How to best approach saving for retirement/debt reduction

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
N10sive
Posts: 329
Joined: Thu May 05, 2016 6:22 pm

How to best approach saving for retirement/debt reduction

Post by N10sive » Thu Jan 12, 2017 3:36 pm

6 Month Update:
I am going to get a pretty significant raise starting june 15th. With this raise I will jump to the 28% + 9% state tax bracket. To get the most out of the raise instead of almost half of it going to taxes(CA state tax is 9.3%) I am thinking about putting a portion into my 401k. I did the math and 10 or 15% is good with me still having an extra roughly 500-700 a month to add to the debt reduction. Also putting into my 401k will keep me in the 25% tax bracket, roughly need 5k this year in contributions. Here is the current situation(I have stuck mostly on track besides a few trips to friends weddings)

30 years old
30k in 401k no match (Halted, but currently around 1.2k this year)
3.3k in Roth IRA (300 per month contribution, keeping since it is my emergency fund. I think I may stop this now with the raise.)
34k cc debt (Working on this currently and hope to have done by end of next year if not sooner. 100% of debt is at 0% for 12months)
9.8k student loan at 7%
105k salary (new salary)

Questions:

1) Should I contribute to my 401k to put me in the 25% bracket. Putting in 10% gives me a $870 extra a month and $875 into my traditional. Where as putting nothing gives me 1350 extra a month. This would still take a while to pay down the debt if I do put into my 401k but it could save me almost 5k a year in taxes.

2)I believe now that I am in the higher tax bracket I should discountinue my roth savings until I completely max out my 401k(this is after debt is gone).

*I know its not the boglehead way, but I do have 3 cards that consistently give me 0% balance transfers. I can keep doing this till paid off with the 2-3% transfer fee. I feel I am more committed than ever to get out of debt so it is not concerning me to go this method once the 0% runs out. While saving a good portion of money from taxes.

As always the comments of this forum are appreciated.
----------------------------------------------------------------------------------------------
I removed the previous questions to focus on my current one.
Hello,

Joined this site about 8 months ago and have been slowly transitioning to concentrating more on retirement and getting out of debt. I've significantly reduced my debt over the last 8 months somewhere north of 10k but still have a ways to go. In this situation I am also looking to keep saving for retirement as most of the debt is at 0% for 18months.

Situation
30 years old
30k in 401k no match (600 per month contribution)
2k in Roth IRA (300 per month contribution, right now acts as my emergency fund so just in a low risk money market account)
40k cc debt (Working on this currently and hope to have done by end of next year if not sooner. 100% of debt is at 0% for 18months)
10k student loan at 7%
81k salary (looking to increase with a job change and state move)

Take home pay is around 4k. Of that 2.3k goes to rent, insurance, phone, gas, food etc(I have been meticulously tracking this and cut my food expenses from 1k to 300 a month). So I have around 1.7k to put towards debt a month which probably 1.5k is going to debt.

TIA for the help. Wish I would have found this website years ago. Ironically found it from a truck forum which was where most of my money was going :).
Last edited by N10sive on Thu Jun 01, 2017 6:21 pm, edited 5 times in total.

rr2
Posts: 1014
Joined: Wed Nov 19, 2008 10:04 pm

Re: How to best approach saving for retirement/debt reduction

Post by rr2 » Thu Jan 12, 2017 3:45 pm

A long time ago, I bought something on a 0% loan for 12 months. The terms were that if the loan was not completely paid back in 12 months, then interest would be retroactively charged at the higher rate from the start of the loan. Not sure if such loans and terms still exist. Something to check.

fishmonger
Posts: 469
Joined: Fri Jan 31, 2014 2:20 pm

Re: How to best approach saving for retirement/debt reduction

Post by fishmonger » Thu Jan 12, 2017 3:46 pm

If it was me, I would put all other goals aside and focus all of your resources on paying off the CC debt (regardless of the current interest rate)

N10sive
Posts: 329
Joined: Thu May 05, 2016 6:22 pm

Re: How to best approach saving for retirement/debt reduction

Post by N10sive » Thu Jan 12, 2017 3:52 pm

rr2 wrote:A long time ago, I bought something on a 0% loan for 12 months. The terms were that if the loan was not completely paid back in 12 months, then interest would be retroactively charged at the higher rate from the start of the loan. Not sure if such loans and terms still exist. Something to check.


For me this is not the case I made sure of it. Only thing is the interest rate will probably be around 19% after the 18 months.

