Author Topic: Paying debt is 3x more important than retirement contributions  (Read 16643 times)

Pooperman

  • Magnum Stache
  • ******
  • Posts: 2941
  • Age: 29
  • Location: North Carolina
According to this article, people are paying off debt at a rate of about 3x as much as they would save for retirement given the same income.

"Being debt free is 3x more important than retiring", Average Joe was quoted as saying.

Travis

  • Handlebar Stache
  • *****
  • Posts: 2371
  • Location: Arizona
Re: Paying debt is 3x more important than retirement contributions
« Reply #1 on: April 15, 2016, 08:07:26 AM »
I think you linked the wrong article.  This article is saying the exact opposite.

Jack

  • Magnum Stache
  • ******
  • Posts: 4734
  • Location: Atlanta, GA
Re: Paying debt is 3x more important than retirement contributions
« Reply #2 on: April 15, 2016, 08:28:16 AM »
Here's the important part:

Quote from: article
But those already saddled with student debt can do something now that will make a difference: save for retirement before trying to pay down your debt faster.

Of course, you want to pay your student loan bills first -- and on time. But, according to the report, it doesn't make sense to put any extra money toward paying down your loan early.

"There are very few circumstances in which paying off a student loan ahead of schedule with funds that would otherwise be saved in an employer-sponsored retirement account leads to a higher net wealth at retirement," the researchers wrote.

In other words, all the debt-averse MMMers who insist on paying off their student loans before investing (not to mention, that asshole Dave Ramsey with his "snowball") are doing the wrong thing.

(Those of us who can do math knew this already, of course, but it's nice to see the sorts of mainstream "authorities" normal people listen to concur.)

Pooperman

  • Magnum Stache
  • ******
  • Posts: 2941
  • Age: 29
  • Location: North Carolina
Re: Paying debt is 3x more important than retirement contributions
« Reply #3 on: April 15, 2016, 08:37:45 AM »
I think you linked the wrong article.  This article is saying the exact opposite.

Think about why it's $0.35/$1.00 and not higher. It can be inferred that it's because if given the same amount of income, an average person will not contribute as much towards retirement as they will towards paying off student loans. Basically, $500/month to student loans and $200 to retirement after the student loans have been paid off (as an example).

Travis

  • Handlebar Stache
  • *****
  • Posts: 2371
  • Location: Arizona
Re: Paying debt is 3x more important than retirement contributions
« Reply #4 on: April 15, 2016, 09:23:01 AM »
I think you linked the wrong article.  This article is saying the exact opposite.

Think about why it's $0.35/$1.00 and not higher. It can be inferred that it's because if given the same amount of income, an average person will not contribute as much towards retirement as they will towards paying off student loans. Basically, $500/month to student loans and $200 to retirement after the student loans have been paid off (as an example).

Who is Average Joe and where was that quote? It's not in the article you linked.

thd7t

  • Handlebar Stache
  • *****
  • Posts: 1297
Re: Paying debt is 3x more important than retirement contributions
« Reply #5 on: April 15, 2016, 09:31:49 AM »
Here's the important part:

Quote from: article
But those already saddled with student debt can do something now that will make a difference: save for retirement before trying to pay down your debt faster.

Of course, you want to pay your student loan bills first -- and on time. But, according to the report, it doesn't make sense to put any extra money toward paying down your loan early.

"There are very few circumstances in which paying off a student loan ahead of schedule with funds that would otherwise be saved in an employer-sponsored retirement account leads to a higher net wealth at retirement," the researchers wrote.

In other words, all the debt-averse MMMers who insist on paying off their student loans before investing (not to mention, that asshole Dave Ramsey with his "snowball") are doing the wrong thing.

(Those of us who can do math knew this already, of course, but it's nice to see the sorts of mainstream "authorities" normal people listen to concur.)
When I read case studies, it is really common to see 6.8% or higher rates for student loan debt. At that point, the debt averse MMMers are probably doing the right thing by reducing a liability that can't be discharged in bankruptcy at a guaranteed reasonable return. I have some SL debt at 3.5%. I'd love for it to be gone, but can't justify paying it down quickly.

mm1970

  • Walrus Stache
  • *******
  • Posts: 6431
Re: Paying debt is 3x more important than retirement contributions
« Reply #6 on: April 15, 2016, 09:39:17 AM »
Here's the important part:

Quote from: article
But those already saddled with student debt can do something now that will make a difference: save for retirement before trying to pay down your debt faster.

