debt either if you don't contribute to the tax-deferred retirement plan.

    A loan balance of $140,000 at 5.1% with 130 months remaining has a payment of $1400.00 per month for P&I. The total interest will be $42,679.

    Not contributing to the 401(k) and and adding the $716 per month remaining after tax to the loan payment will pay off the debt in 77.9 months with $24,734 in interest. So you save $17,944 in interest and 52.6 months time on the debt.

    Sounds good at first, but notice that during that 77.9 months you've paid an extra $17,597 in taxes that you could have invested for yourself in order to save that $17,944 in interest.

    (Wow! I did a double-take when by coincidence the taxes paid came so close to the interest saved. I've done thousands of these kinds of comparisons over a couple of decades or more, and that is an unusual coincidence.)

    If you did not delay your contributions, the investment of $941.67 per month earning 7% for the first 282 months and then a conservative estimated average of 7% would grow to $1,148,806 by retirement time 30. years from now.

    The 77.9 months delay in contributions while paying down the debt will cause it to grow to only $671,605 in the remaining 282.1 months. That's a loss of $477,201 at retirement in exchange for saving $17,944 in interest on the debt.

    You won't get to defer any taxes, but you were to re-invest the 52.6 freed-up payments of $1400 in an after-tax account with no delay starting after month 77.9, at 7.% it would grow to $85,936 by the end of the original 130 months.

    With no more contributions, that portion would grow to $326,540 by retirement in 30. years. Added to the $671,605 you would have from the delayed $942 contributions, your total at retirement would be $998,145.

    That is still a loss of $150,661 at retirement for exactly the same money out of pocket.

    But those losses are only the tip of the iceberg. Many people seem to overlook that because of compounding, you will usually earn more interest after retirement than you did during your years of contributions.

    If you were to earn a conservative 4% after retirement, that $477,201 that you won't have at retirement if you don't reinvest the payments could have paid you an extra $1590.67 per month without even touching the principal. ( At 3% inflation for 30 years, that would be equivalent to an extra $655/mo. in income today.)

    So if you lived another 30 years, you would have lost the $477,201 that you won't have at retirement, plus the $572,641 of interest it won't earn after retirement, for a total loss of $1,049,842 in the long term in exchange for saving $17,944 in interest on the short-term debt.

    That's a cost of $59 out of your future retirement income for every dollar you saved on the debt, or $19,951 for every month you cut from the debt.

    Even if you religiously reinvested the freed-up payments, then at 4% after retirement, the extra $150,661 that you won't have could have paid you an extra $502 in interest every month without touching the principal.

    If you lived another 30 years that would be another $180,793 for a total lifetime loss of $331,454 in exchange for saving $17,944 on the short-term debt. That's still losing $18 out of your future retirement for ever dollar of interest saved on the debt, or $6,299 for every month you cut from the debt.
My dilemma is centered around what to do with the extra $1800 cash I am making. Increase contributions to retirement, pay of car bill, double up on my loans or do a combination of both? I am in the 24% tax bracket. I live in texas so no state taxes.
I'd contribute the max to the 401(k) first. Then build up at least 6 months or more of cash savings for emergencies. Then I'd look more at paying down the student loan debts and/or car.

You're seeing differing opinions here. Yes, there is some risk in speculating on on how much you might earn in the stock market. But my previous post in this thread shows some examples of how a lot of popular funds and allocations have performed.

But at least this way you'll be able to make a more informed decision about how much you want to risk and how much more tax you want to guarantee to pay in advance -- to compare to how much it might cost you if the stock market does do as well in the future as it has always done on the average in the past.

And don't forget that if you don't max the 401(k) you are guaranteeing to pay taxes in your highest bracket now and losing the Time Value Of Money on that amount. (However, since you don't have a state tax, the potential loss of tax advantage is not quite as bad as it would be in a high-tax state.)

Incidentally, I'm a big fan of paying off debt. We paid off our two homes in about 10 years each. We haven't had a mortgage since the early 90s and haven't had a car payment or other interest-bearing debt payment since about 1980.

