Author Topic: Help a 31yo & his family get out of debt and retire early!  (Read 6327 times)

toad767

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Help a 31yo & his family get out of debt and retire early!
« on: November 26, 2015, 07:35:32 AM »
I recently discovered this website and so far I love it!  It has given me a source of hope that I can be FIRE.  I am continuing to explore the website and the forums for ways/methods that suite my situation  The information I
found still has be questioning whether or not I am doing the right things.I am in a unique situation.

I am a 31 yo male, married, 1 child (3month old).  The wife and I both work full time with a combined base salary of $220,000 ($11,420/mo take home).  We both graduated 4 years ago with substantial student loan debt.  Substantial!

Her student loans
13 different loans ranging from 1.86 - 8.00%
Total :$168,500
Weighted average interest rate: 6.42%
Min monthly payment: $990

My student loans

8 different loans ranging from 5.05-6.55%
Total $120,000
Weighted average interest rate: 5.93%
Min monthly payment: $735

Total student loan debt: $288,500
Total monthly payment: $1,635

I switched the repayment plan from 10year to a 20y payment.  We got interest rate reduction for autodraft.  So instead of autodrafting the close to $5,000 per month (10yr repayment), we autodraft $1,635 (20y repayment) and I go in every month to pay $3,365 to the highest % loan.  This will keep us on 10y repayment plan but I have more control over my money.  I can direct it at the high % loans.  I will get $12,000 student loan reimbursement for the next 3 years from my employer.

2 years ago we moved from a rental house to a house we purchased in a great school system for our children (so we don't have to send our children to private school).  We owe $234,000 @ 4.375% on the house and our monthly payment is $1675 (mortgage & property taxes).

We owe $26,000 on 1 of our cars and own the other car.  Monthly payment $420 @ 1.49%.  I believe Dave Ramsey says that if you owe more than 20-25% of your income to an auto loan, you should sell the car.  Ours is about 12% of our income and we really don't want to sell the car because we need a reliable car that will last us a long time.

My employer matches 1:1 up to 5% for my retirement TSP.  That is free money so I am doing 5% roth contribution to my TSP (current balance $33,000).  This has me putting away 10% of my salary to my retirement   My wife's employer gives her 7% of her salary regardless of what she contributes, and we are currently not contributing to hers.

We are in the process of rolling over our 401k with previous employers into a rollover IRA with vanguard, which will total $42,000.  I haven't researched which funds to put the money into yet.  Any suggestions?

We started using YNAB this month.  We have a 1 month emergency fund and are living off the previous month's income.  So effectively we have a two month emergency fund if something were to happen.

Total Debt summary
Student loans: $288,500 @ 6.22% ($1,635/mo)
Mortgage: $234,000 @ 4.375% ($1,675/mo)
Car: $26,000 @ 1.49% ($420/mo)

"Fixed" expenses (utilities, water, tv/internet service, phone,car ins)
Total: $900

Monthly fixed expenses + debt: $4,670  (this does not include the extra $3,365 to student loans, spending money, auto fuel, groceries, eating out, etc)


Savings summary

Rollover IRA: $75,000
Wife's saving: 7% of salary
My retirement: 10% (5% from me, 5% from employer)
2 month emergency fund
About $65,000 in home equity


So my questions are:
1.  Our main focus is I want to pay off student loans by 2020 if not before.  Because of this, we are only contributing 17% of our salary to retirement.  Is this okay?

2.  I think we can be debt free by 2023 if we continue to pay $5,000/mo to student loans and then pay extra $5,000 to the mortgage after the loans are paid off.  But should we?  Should we increase our retirement savings instead?

3.  Very broad question:  What are your thoughts about our situation?  How would you handle it?

4.  Help?!?

Neustache

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #1 on: November 26, 2015, 07:51:07 AM »

So my questions are:
1.  Our main focus is I want to pay off student loans by 2020 if not before.  Because of this, we are only contributing 17% of our salary to retirement.  Is this okay?

2.  I think we can be debt free by 2023 if we continue to pay $5,000/mo to student loans and then pay extra $5,000 to the mortgage after the loans are paid off.  But should we?  Should we increase our retirement savings instead?

3.  Very broad question:  What are your thoughts about our situation?  How would you handle it?

4.  Help?!?


Welcome!!  Since it's a holiday, you might not get swift responses, and since all I have to make today is pumpkin bread, thought I'd chime in so that you'd get a response.

My replies to the above:

1.  Yes, it's fine as long as it fits in with your retirement goals - how long do you anticipate working? I don't know with your income level (not a CPA) if you should be maxing IRA's plus 401K contributions to decrease taxes - someone versed with higher income levels can chime in (too lazy to look up where/if those deductions start to taper off due to high income)
2.  Your interest rate is moderately high so you probably could payoff mortgage first, but I'd again make sure you are maxing out all available tax deductible options for you (t. IRAs/401K) so that you pay the least amount in taxes.  Another option is refinancing to a lower rate, or do a mortgage recast to lower your monthly payment (if you dump in at least 10K on a principal payment, they'll re-amortorize the loan and lower your payment. 
3.  I think if you stick with it, your situation will be fun to watch.  High income plus high motivation make fun journals.  Go start one. :D
4. Do a detailed budget and post it. 

Rezdent

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #2 on: November 26, 2015, 08:12:17 AM »
Welcome to the forum.

My thoughts...
1.  Yes, need more towards savings, but not at the expense of paying debt - see #3.