Of course, you want to pay your student loan bills first -- and on time. But, according to the report, it doesn't make sense to put any extra money toward paying down your loan early.

"There are very few circumstances in which paying off a student loan ahead of schedule with funds that would otherwise be saved in an employer-sponsored retirement account leads to a higher net wealth at retirement," the researchers wrote.

In other words, all the debt-averse MMMers who insist on paying off their student loans before investing (not to mention, that asshole Dave Ramsey with his "snowball") are doing the wrong thing.

(Those of us who can do math knew this already, of course, but it's nice to see the sorts of mainstream "authorities" normal people listen to concur.)

My own personal opinion (take it for what it's worth), is that there is a mental/ emotional advantage to being debt free that is often overlooked when doing the simple math.  A sense of security.

For example, we are paying off our house early.  And all the math tells us that it's better to invest that money.  Sure.  But it's a security blanket to me to know that the house is paid for, in case something happens.

Of course, I'm also a dabbler, and I believe in diversifying.  So I have my own personal preferences for how much goes into the stock market, how much goes to the mortgage, etc.  I have never been all or nothing either way.  My own preferences don't match other people's preferences, and that's okay.

Even when I was paying off student loans, I was putting money away for retirement into an IRA.   My student loan rates, by the way, were 8-10% back in the early 90s.

Eric222

  • Pencil Stache
  • ****
  • Posts: 901
Re: Paying debt is 3x more important than retirement contributions
« Reply #7 on: April 20, 2016, 09:00:38 AM »
I struggle with the emotional versus mathematical aspects of this.

I really want to kill all of my debt.  A large portion of my debt is from all the crap surrounding my divorce, which gives it an extra emotional kick. 

However; with the tax benefits and the interest rates of my debt it makes much more sense to max out my 401(k) first, then use the rest to pay down the debt as quickly as possible. 

I will max out my 401(k) this year and every year going forward...but wish all that money was going into the loans. 



AZDude

  • Handlebar Stache
  • *****
  • Posts: 1298
Re: Paying debt is 3x more important than retirement contributions
« Reply #8 on: April 20, 2016, 10:09:24 AM »
Well, if you bought a car at an interest rate of 27%, then it would be 3 times more important.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 40
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: Paying debt is 3x more important than retirement contributions
« Reply #9 on: April 22, 2016, 09:20:02 AM »
I struggle with the emotional versus mathematical aspects of this.

I really want to kill all of my debt.  A large portion of my debt is from all the crap surrounding my divorce, which gives it an extra emotional kick. 

However; with the tax benefits and the interest rates of my debt it makes much more sense to max out my 401(k) first, then use the rest to pay down the debt as quickly as possible. 

I will max out my 401(k) this year and every year going forward...but wish all that money was going into the loans.
Just breathe, man. ;)

The widespread irresponsible use of debt in our society has produced a flood of helpful advice intended to save us from bad choices, and to an extent that is good. But the overly broad nature of the advice (because, let's face it, it needs to be dumbed down for the sake of the average debt-crippled consumer sucka) has dulled the message into "all debt is bad, never have debt, be afraid of suffering for as long as you have any debt", and so on. And for those of us living a deliberate, calculated, optimized lifestyle, the net effect of that conditioning can actually make us so debt-averse that it holds us back, by making us fear the responsible use of productive debt.

I have plenty of debt too. All else being equal, I'd love for the number to be 0 instead of hundreds of thousands. But, all else is never equal: virtually all of that debt is directly tied to productive assets earning higher returns than what it pays, and the rest is still driven by rational decisions. Not paying off my car loan after I started adopting MMM-ish habits might be questioned by some here, but in those two years, I've invested the difference in real estate and earned 5x as much (all tax-deferred, thanks to mortgage interest and depreciation) as I paid in interest. Focus on the positives and the net gains, and make responsible steps toward paying off that debt when it makes sense for you, and you'll be fine.

Pooperman

  • Magnum Stache
  • ******
  • Posts: 2941
  • Age: 29
  • Location: North Carolina
Re: Paying debt is 3x more important than retirement contributions
« Reply #10 on: April 22, 2016, 09:26:56 AM »
I struggle with the emotional versus mathematical aspects of this.