But I can tell you from nearly 3 decades of experience in retirement (since age 45) that neither I or any other retirees I know of are really all that glad to have anywhere from tens to hundreds of thousands less in our retirement accounts now in exchange for saving a few thousand dollars in interest on our debts several decades ago.

So … now you're better equipped to decide how much is might be worth probably losing from your future retirement in order to feel good about eliminating your debt a little sooner.

jimb
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Re: Invest or Pay off Student Loans

Post by megabad »

tbxavier wrote: Wed Aug 22, 2018 7:49 pm Thank you for your reply. I am a fan of TRS. TRS just deals with the pension in which teachers are automatically enrolled. The 403B and 457B are separate plans (not administered by TRS) that she is eligible to participate in by virtue of her being a full time employee of the school district. If you go to tcgservices.com select my account and CLICK on plan information. Type in FORTBEND ISD, click on 457B then click on the summary plan description. Let me know what you think about those fees. And those fees does not include the fees for the investment plan. If you go to 1st quarter review under resources heading, yo can see the individual plans. Let me know what you think of it. They do offer Vanguard Total Stock Mkt Idx Inv (VTSMX). But that's about it i guess.
Thanks for the education, I just incorrectly assumed the 457 was regulated by TRS as well. I would definitely agree that those fees seem quite high.
We apparently have a different flavor of Texas account thru "ERS" which is pretty good? I can't remember how that happened as I know the money started in TRS? I guess I would just stick to the 403b in your case (which seems pretty attractive to me if you go with VG or Fido).
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Re: Invest or Pay off Student Loans

Post by camillus »

emoore wrote: Wed Aug 22, 2018 10:17 pm I’d max out your retirement and pay any extra toward the loans. You’ll probably come out ahead in 10 years doing that.
I think there's a difference between the two lines of suggestions here, apples and oranges:

1) Maintain moderate lifestyle, put available cash flow into deferred retirement accounts.

2) Cut lifestyle and increase savings rate, focus like crazy on a "debt snowball."

Behaviorally, I think a debt snowball works because of a higher level of focus and dedication. As Mr Money Mustache puts it, debt is an emergency - something like, "you are on fire and covered with bees."

A debt snowball, behaviorally, works concretely because of goal setting: "Let's work together to pay off the car by June, 2019 or earlier!" This goal setting promotes an increased savings rate and decreased consumption rate.

Also, keep in mind that the route of contributing to a 401k may result in a higher net worth in 10 years, assuming one's saving rate is the same as a debt snowball scenario - which I contest - that isn't a "true" net worth comparison, because the 401k balance will eventually have taxes due.

Paying down debt at 5% is a tax free return.

In sum: the rate of return isn't the only variable to consider. Equally or perhaps more important is the rate of saving. The way to leverage your savings rate is through behavioral finance, namely a debt snowball.


Another random thought --

If it is logical to max out a 401k to invest even in the presence of debt in multiples of annual income, wouldn't the common advice be to take out all possible debt, mortgage, HELOC, etc, in order to max out retirement accounts? Notice that this advice is not given.
Last edited by camillus on Thu Aug 23, 2018 10:12 am, edited 1 time in total.
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jehovasfitness
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Re: Invest or Pay off Student Loans

Post by jehovasfitness »

Your wife has 170k student loans as a teacher?
jehovasfitness
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Joined: Mon Jan 22, 2018 2:26 pm

Re: Invest or Pay off Student Loans

Post by jehovasfitness »

To answer your question.

I would do what people above said, contribute to get the match (that's basically 100% ROI) and the pay off the debt.

That's a TON of debt
User avatar
CyclingDuo
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Re: Invest or Pay off Student Loans