N10sive
Posts: 329
Joined: Thu May 05, 2016 6:22 pm

Re: How to best approach saving for retirement/debt reduction

Post by N10sive » Thu Jan 12, 2017 3:54 pm

fishmonger wrote:If it was me, I would put all other goals aside and focus all of your resources on paying off the CC debt (regardless of the current interest rate)


My worry is I see all the compound interest marketing. Specifically one where if people were aged 10 years apart the older person would have to put twice as much into investments as the younger age to achieve the same results.

Is this something to not worry about?

autopeep
Posts: 120
Joined: Fri Jan 01, 2016 6:30 pm

Re: How to best approach saving for retirement/debt reduction

Post by autopeep » Thu Jan 12, 2017 3:56 pm

N10sive wrote:
fishmonger wrote:If it was me, I would put all other goals aside and focus all of your resources on paying off the CC debt (regardless of the current interest rate)


My worry is I see all the compound interest marketing. Specifically one where if people were aged 10 years apart the older person would have to put twice as much into investments as the younger age to achieve the same results.

Is this something to not worry about?


Those people don't have substantial credit card debt.

rr2
Posts: 1014
Joined: Wed Nov 19, 2008 10:04 pm

Re: How to best approach saving for retirement/debt reduction

Post by rr2 » Thu Jan 12, 2017 3:57 pm

N10sive wrote:
rr2 wrote:A long time ago, I bought something on a 0% loan for 12 months. The terms were that if the loan was not completely paid back in 12 months, then interest would be retroactively charged at the higher rate from the start of the loan. Not sure if such loans and terms still exist. Something to check.


For me this is not the case I made sure of it. Only thing is the interest rate will probably be around 19% after the 18 months.

I would focus on paying off the CC before the 18 months expire and minimize/eliminate other savings. One delayed year of savings will not matter too much.

Don't count on receiving the loaned money. If you are lucky and it comes soon, then use it to pay off the CC debt.

bloom2708
Posts: 2940
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: How to best approach saving for retirement/debt reduction

Post by bloom2708 » Thu Jan 12, 2017 4:02 pm

Think how (correction) much you could invest with the $50k in debt gone. You are feeling the dilution of effort because the debt is limiting your cash flow.

Have you addressed the issues that resulted in the $40k in CC debt? I have a friend that has been "debt free" many times. He doesn't address the issues that gets him in the CC debt.

If so, I would set a 12 to 18 month plan to thrash the debt. No polite and slow walking out the door. Stop retirement contributions. Keep a bare minimum $1,000 Emergency Fund. Sell anything that isn't nailed down. Get a second job.

The Total Money Makeover by Dave Ramsey might be a good read for you. You need something to light a spark and blast the debt. 12-18 months isn't going to dramatically set back your retirement. Especially if you can save $1,000 per month compared to $600 per month currently.

Good luck.
Last edited by bloom2708 on Thu Jan 12, 2017 4:57 pm, edited 1 time in total.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

N10sive
Posts: 329
Joined: Thu May 05, 2016 6:22 pm

Re: How to best approach saving for retirement/debt reduction

Post by N10sive » Thu Jan 12, 2017 4:25 pm

bloom2708 wrote:Think you much you could invest with the $50k in debt gone. You are feeling the dilution of effort because the debt is limiting your cash flow.

Have you addressed the issues that resulted in the $40k in CC debt? I have a friend that has been "debt free" many times. He doesn't address the issues that gets him in the CC debt.

If so, I would set a 12 to 18 month plan to thrash the debt. No polite and slow walking out the door. Stop retirement contributions. Keep a bare minimum $1,000 Emergency Fund. Sell anything that isn't nailed down. Get a second job.

The Total Money Makeover by Dave Ramsey might be a good read for you. You need something to light a spark and blast the debt. 12-18 months isn't going to dramatically set back your retirement. Especially if you can save $1,000 per month compared to $600 per month currently.

Good luck.


Yes I have, Mostly from lending a chunk of money I didn't have with expectation to get it back along with an expensive overseas trip and moving to a very HCOL area without adjusting much of my needs. Rent doubled to 1k, and I always ate out which was around 1k a month but now I budget for 300. As I said around 8 months ago I changed a lot of things, sold my truck and got a civic which is saving me around 700 bucks a month and reduced my debt to what it is now.

I feel I am on the right path just wanted to know if I should put retirement savings off to pay my debt off first. I have debated a second job, possibly doing some driving delivery but my work consumes most of my days and I am studying to pass my ccna currently.

pierremonfrere
Posts: 125
Joined: Tue Jun 23, 2015 7:34 pm

Re: How to best approach saving for retirement/debt reduction

Post by pierremonfrere » Thu Jan 12, 2017 4:51 pm

N10sive wrote:
bloom2708 wrote:Think you much you could invest with the $50k in debt gone. You are feeling the dilution of effort because the debt is limiting your cash flow.