I really want to kill all of my debt.  A large portion of my debt is from all the crap surrounding my divorce, which gives it an extra emotional kick. 

However; with the tax benefits and the interest rates of my debt it makes much more sense to max out my 401(k) first, then use the rest to pay down the debt as quickly as possible. 

I will max out my 401(k) this year and every year going forward...but wish all that money was going into the loans.
Just breathe, man. ;)

The widespread irresponsible use of debt in our society has produced a flood of helpful advice intended to save us from bad choices, and to an extent that is good. But the overly broad nature of the advice (because, let's face it, it needs to be dumbed down for the sake of the average debt-crippled consumer sucka) has dulled the message into "all debt is bad, never have debt, be afraid of suffering for as long as you have any debt", and so on. And for those of us living a deliberate, calculated, optimized lifestyle, the net effect of that conditioning can actually make us so debt-averse that it holds us back, by making us fear the responsible use of productive debt.

I have plenty of debt too. All else being equal, I'd love for the number to be 0 instead of hundreds of thousands. But, all else is never equal: virtually all of that debt is directly tied to productive assets earning higher returns than what it pays, and the rest is still driven by rational decisions. Not paying off my car loan after I started adopting MMM-ish habits might be questioned by some here, but in those two years, I've invested the difference in real estate and earned 5x as much (all tax-deferred, thanks to mortgage interest and depreciation) as I paid in interest. Focus on the positives and the net gains, and make responsible steps toward paying off that debt when it makes sense for you, and you'll be fine.

The issue, in the article, is basically this:

$20k in student loan debt, $600/month (this is an example). After a few years, the debt is paid off and the person has three choices of what to do with that money. Option 1: save/invest that money (this is the option we would take). Option 2: spend this money on stuff. Option 3: buy something big that has a payment around the same.

The reality is, according to the article, that the average person takes $200/month to save and $400/month to spend (based on that example).

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 40
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: Paying debt is 3x more important than retirement contributions
« Reply #11 on: April 22, 2016, 09:57:45 AM »
The issue, in the article, is basically this:

$20k in student loan debt, $600/month (this is an example). After a few years, the debt is paid off and the person has three choices of what to do with that money. Option 1: save/invest that money (this is the option we would take).

Option 2: spend this money on stuff. Option 3: buy something big that has a payment around the same.

The reality is, according to the article, that the average person takes $200/month to save and $400/month to spend (based on that example).
I know I'm kind of a hedonist outlier but I would definitely consider spending at least a portion of it. I'm actually at one of those thresholds now. I'm paying off a substantial debt, and the temptation to run out and "celebrate" is non-trivial.
But yeah, most of what I wanna buy are more energy improvements to the house and better tools. Hehe

FINate

  • Handlebar Stache
  • *****
  • Posts: 1300
Re: Paying debt is 3x more important than retirement contributions
« Reply #12 on: April 22, 2016, 09:58:28 AM »
Here's the important part:

Quote from: article
But those already saddled with student debt can do something now that will make a difference: save for retirement before trying to pay down your debt faster.

Of course, you want to pay your student loan bills first -- and on time. But, according to the report, it doesn't make sense to put any extra money toward paying down your loan early.

"There are very few circumstances in which paying off a student loan ahead of schedule with funds that would otherwise be saved in an employer-sponsored retirement account leads to a higher net wealth at retirement," the researchers wrote.

In other words, all the debt-averse MMMers who insist on paying off their student loans before investing (not to mention, that asshole Dave Ramsey with his "snowball") are doing the wrong thing.

(Those of us who can do math knew this already, of course, but it's nice to see the sorts of mainstream "authorities" normal people listen to concur.)

Purely out of curiosity I read Dave's "Total Money Makeover" - just to understand his approach. It's too cultish for my taste (you have to do everything exactly my way), but honestly, for most Americans with zero financial literacy and a 6th grade level of math, this type of highly directive approach is probably their only real hope get getting out of the financial mess they've created.

The "snowball" approach means that the rate at which debt is paid off accelerates over time, providing a huge emotional boost which increases commitment. Dave admits this is mathematically less efficient, yet it doesn't matter because the problem is psychological for most people. I've always focused on paying off the highest rate loans first, but freely admit that I'm a bit of an oddball because I'm more analytical than emotional about such things (I also never took out student loans!). I've never listened to his radio program, so maybe that's why you think he's an asshole?