Post by CyclingDuo »

tbxavier wrote: Wed Aug 22, 2018 3:19 pm This is driving me crazy. Here's my situation:
Me 36, Wife 35 No kids Married filing separately (for student loan purposes)
Salary: Me: $120,000 Wife: $59,000 annual
Student loans: Me $140K fixed at 5.1% IR 10 yrs
Wife $80K fixed at 5% IR (10 yrs) private & $90K government (wife's government loan
enrolled in PSLF program so most of that will be forgiven after 8 years. So were paying
the minimum of $190/M on that)
Currently paying $1400/M on my loans and $650/M on my wife's private loans)
We currently have a house mortgage $300K (IR 3.875%). With insurance and taxes we pay around $2100/M
Car loans: $11,500 Payment listed at $238/M x 4 yrs, however I pay $322/M
Retirement: Me: 401 K I contribute 6% to get employer match
Wife is a teacher so she has some form of pension at retirement. Also have the option of doing a
457B or a 403b (investing in annuities) through her school district
Has $30K we need to rollover to another retirement account

I recently picked up an extra job, where I can make $1800 extra before taxes. I am conflicted as to what to do with this money. Initially, my idea was to double up on my student loan payments and clear them in 4 yrs, but I keep changing my mind.
Gross Annual Salary: $179,000

Monthly Income after taxes: $?????
Monthly Extra Job Salary: $????
Mortgage: $2100 per month
Car Payment: $322 per month
Retirement 401k: $600 per month
Wife's Pension: $???? per month
Student Loans: $2050 per month
Other expenses (needs/wants/variable): $?????

It wouldn't hurt to provide a monthly cash flow so we could see what is left over from your gross income minus the debt payments, your 401k contribution (not your employer's match), your wife's pension contribution (not her employer's contribution), taxes, and your other expenses (food, gas, utilities, garbage, cable, phone/internet, health/dental insurance, car insurance, life insurance, umbrella insurance, home maintenance, clothing, hobby/recreation, travel, entertainment, etc...). Without knowledge of the monthly cash flow budget, we have no idea what to recommend. As far as we know you are burning through the remaining cash - or not? We have no idea.

Example of our expense categories...


Expenses (Needs) - $

Mortgage (PITI) - $
Health Insurance - $
Dental Insurance - $
Utilities - $ (Electric/Water/Gas/Sewer)
Garbage: $
Insurance (Auto/Umbrella/Flood/Jewelry): $

Expenses (Wants) - $

Pets: $
Hair Styling: $
Family Cell Phone Plan/4 phones + iWatches - $
Religious Tithing - $
Insect Control: $
Netflix: $
Cable/Internet: $
Charitable Organization Monthly Donation: $
XM Radio – $

Expenses (Variable Monthly) - $

Groceries/Food/Restaurants – $
Entertainment – $
Travel – $
Clothing – $
Auto Maintenance/Gas/Repairs – $
Home Maintenance – $


Total Expenses (Needs/Wants/Variables) = $

Knowing what is left at the end of the month is key for any of us to make a recommendation where it would be best utilized, or where lifestyle creep could be thwarted.
"Save like a pessimist, invest like an optimist." - Morgan Housel
Topic Author
tbxavier
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Re: Invest or Pay off Student Loans

Post by tbxavier »

jehovasfitness wrote: Thu Aug 23, 2018 10:12 am Your wife has 170k student loans as a teacher?
Yep. She also went to grad school.
Topic Author
tbxavier
Posts: 30
Joined: Wed Aug 22, 2018 2:00 pm

Re: Invest or Pay off Student Loans

Post by tbxavier »

jehovasfitness wrote: Thu Aug 23, 2018 10:18 am To answer your question.

I would do what people above said, contribute to get the match (that's basically 100% ROI) and the pay off the debt.

That's a TON of debt
I agree.
Topic Author
tbxavier
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Re: Invest or Pay off Student Loans

Post by tbxavier »

jimb_fromATL wrote: Wed Aug 22, 2018 11:12 pm
tbxavier wrote: Wed Aug 22, 2018 9:48 pm

Wow..... I like your breakdown and it does make some sense, however, are you assuming that I wouldn't be contributing the 6% to my 401 K? I would never do that.
IMO it would never make financial sense to take a voluntary cut in pay by giving up the employer match.

Actually, I realize now that for my first example I transposed a couple of numbers when I cranked up my spreadsheet. It's still valid, but not quite like your actual tax and 401(k) contributions.

Your 6% of $120,000 is $7,200 per year. The max for a 401(k) this year is $18,500. So you could contribute $11,300 more per year ($941.67 per month) to your 401(k).