Have you addressed the issues that resulted in the $40k in CC debt? I have a friend that has been "debt free" many times. He doesn't address the issues that gets him in the CC debt.

If so, I would set a 12 to 18 month plan to thrash the debt. No polite and slow walking out the door. Stop retirement contributions. Keep a bare minimum $1,000 Emergency Fund. Sell anything that isn't nailed down. Get a second job.

The Total Money Makeover by Dave Ramsey might be a good read for you. You need something to light a spark and blast the debt. 12-18 months isn't going to dramatically set back your retirement. Especially if you can save $1,000 per month compared to $600 per month currently.

Good luck.


Yes I have, Mostly from lending a chunk of money I didn't have with expectation to get it back along with an expensive overseas trip and moving to a very HCOL area without adjusting much of my needs. Rent doubled to 1k, and I always ate out which was around 1k a month but now I budget for 300. As I said around 8 months ago I changed a lot of things, sold my truck and got a civic which is saving me around 700 bucks a month and reduced my debt to what it is now.

I feel I am on the right path just wanted to know if I should put retirement savings off to pay my debt off first. I have debated a second job, possibly doing some driving delivery but my work consumes most of my days and I am studying to pass my ccna currently.


It sounds like you are making some very good progress.

If I were in your situation I would put all my money towards the debt (ala MMM). Definitely needs to be gone before the CC interest kicks in.

Perhaps stretching out the payments while you're on 0% interest and investing the difference might make more financial sense. But I feel like the lessons learned and psychological factor of becoming debt free asap would be more beneficial. YMMV

http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency

N10sive
Posts: 329
Joined: Thu May 05, 2016 6:22 pm

Re: How to best approach saving for retirement/debt reduction

Post by N10sive » Thu Jan 12, 2017 5:05 pm

pierremonfrere wrote:
Perhaps stretching out the payments while you're on 0% interest and investing the difference might make more financial sense. But I feel like the lessons learned and psychological factor of becoming debt free asap would be more beneficial. YMMV


This is really what I came here to get answered. I feel that funding my retirement has benefits. 1) Accrued interest although everyone expects there to be a drop. 2)Tax reduction. I know putting in my current amount saves me over 2k in taxes. 3) Able to get the student loan interest reduction.(although not much but as long as I am unable to pay it off it still helps. 4)Putting the 1.5k towards debt in a year it is down almost half while still saving for my retirement (Putting off retirement it is down at least another 10k)

However the consensus seems to be pay the debt of as fast as I can. Like most of the advice on here I value it and will start towards that process. It is a very good emotional accomplishment/relief getting out of debt

Chadnudj
Posts: 664
Joined: Tue Oct 29, 2013 11:22 am

Re: How to best approach saving for retirement/debt reduction

Post by Chadnudj » Thu Jan 12, 2017 6:09 pm

It's not going to be a popular position here on Bogleheads, but maybe consider lining up another credit card that would have a 0% balance transfer offer in case you're not done paying off the CC debt in 18 months. Even if there is a one-time 3% fee on the balance transfer (which is typical), that's still a heck of a lot better than the 19% APR or whatever. I used a couple of such transfers myself, when I was paying off/getting rid of credit card debt, and it definitely helped.

Other than that, keep on top of getting paid back that $20k you lent to the homeowner (hopefully you have something in writing), I'd max out the Roth (because you should at a low income, and because it's a de facto emergency fund; I'd invest it at least in a bond fund, though), and keep plugging away at paying off the credit card debt (pay minimum for now on the student loan -- your interest is deductible at your income, so that reduces a bit the pain of paying 7%).

User avatar
warowits
Posts: 309
Joined: Tue Sep 29, 2015 2:38 am

Re: How to best approach saving for retirement/debt reduction

Post by warowits » Thu Jan 12, 2017 6:38 pm

N10sive wrote:
1) Am I doing this right? Should I put more towards debt instead of contributing to my 401k? Id like to keep contributing to my 401k to reduce my taxes. And I would like to keep contributing to my roth since I am hopefully in my lowest tax bracket right now(effective tax rate was 17% last year) and since it is also acting as my emergency fund. All the debt is at 0% but the student loan.

I think your credit card debt, which may have 19% interest soon, is the priority right now, especially if you are not getting a company match.