GuitarStv

  • Senior Mustachian
  • ********
  • Posts: 13067
  • Age: 37
  • Location: Toronto, Ontario, Canada
Re: Paying debt is 3x more important than retirement contributions
« Reply #13 on: April 22, 2016, 10:05:47 AM »
Hmm.  I worked throughout university so that I wouldn't have to take on any loans.  Bad choice I guess.  My wife and I bought our car in cash when we could have financed.  Stupid, stupid, stupid.  I'll be finishing my mortgage payments in a couple months.  Also dumb.

Dammit, if only I wasn't debt free I'd be rich.

MilesTeg

  • Pencil Stache
  • ****
  • Posts: 680
Re: Paying debt is 3x more important than retirement contributions
« Reply #14 on: April 22, 2016, 11:06:07 AM »
As always, all financial decisions should be examined with ROI in mind.

It's always an examination between how much debt is costing you vs the opportunity cost of less investing.

But, as with most things in the real world, there is a difficult to quantify factor of how much financial security paying off debt will provide that should be included in "how much debt is costing you".

Pooperman

  • Magnum Stache
  • ******
  • Posts: 2941
  • Age: 29
  • Location: North Carolina
Re: Paying debt is 3x more important than retirement contributions
« Reply #15 on: April 22, 2016, 11:12:45 AM »
As always, all financial decisions should be examined with ROI in mind.

It's always an examination between how much debt is costing you vs the opportunity cost of less investing.

But, as with most things in the real world, there is a difficult to quantify factor of how much financial security paying off debt will provide that should be included in "how much debt is costing you".

And the differences between having a paid off house so you have the option of downshifting vs retiring earlier but downshifting is harder because you'd have to touch your stache.

Jack

  • Magnum Stache
  • ******
  • Posts: 4734
  • Location: Atlanta, GA
Re: Paying debt is 3x more important than retirement contributions
« Reply #16 on: April 22, 2016, 12:57:16 PM »
that asshole Dave Ramsey

Purely out of curiosity I read Dave's "Total Money Makeover" - just to understand his approach. It's too cultish for my taste (you have to do everything exactly my way)...  I've never listened to his radio program, so maybe that's why you think he's an asshole?

No, the "cultish approach" is pretty much why I think he's an asshole. (Well, that and his corrupt investment advice.) I have very low tolerance for people who use religion as a substitute for logic in order to persuade people (even, or perhaps especially, if it works).

FINate

  • Handlebar Stache
  • *****
  • Posts: 1300
Re: Paying debt is 3x more important than retirement contributions
« Reply #17 on: April 22, 2016, 02:08:42 PM »
that asshole Dave Ramsey

Purely out of curiosity I read Dave's "Total Money Makeover" - just to understand his approach. It's too cultish for my taste (you have to do everything exactly my way)...  I've never listened to his radio program, so maybe that's why you think he's an asshole?

No, the "cultish approach" is pretty much why I think he's an asshole. (Well, that and his corrupt investment advice.) I have very low tolerance for people who use religion as a substitute for logic in order to persuade people (even, or perhaps especially, if it works).

Meh, I say whatever works is better than the status quo. His investing method is the weakest part of the system, but people don't get to that until their finances are in order and have the worst debts paid off. In any case, people are substantially better off having low debt and some investments, even if those investments underperform. Yes, you can (and should) do better by managing your own buy and hold index investing, but it's really difficult to get people to learn about this even though it's very simple.

Apocalyptica602

  • Bristles
  • ***
  • Posts: 271
Re: Paying debt is 3x more important than retirement contributions
« Reply #18 on: April 27, 2016, 08:49:37 AM »
As always, all financial decisions should be examined with ROI in mind.

It's always an examination between how much debt is costing you vs the opportunity cost of less investing.

But, as with most things in the real world, there is a difficult to quantify factor of how much financial security paying off debt will provide that should be included in "how much debt is costing you".

It's also important to keep in mind that while the mathematically ideal method may be the assumption of 7% long term returns in the stock market, 4% or whatever interest someone has on their house isn't a terrible return either.