So … here's a little closer summary of how it might work with the $941.67 extra per month. This also reduces your taxes since you're in TX.
  • If you stopped contributing $11,300 per year ($941.67 per month) to a 401(K) and if your top tax brackets were 24% federal and 0% state for a total of 24.% then you would pay $226.00 per month more in taxes, leaving $715.67 to pay on the debt.

    That $226.00 is money that won't pay bills, buy necessities, earn compound interest for the rest of your life, or pay down debt either if you don't contribute to the tax-deferred retirement plan.

    A loan balance of $140,000 at 5.1% with 130 months remaining has a payment of $1400.00 per month for P&I. The total interest will be $42,679.

    Not contributing to the 401(k) and and adding the $716 per month remaining after tax to the loan payment will pay off the debt in 77.9 months with $24,734 in interest. So you save $17,944 in interest and 52.6 months time on the debt.

    Sounds good at first, but notice that during that 77.9 months you've paid an extra $17,597 in taxes that you could have invested for yourself in order to save that $17,944 in interest.

    (Wow! I did a double-take when by coincidence the taxes paid came so close to the interest saved. I've done thousands of these kinds of comparisons over a couple of decades or more, and that is an unusual coincidence.)

    If you did not delay your contributions, the investment of $941.67 per month earning 7% for the first 282 months and then a conservative estimated average of 7% would grow to $1,148,806 by retirement time 30. years from now.

    The 77.9 months delay in contributions while paying down the debt will cause it to grow to only $671,605 in the remaining 282.1 months. That's a loss of $477,201 at retirement in exchange for saving $17,944 in interest on the debt.

    You won't get to defer any taxes, but you were to re-invest the 52.6 freed-up payments of $1400 in an after-tax account with no delay starting after month 77.9, at 7.% it would grow to $85,936 by the end of the original 130 months.

    With no more contributions, that portion would grow to $326,540 by retirement in 30. years. Added to the $671,605 you would have from the delayed $942 contributions, your total at retirement would be $998,145.

    That is still a loss of $150,661 at retirement for exactly the same money out of pocket.

    But those losses are only the tip of the iceberg. Many people seem to overlook that because of compounding, you will usually earn more interest after retirement than you did during your years of contributions.

    If you were to earn a conservative 4% after retirement, that $477,201 that you won't have at retirement if you don't reinvest the payments could have paid you an extra $1590.67 per month without even touching the principal. ( At 3% inflation for 30 years, that would be equivalent to an extra $655/mo. in income today.)

    So if you lived another 30 years, you would have lost the $477,201 that you won't have at retirement, plus the $572,641 of interest it won't earn after retirement, for a total loss of $1,049,842 in the long term in exchange for saving $17,944 in interest on the short-term debt.

    That's a cost of $59 out of your future retirement income for every dollar you saved on the debt, or $19,951 for every month you cut from the debt.

    Even if you religiously reinvested the freed-up payments, then at 4% after retirement, the extra $150,661 that you won't have could have paid you an extra $502 in interest every month without touching the principal.

    If you lived another 30 years that would be another $180,793 for a total lifetime loss of $331,454 in exchange for saving $17,944 on the short-term debt. That's still losing $18 out of your future retirement for ever dollar of interest saved on the debt, or $6,299 for every month you cut from the debt.
My dilemma is centered around what to do with the extra $1800 cash I am making. Increase contributions to retirement, pay of car bill, double up on my loans or do a combination of both? I am in the 24% tax bracket. I live in texas so no state taxes.
I'd contribute the max to the 401(k) first. Then build up at least 6 months or more of cash savings for emergencies. Then I'd look more at paying down the student loan debts and/or car.

You're seeing differing opinions here. Yes, there is some risk in speculating on on how much you might earn in the stock market. But my previous post in this thread shows some examples of how a lot of popular funds and allocations have performed.

But at least this way you'll be able to make a more informed decision about how much you want to risk and how much more tax you want to guarantee to pay in advance -- to compare to how much it might cost you if the stock market does do as well in the future as it has always done on the average in the past.

