Topic Title: Forgetting about student loan debt to save for retirement
Life Situation: 30M, 32F MFJ. No kids (yet). One year out of professional school(s). MCOL area in a non-income tax state.
Gross Salary/Wages: $120k him, $80k her
Retirement accounts: Total~$100k
We really try to max out tax advantaged accounts to hide our income from the income based student loan payments we will have to start paying on next year.
Her:
457: 16,000 large cap index funds, zero expense
Defined benefit plan: $3,000...75% large cap index, 5% small cap index, 20% global index, all low expense
403b $6,000 VTI Mostly
tIRA $30,000 VTI mostly
She has access to 457, 403b which we will max for $39,000 pre tax savings. The defined benefit plan had an option to automatically deduct 15% of her income, but we missed the window to set it there and have defaulted to the standard 5%, unfortunately. This was a very costly mistake, because I think at 15% contribution, we would end up within tIRA income deduction territory. According to the handbook, there is no way to change this contribution amount unless you change employers.
His
tIRA: $11,000 VTI mostly
Roth IRA: $5,000 VTI mostly
HSA: $6,000 large cap index, low expense
401k: $17.5 VIIIX
Other assets:
~$12,000 in cash, small physical amount, the rest in a crappy savings at BoA. Not an emergency fund necessarily, will probably end up in Roth IRAs at the end of the year or sooner if stocks dip again.
2 paid off cars, ‘05 Tacoma and ‘13 accord.
The Baggage
Her: $70k private student loan 4.75%
$85k fed loans avg 5.9%
Him: $107k fed loans 7%
We have made OK progress here considering most of our savings went into retirement accounts in the last year. Her private loan was 9% and $93k when we started working last June. We refinanced it and made a ~23k dent in balance. We recently refinanced again to lower the monthly payments which will allow us to continue focusing on tax advantaged savings first. Every extra dollar we pay on the private loan is a dollar we could have sheltered in a tax advantaged Account, which is a dollar more that factors into our income based repayment.
Both of us are eligible for the public service loan forgiveness (PSLF) program after 10 years of payments. She is about a quarter of the way there from working while going to school. Our FI(RE?) goal date is based around this date, some time in roughly ~9.5 years. We are both under the REPAYE plan which caps our payments at 10% of whatever we make over 150% of the poverty level. If for some reason PSLF isn’t an option down the road, any balance left over after 25 years (for graduate school loans) is forgiven. Under this plan, spousal income AND federal loan debt is considered, so although our income is fairly high, our high combined loan balances make for affordable monthly payments.
It is an option, ethics of it aside, to FIRE with a federal student loan balance. If income is at or near 150% of the poverty line, monthly payments would be $0 until the remained is discharged at the 25 year mark (though there will be a large tax bill for the discharged amount). I first read this strategy on this forum and would love to hear if anybody has done it or knows anybody who has, just for curiosity’s sake. Feel free to PM if you want to avoid any possible drama.
Other Debt:
Mortgage $300k. Bought our house with VA loan and no money down in Jan of this year. $300k is the near the median house cost here. Hoping this wasn’t a mistake, but the rent v own calculators showed even if the house appreciates at a fraction of what it did in recent times, it will be a good financial decision if we are here for a few years. We are hoping to stay for 10. Not sure I would do this over again. Turns out there are a lot more expenses that go into ownership than we had planned.
Monthly expenses and savings rate
We’ve been tracking our expenses with YNAB since we started working (almost one year). I know there is a lot of fat left to be trimmed, and we will get there I hope.
We spend about $4,500 a month for all of our expenses EXCEPT student loan payments. Our biggest expenses are $1600 for housing and an astronomical amount on groceries. Trying a new strategy of one grocery trip per week, and largely avoiding Costco (except for rotisserie chickens) which seems to help. Our monthly expenses were $3500 last month, largely because of spending less on groceries.
As far as student loan payments, our monthly payment is $0 for the fed loans based on last year’s income. Our new monthly payment for the private loan is $450, down from $1100 we have been paying for the last year. Our AGI was ~100K for 2019, so we will start making payments with that as our reported income when we recertify in December.
I have just started tracking our contributions to our retirement accounts as of Jan. For the first quarter of 2020, we saved $26,790 in retirement accounts including tIRA contributions for 2019. Ill do a better job of tracking this going forward and separating it from debt payment.
The Plan
Our FIRE timeline is based more on the pursuit of PSLF than it is any specific number. Until then, the rough yearly plan is to maximize tax advantaged account contributions (457, 403b, 401k, HSA, defined benefit plan) ~$68,000 this year. $12,000 into Roths. Use the rest of our savings to pay down the private student loan debt. Assuming current income and expenses, we should be able to pay off the $70k private loan within a few years.
We are fairly new to this lifestyle and neither of us are good at crunching numbers or planning too far beyond the next year. With that said, at some point when the private loan is paid off, we are going to have a good chunk of change to invest into a brokerage account. The problem is, we need to figure out eventually how much our income will grow from those investments because of the second order issue of paying more in student loan payments. I don’t think it’s too much of a stretch to predict some kind of student loan reform given all the attention the issue has been getting recently. A plan like Biden’s would completely rearrange our priorities in this regard. If anybody has any thoughts or a crystal ball and would like to share what they see coming in this domain, please do!