Especially when you compare to other less positive or negative ROI options like "Do neither! Finance a brand new F150!" or "Stick it in a 'high interest' (1%) savings account because stocks are too risky"

Jack

  • Magnum Stache
  • ******
  • Posts: 4734
  • Location: Atlanta, GA
Re: Paying debt is 3x more important than retirement contributions
« Reply #19 on: April 27, 2016, 03:37:22 PM »
It's also important to keep in mind that while the mathematically ideal method may be the assumption of 7% long term returns in the stock market, 4% or whatever interest someone has on their house isn't a terrible return either.

Especially when you compare to other less positive or negative ROI options like "Do neither! Finance a brand new F150!" or "Stick it in a 'high interest' (1%) savings account because stocks are too risky"

It's still 3% worse.

Besides, you should never compare yourself to the mediocre; all you'll do is become complacent with your mediocrity. Instead, compare yourself to the optimal and always strive to do better!

This is not a forum for mediocrity!

AMandM

  • Pencil Stache
  • ****
  • Posts: 791
Re: Paying debt is 3x more important than retirement contributions
« Reply #20 on: May 08, 2016, 11:45:23 PM »
The "snowball" approach means that the rate at which debt is paid off accelerates over time, providing a huge emotional boost which increases commitment. Dave admits this is mathematically less efficient, yet it doesn't matter because the problem is psychological for most people.

I know someone who's very anti-debt and a fan of the snowball approach.  She agrees that it is mathematically sub-optimal, but thinks it's more efficient in fact, because of the increased likelihood people will stick with it.  Falling off the mathematically optimal wagon is worse than staying on the slower one.  And as she says, people who are good at rational, disciplined money decisions aren't usually the ones deep in debt trouble.

ETA:  This is not a forum for mediocrity, but Ramsey isn't offering advice to people on this forum.
« Last Edit: May 08, 2016, 11:47:38 PM by AMandM »

FINate

  • Handlebar Stache
  • *****
  • Posts: 1300
Re: Paying debt is 3x more important than retirement contributions
« Reply #21 on: May 09, 2016, 04:58:03 PM »
ETA:  This is not a forum for mediocrity, but Ramsey isn't offering advice to people on this forum.

Well said.

The Money Monk

  • Pencil Stache
  • ****
  • Posts: 619
  • Location: Nevada
Re: Paying debt is 3x more important than retirement contributions
« Reply #22 on: May 09, 2016, 10:48:35 PM »
this topic always resurfaces (paying debts vs investing), and the 'right' thing to do is always the same: whatever gets you closer to your personal goals. Just because the math shows that a particular option will lead to you having more money in 40 years doesn't mean it's the right option for you. I mean for Pete's sake (pun intended), this ENTIRE site is about retiring early - which is definitely NOT the mathematical way to maximize your dollars over a lifetime.

It's always funny to me to listen to a bunch of people who are planning on giving up millions of dollars in potential wages in exchange for living life they way they want,  argue about how some people who don't want any debt should have some anyway because they'll end up with an extra few thousand dollars when they die.

Step back and remember why we're doing this.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 40
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: Paying debt is 3x more important than retirement contributions
« Reply #23 on: May 10, 2016, 08:08:03 AM »
this topic always resurfaces (paying debts vs investing), and the 'right' thing to do is always the same: whatever gets you closer to your personal goals. Just because the math shows that a particular option will lead to you having more money in 40 years doesn't mean it's the right option for you. I mean for Pete's sake (pun intended), this ENTIRE site is about retiring early - which is definitely NOT the mathematical way to maximize your dollars over a lifetime.

It's always funny to me to listen to a bunch of people who are planning on giving up millions of dollars in potential wages in exchange for living life they way they want,  argue about how some people who don't want any debt should have some anyway because they'll end up with an extra few thousand dollars when they die.

Step back and remember why we're doing this.
Can I get a mic drop? xD

Pooperman

  • Magnum Stache
  • ******
  • Posts: 2941
  • Age: 29
  • Location: North Carolina
Re: Paying debt is 3x more important than retirement contributions
« Reply #24 on: May 10, 2016, 09:02:26 AM »
This isn't just opportunity cost though. It's also that debt is more important to people. If someone has to pay $500 to debt, they will, but when that debt is paid, do they then save $500 for retirement? No. The average person tends to save about $150 of that and spend $350.