And don't forget that if you don't max the 401(k) you are guaranteeing to pay taxes in your highest bracket now and losing the Time Value Of Money on that amount. (However, since you don't have a state tax, the potential loss of tax advantage is not quite as bad as it would be in a high-tax state.)

Incidentally, I'm a big fan of paying off debt. We paid off our two homes in about 10 years each. We haven't had a mortgage since the early 90s and haven't had a car payment or other interest-bearing debt payment since about 1980.

But I can tell you from nearly 3 decades of experience in retirement (since age 45) that neither I or any other retirees I know of are really all that glad to have anywhere from tens to hundreds of thousands less in our retirement accounts now in exchange for saving a few thousand dollars in interest on our debts several decades ago.

So … now you're better equipped to decide how much is might be worth probably losing from your future retirement in order to feel good about eliminating your debt a little sooner.

jimb
I wish I could retire at 50....congrats. Based on our budget and salary, I think I can do a bit of both. If I double my retirement savings (401K) from 6 to 12 % I would be contributing roughly $14,000 instead of $7000. That will leave a $4500 gap per year. Over 3 years that would be $13,500 I would not be allocating to the 401K. Much better than before I think. I think I should start there for the first year and see how it goes. If all goes well then I will max out as your argument is logical and it would benefit us in the long run. I can do this without using the extra cash. So it still means that I can at least use the extra to pay down on the loans and build an emergency fund.

Question: No one addressed my question on the backdoor roth. What do you think about it in our situation. Lets say I maxed out my 401 K. Would it be wise to do a backdoor roth? I understand the concept but not sure about the tax implications.
b42
Posts: 379
Joined: Thu Apr 11, 2013 7:00 pm

Re: Invest or Pay off Student Loans

Post by b42 »

A backdoor Roth IRA would require you to pay taxes on the contributions, which doesn't make financial sense when you have relatively-high interest debt.

Check this link for more in-depth information:
https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
LuckBeALady
Posts: 76
Joined: Sun Mar 14, 2010 7:33 am

Re: Invest or Pay off Student Loans

Post by LuckBeALady »

We were up to our armpits in debt in 2001. I took jimb’s advice from a post in the early 2000’s and contributed to my TSP before paying down student loan debt (despite Dave Ramsey’s advice to pay off debt first at all costs), and today I have a cool million socked away in retirement savings despite a fairly modest income for many years...and I’m debt free except the mortgage. It was good advice. We will be going part-time later this year at ages 53 and 54.

The power of compounding is indeed magical.

Thanks, jimb. I appreciate the time you take to lay out the facts that support your recommendations.
megabad
Posts: 3625
Joined: Fri Jun 01, 2018 4:00 pm

Re: Invest or Pay off Student Loans

Post by megabad »

jimb_fromATL wrote: Wed Aug 22, 2018 11:12 pm If you lived another 30 years that would be another $180,793 for a total lifetime loss of $331,454 in exchange for saving $17,944 on the short-term debt. That's still losing $18 out of your future retirement for ever dollar of interest saved on the debt, or $6,299 for every month you cut from the debt.[/list]
Respectfully, it seems to me that almost the entire difference ("loss") depends on an assumed 7% gain in the 4 year period in which OP would pay down debt (and not max out 401k). I would not bet the farm on a 7% return in the next 4 years, but I could be wrong. And I would argue a sizable correction would change your calculations considerably. In contrast, I would probably be much more keen on your bet with a 4% 30 yr mortgage.

In this case, I am actually of the belief that the end result will not be that different either way (a few % of retirement portfolio size). Statistically though, I would agree that your bet has a higher probability of ending better off based on historical information. But you have to draw the line with risk somewhere or we would all be leveraged to the hilt with low interest margin debt due to high probability of higher returns in the market than the interest rate. Unfortunately, in statistics you get to flip the coin again if you don't like the result; in life you don't.
3504PIR
Posts: 975
Joined: Mon Jul 26, 2010 2:46 am

Re: Invest or Pay off Student Loans

Post by 3504PIR »

