Keep contributing to 401k when only 20% vested? // job hunt underway

[TrulyStashin]

Hi fellow Mustachians.

I have lots of debt and am working my ass off to conquer it -- did a Mustachian-180 starting last May and am full-steam in the right direction, sending 60% of my income to debt service.

I've been contributing to my 401k just enough to get my employer match.  BUT I am gunning for a new job sometime this year.  No kidding, I'm seriously networking and will be very surprised if I make a 3rd anniversary with my current employer (April, 2015).

If I leave before my 3rd anniversary, then I only get 20% of the employer match -- that's all I'm vested at this point.

I'm considering stopping my contributions and funneling my current contribution ($370/ mo) toward debt.  Given that 80% of my employer-matched money will be surrendered when I leave, it doesn't seem wise to keep contributing.

Thoughts?

[lentilman]

Are you looking at a 20% return even if you leave?  That still sounds pretty good to me....

[ultros1234]

For the typical mustachian who's going to be responsible about paying down debt eventually and not incurring any new debt, I believe 401(k)-type contributions should usually take priority over debt repayment, if that debt is under 7% or so. The expected return should be about 7%, and the tax savings tip the scales toward 401(k). An employer match makes it a no-brainer.

Unless of course we're talking 15% credit card debt. Even then it probably makes sense to prioritize 401(k) if you have any match at all, but I'd have to run some numbers. What's the interest on your debt?

[TrulyStashin]

I have two categories of debt:

Law school student loans at 6.9 and 7.8% interest.  Horrifying, I know.
Consumer debt, currently all parked on accounts with either 0% or .99% interest until either Sept or December.  It will be a stretch for me to make these deadlines. 

I'm contributing 4% of my income -- about $4,000, which is the minimum to get a 25% match.  So, my employer will kick in $1,000 this year.  When I leave, I'll only get to keep $200 of that $1,000.

[eman resu]

So the match is 25 cents on the dollar, of which you will keep 5 cents if you leave before anniversary?  That's 5%, right?  Seems debt reduction might be the way to go.  If you happen to stay through anniversary, does your vested portion jump to 10 cents on the (your) dollar? Gets a little stickier then, maybe.

[TrulyStashin]

If I"m still there in April of 2015, I'll have bigger problems than the vesting!

On the third anniversary, my vesting jumps to 40%.  Big whup.

[Prairie Stash]

5% return, with upside on more if you linger and tax relief (plus investment returns). Or 7.8% and debt freedom. Math says keep contributing (the logical answer I presume you already knew).
My ultra conservative worrying side will understand debt repayment for the psychological benefits. Being debt free was a major milestone for me, regardless of what I logically knew to be the wiser choice.

Either choice will work, it depends if you want to be aggressive and invest or conservative and reduce debt. 60% savings is nice, keep up the great work!

[eman resu]

Sounds like you're answering your own question.  :)

If you are motivated to get out before the vested portion of the match jumps, focus on debt reduction and the job search (says this one random person on the internet).  Good luck!

[momo]

We feel eliminating the debts should.take priority over.adding more to your 401k. The vesting on the match is always a  concern of ours.  Yours is better.than ours since you have tiered vesting. We have cliff vesting, stay less than three years and you get zero.  That said, after paying off your debts, if you have more top save, you can always add to an IRA.  Good luck.

[bugbaby]

You are solidly in 25% marginal tax bracket. with the 5% match + tax savings,  that's 30% return unless my math fails me.

On the other hand, if your next job offers better match obviously you should stop contributing asap and make it up in the next job.

[Blindsquirrel]

   I would say, do the minimum to get the maximum match as 20% return is stellar and risk less but hammer the 7.8% loan. If someone provided me with a 0% risk 100.0% chance of success investment at 7.8% return, I would load up on that like a fat guy at the Chinese buffet.  The defensive side of me says, the less debt you have, the less taxable income you need. Losing 32%+ on the higher portion of your income is a drag on your road to FI so a mathematical case can certainly be made to max the 401K at $17,500 a year. That scenario does come with a not insignificant risk I would say.

[Blindsquirrel]

ooops, sorry,  Should have said hammer the consumer debt first that will jack up in rate in Sept, my bad. Rates on consumer debt are generally thievish.

[Cheddar Stacker]

An employer match is a nice perk most people have, but some don't. Even with a 0% match I would still contribute to the 401K for the accelerated savings effect. I didn't see where you mentioned a tax bracket but babybug mentioned 25%. If that's the case your $4K contribution is saving you $1K in tax which allows you to save (or pay debt) even more.

If you don't contribute, you permanently lose the opportunity for that year.

The only way I would consider no contribution is if that consumer debt will balloon into a 2 digit interest rate in Sept/Dec with no refi/rollover options. Seeing the total debt numbers for each category and a repayment schedule migh change my persective a little if you care to provide.

[trugrit03]

I'm going to side with the others that say keep contributing. The 401k contribution is an IMMEDIATE 5% return, but as others mentioned, the tax break and possible capital appreciation make it the clear choice. People talk about the psychological advantage of paying down debt, but what about the psychological advantage of getting "free" money from your employer just for saving for retirement?

[TrulyStashin]

Thanks everyone.  I'll keep contributing at my current level.  I have good credit now and after killing almost all of my consumer debt this year, my score will be even better.  So if I get close-but-not-quite with my consumer debt payoff in Sept./ Dec. then I will have options for refinancing any residual debt and should have it paid off in full by Q1 of 2015.  After that I can start crushing my student loans (though that will take a LONG time -- law school cost a fortune). 

It does feel good to see that 401k balance going up........