2)I came to the conclusion last year that the student loan really needs to go but its a fixed payment and I am actually a year ahead in payments. Meaning I could stop paying and wouldn't need to pay for a year however Ill still get charged the interest. With my income I am right at the cusp of the student interest loan not being able to write off. If I keep contributing to the 401k at least some of the interest is written off, not much since my MAGI is around 76k.

That credit card debt, while it is at 0% right now, is a big pending liability. I would pay it before getting ahead on my student loan.

3)Are the dave ramsey type investment calculators trustworthy? For my situation and contributing 800 a month min for the next 35 years with a 5% return says I would have just over 1 million. If I were to take out 80k of that 1million it would only technically last around 13 years? Not sure if I am thinking about that right. I guess I am missing my estimated 30k a year in SS before taxes.

If you have ~30k already in investments, yes the calculator seems correct. Just make sure you don't spend crazy fees on a 'Dave Ramsey' Financial Advisor and their high fee mutual fund picks. Back of the napkin math says you will have about 70k a year spending (in today's dollars) with that plan if you use a 4% SWR.

4)What would be a suitable retirement number if expecting to live off 80k a year with 30k in SS a year (before taxes)? To last say 25 years?

I am guessing you would make it with 1 million, but it would mean more than a 4% withdrawal rate. As I understand it the 4% withdrawal rate is used with a 30 year retirement, so you could likely make it. I prefer using the variable percentage withdrawal method
https://www.bogleheads.org/wiki/Variabl ... withdrawal

5)One caveat which I am hoping for but not counting on. I gave a family member 20k(in increments) to keep their house and was expected to be paid back in sept 2015. That has obviously passed however I do expect to get it back this time in possibly 8 months. They are putting their house up for sale in the spring. They have considerable equity in it(one reason for giving them the money but it has spiraled me down to use credit cards for the previous year). Would you approach things differently given this information? Again I am planning on not getting it but with the house going up for sale I am 90% sure I will get it back.

Concentrate on the CC debt, and if you get paid back this money, use it to pay it off even faster.

It sounds like you righting the ship. Keep track of your net worth, and remember that paying down debt translates into less interest and more money for investing later

There are an army of people whose pay checks depend on convincing people to invest in ways that are against their self interest. This forum is the volunteer army that fights back!

Ace$
Posts: 32
Joined: Wed Jan 11, 2017 11:07 am

Re: How to best approach saving for retirement/debt reduction

Post by Ace$ » Thu Jan 12, 2017 6:41 pm

I glad to see many have already made reference to The Total Money Make Over by Dave Ramsey. It is a very simple, don't confuse that with easy, plan that's primary claim to fame is getting households on the zero-based budget (eliminates overspending and/or not knowing where your money is going) and eliminating debt.

With $1.5k of your discretionary income going towards debt, you're looking at over 3 years if nothing else goes wrong. That's too long.

Obviously, if you did recover that $20k, this journey is cut down to under 2 years which is on average with those using the Ramsey approach. But I'm certainly not waiting around for that to get my financial house in order.

Ramsey (TMMO) teaches the Baby Step approach:
1. $1k starter emergency fund to serve as a buffer between you and the need to go into additional debt
2. Debt snowball - payoff all consumer debts smallest to largest regardless of interest rates (behavioral reasons, not financial reasons)
3. Fully funded emergency fund of 3-6 months worth of expenses
4. 15% towards retirement
5. College funding, if applicable (optional step if for kids)
6. Payoff the mortgage early
7. Build wealth

Assuming you have $1k in cash set aside, you're in BS2. You should stop all retirement investing which allows you to direct every available dollar to the debt snowball. During this time, you are also looking to increase income and reduce expenses to free up even more available dollars. By not diluting your income by doing multiple things, you make faster progress on the current step.

Given the fact you're only 30 and have at least that many more years to work, you'll be a millionaire several times over by following his simple approach.

Good luck.

mhalley
Posts: 5211
Joined: Tue Nov 20, 2007 6:02 am

Re: How to best approach saving for retirement/debt reduction

Post by mhalley » Fri Jan 13, 2017 3:46 pm

Check out WCI loan vs invest post.
http://whitecoatinvestor.com/student-lo ... investing/
I think the general rule of thumb is 25x expenses at a 4% safe withdrawal rate is a reasonable retirement goal.

N10sive
Posts: 329
Joined: Thu May 05, 2016 6:22 pm

Re: How to best approach saving for retirement/debt reduction

Post by N10sive » Tue May 23, 2017 8:00 pm

I've updated the original post with an update and new situation.

Post Reply