PFInterest wrote: Wed Aug 22, 2018 4:18 pm
tbxavier wrote: Wed Aug 22, 2018 3:19 pm This is driving me crazy. Here's my situation:
Me 36, Wife 35 No kids Married filing separately (for student loan purposes)
Salary: Me: $120,000 Wife: $59,000 annual
Student loans: Me $140K fixed at 5.1% IR 10 yrs
Wife $80K fixed at 5% IR (10 yrs) private & $90K government (wife's government loan
enrolled in PSLF program so most of that will be forgiven after 8 years. So were paying
the minimum of $190/M on that)
Currently paying $1400/M on my loans and $650/M on my wife's private loans)
We currently have a house mortgage $300K (IR 3.875%). With insurance and taxes we pay around $2100/M
Car loans: $11,500 Payment listed at $238/M x 4 yrs, however I pay $322/M
Retirement: Me: 401 K I contribute 6% to get employer match
Wife is a teacher so she has some form of pension at retirement. Also have the option of doing a
457B or a 403b (investing in annuities) through her school district
Has $30K we need to rollover to another retirement account

I recently picked up an extra job, where I can make $1800 extra before taxes. I am conflicted as to what to do with this money. Initially, my idea was to double up on my student loan payments and clear them in 4 yrs, but I keep changing my mind. So my questions are below:

1. Should I focus on clearing my student loan debt first by doubling up on my student loan payments and pay of in 4 years VS 10 yrs. (My concern here is that it's hard to dish out so much money and forgo missing out on cumulative interest if I invest). But I am thinking that if I can free up $1400 per month, I could do a lot with that.

2. Should I focus on retirement savings or regular investments instead and max out my 401 K instead ? Am only paying 6% (which roughly equals to around $9K with employee additions). In my ideal world of course it would make sense to max out my 401K and also retirement account for my wife. But given our situation, am just trying to figure out what makes best sense.

3. Should I rollover my wife's 30K in the 403B or 457B that's offered and contribute the max also ? Or should I just make contributions we can afford? Or just roll it over and hold off on contributions until our debts are paid?

4. Is the 'backdoor ROTH' an option and does it make sense tax wise for me and/or her given our situation? Right now we don't qualify for a regular roth. (This may be a topic for another thread because i have more questions related to this)

5. Should I just knock out that car loan within a year by paying $1000/M and just get rid of it?

6. Should I just do a combination, some towards loans, some towards the car and some towards savings? towards loans?

I welcome advice, debate and discussion. I appreciate your time and wisdom.
- you need to pay off the car (a loan on a depreciating asset isnt great)
- you need to pay off the private loan
- why would you pay extra to the loans when you are already going through the trouble of MFS to lower the potential payment?
- you need to start maxing retirement accounts and rIRAs.
As the first responder, or even second or third for that matter, why do you quote the op? I’ve noticed this is common on BH but never seen it anywhere else.
3504PIR
Posts: 975
Joined: Mon Jul 26, 2010 2:46 am

Re: Invest or Pay off Student Loans

Post by 3504PIR »

PFInterest wrote: Wed Aug 22, 2018 4:18 pm
tbxavier wrote: Wed Aug 22, 2018 3:19 pm This is driving me crazy. Here's my situation:
Me 36, Wife 35 No kids Married filing separately (for student loan purposes)
Salary: Me: $120,000 Wife: $59,000 annual
Student loans: Me $140K fixed at 5.1% IR 10 yrs
Wife $80K fixed at 5% IR (10 yrs) private & $90K government (wife's government loan
enrolled in PSLF program so most of that will be forgiven after 8 years. So were paying
the minimum of $190/M on that)
Currently paying $1400/M on my loans and $650/M on my wife's private loans)
We currently have a house mortgage $300K (IR 3.875%). With insurance and taxes we pay around $2100/M
Car loans: $11,500 Payment listed at $238/M x 4 yrs, however I pay $322/M
Retirement: Me: 401 K I contribute 6% to get employer match
Wife is a teacher so she has some form of pension at retirement. Also have the option of doing a
457B or a 403b (investing in annuities) through her school district
Has $30K we need to rollover to another retirement account

I recently picked up an extra job, where I can make $1800 extra before taxes. I am conflicted as to what to do with this money. Initially, my idea was to double up on my student loan payments and clear them in 4 yrs, but I keep changing my mind. So my questions are below:

1. Should I focus on clearing my student loan debt first by doubling up on my student loan payments and pay of in 4 years VS 10 yrs. (My concern here is that it's hard to dish out so much money and forgo missing out on cumulative interest if I invest). But I am thinking that if I can free up $1400 per month, I could do a lot with that.

2. Should I focus on retirement savings or regular investments instead and max out my 401 K instead ? Am only paying 6% (which roughly equals to around $9K with employee additions). In my ideal world of course it would make sense to max out my 401K and also retirement account for my wife. But given our situation, am just trying to figure out what makes best sense.

3. Should I rollover my wife's 30K in the 403B or 457B that's offered and contribute the max also ? Or should I just make contributions we can afford? Or just roll it over and hold off on contributions until our debts are paid?

4. Is the 'backdoor ROTH' an option and does it make sense tax wise for me and/or her given our situation? Right now we don't qualify for a regular roth. (This may be a topic for another thread because i have more questions related to this)

5. Should I just knock out that car loan within a year by paying $1000/M and just get rid of it?

6. Should I just do a combination, some towards loans, some towards the car and some towards savings? towards loans?

I welcome advice, debate and discussion. I appreciate your time and wisdom.
- you need to pay off the car (a loan on a depreciating asset isnt great)
- you need to pay off the private loan
- why would you pay extra to the loans when you are already going through the trouble of MFS to lower the potential payment?
- you need to start maxing retirement accounts and rIRAs.
As the first responder, or even second or third for that matter, why do you quote the op? I’ve noticed this is common on BH but never seen it anywhere else.
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Invest or Pay off Student Loans

Post by PFInterest »

3504PIR wrote: Fri Aug 24, 2018 3:53 am As the first responder, or even second or third for that matter, why do you quote the op? I’ve noticed this is common on BH but never seen it anywhere else.
so they get a notification.

no need to post twice as well.
gvsucavie03
Posts: 1460
Joined: Sat Feb 16, 2013 8:30 am

Re: Invest or Pay off Student Loans

Post by gvsucavie03 »

LuckBeALady wrote: Thu Aug 23, 2018 6:42 pm We were up to our armpits in debt in 2001. I took jimb’s advice from a post in the early 2000’s and contributed to my TSP before paying down student loan debt (despite Dave Ramsey’s advice to pay off debt first at all costs), and today I have a cool million socked away in retirement savings despite a fairly modest income for many years...and I’m debt free except the mortgage. It was good advice. We will be going part-time later this year at ages 53 and 54.

The power of compounding is indeed magical.

Thanks, jimb. I appreciate the time you take to lay out the facts that support your recommendations.
Had you put your match at the debt instead, your overall balance sheet today wouldn't be that much different, maybe a bit higher, assuming your match plus additional debt payments were invested immediately after the debt was paid off. In other words, the debt was paid off much faster and your amount you started investing was much greater. However, those folks with large incomes that have more disposable income can do this and make heavy debt payments. I would not have been able to do this as a teacher just starting out. My student loan payments alone were over $700 per month. I did 100% debt repayment and paid cash for my Masters and I'm very glad I did despite what could be a smaller retirement account. I now have income to make up some ground, and my pension is higher for life with a Masters, too.
Topic Author
tbxavier
Posts: 30
Joined: Wed Aug 22, 2018 2:00 pm

Re: Invest or Pay off Student Loans

Post by tbxavier »

LuckBeALady wrote: Thu Aug 23, 2018 6:42 pm We were up to our armpits in debt in 2001. I took jimb’s advice from a post in the early 2000’s and contributed to my TSP before paying down student loan debt (despite Dave Ramsey’s advice to pay off debt first at all costs), and today I have a cool million socked away in retirement savings despite a fairly modest income for many years...and I’m debt free except the mortgage. It was good advice. We will be going part-time later this year at ages 53 and 54.

The power of compounding is indeed magical.

Thanks, jimb. I appreciate the time you take to lay out the facts that support your recommendations.
Cool...thank you for sharing this. I appreciate it.
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