2.  Both.

3.  Oh, this.  11400 take home.  Monthly fixed expenses 4670.  ~3500 extra thrown at debt.  Maybe I read this wrong, but there's a 4k/month hole here?

4.  Get a handle on where this money is going, and reduce it to a minimum to free up cash for #2.

use2betrix

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #3 on: November 26, 2015, 08:36:49 AM »
I think Dave Ramsey said 20-25% on your mortgage, not an auto loan. I may be incorrect.

That's way too much for a vehicle, you do NOT need 26k to be reliable. I bought my fiancé a 99 Camry with 88k miles from a Toyota dealer for 6k two years ago. It's never left her stranded. Due to its age it does need catch up on some routine maintenance but we're taking it on a 3,000 mile road trip next month without a second thought. My income is also close to yours (combined), so it's not like we can't afford a nicer vehicle. (I do have a nice truck but I use it to tow my 5th wheel we live full time in)

That being said, I'd say you can find something great in the 10-14k range, and that's out a big dent towards your other stuff.

Other than that, congrats on finding the site. It's not easy to turn spending around, I'm new at it as well!

Bellatrix

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #4 on: November 26, 2015, 08:58:58 AM »
I think you are on the right track.  Keep paying down your student loans as fast as you can.  After that, I personally would max out retirement accounts and then everything left over would go towards paying down my mortgage.  I delayed paying towards retirement while I paid off my student loans and now feel like I am a little behind compared to my peers.

You will feel so relieved when your debt is all gone.  I had 200k in student loans and a 400k mortgage.  I have about 300k of debt left, which should be gone in another 3 years or so.  Granted, I waited to get a mortgage until my SL were mostly paid off, however, with your family's salary, I think your debt is manageable if you budget well. 

I don't have any advice about your car.  I bought a 25k car about 10 years ago and hope it lasts me another 10 years.  Luckily it is paid off.  I can't afford to buy another car just yet, although every time I sit in a car with heated seats, it makes be very tempted to go to a car dealership! 

toad767

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #5 on: November 26, 2015, 09:10:47 AM »
Here is my budget so far.  Yes, we will decrease the fast food & restaurant budget significantly.  Also, the spending money.  We do have to have some $ to budget for our child though.  So that money can be reassigned jobs to cover any expenses for him.

Monthly expenses
Mortgage   $1,675
Water   50
Utilities   220
Cell phone   155
Internet/TV   200
Car Ins   180
iPhones 82
Radio 10
Student loan-minimum   $1635
Car   $420
Total   $4627
   
Rainy day funds  expenses we know we will have but just don't know when
Dog (food/2/week camp)   250
Pool Maintenance   170
Car maintenance   75
Total $495

Other expenses
Groceries   450
Fast food   250
Eating out   350
Fuel    320
Spending money   750
total   2120
   
Income   $11,400
Expense total   $7,242
Net   $4,158

$4,158 for unbudgeted expenses and for the extra payment towards student loans.


I anticipate working for quite sometime but I would like to know that I could retire early if I chose to.  However, my wife will work another 10 years or so, but she doesn't want to work for the rest of her life.

Dave definitely said 20-25% for your mortgage.  He also said that percentage if you can't pay off your loans with 1-2 years, which we can't.

Selling the vehicle to get another one is an option in my mind.  However, right now, it isn't an option in my wife's mind.  Maybe that will change.  We both want to get out of debt and are on the same page.  But there a few things that she won't budge on right now...car and the tv service (though I did cut the price down by $50/mo)

JustGettingStarted1980

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #6 on: November 26, 2015, 09:31:52 AM »
Bump

Toad, You are Me about 5 years ago. Been There, You Can Do It! And you have a plan, which is the most important thing of all.

Recommendations:

1. Since you are high income, there really aren't many tax deductions outside of child care, mortgage interest rates. You make too much for student loan deduction. I wish 5 years ago I had considered the Tax Implications of Maxing out my 401K (regardless of the match). Do the math and see if it's worthwhile for you. MDM and Cheddar Stacker here are AWESOME at the math, if you're lucky maybe they'll check in here.
-per my crappy math, you may have 6-8K in yearly tax savings deferred to pay at a lower rate in retirement

2. If you are putting in 5K per month toward student loans anyway, consider refinancing with your high income. At least refinance the loans over 6% since you could possibly get (depending on your credit rating) a variable 5 year loan at 1.9% at SOFI (I got one for this).

Example: Lets say you refinance half your loans, since you want some cash flexibility:

a) 140K currently at 6.25% = Cost of $8,750/year

b) Same 140 K at 3.125% Fixed 5 year (monthly payments $2520) = Cost of $4375/year (Saving $4375/year)

c) Same 140K at 1.90 % Variable 5 year (monthly payments $2447) = Cost of $2660/year (Savings of $6090/year)

Together these 2 things can lead to $12,000-$14000 more dollars in net worth gain per year for your family. While retaining some flexibility with extra cash on hand as needed.

Best of luck, and I hope this helps.

I have a SOFI referral linh, and MMM has one as well, MMM's is much better for you, Look it up.

Regards,

JGS



Goldy

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #7 on: November 26, 2015, 09:34:38 AM »
Just a quick comment to your question #1, you are not actually saving 17% for retirement, more like 8-9 depending on what income you and your wife make separately.  We make about the same as you and are also 31 each but have been working longer so we have a NW of 979k and the reason we have what we have is that we maxed out the 401k to reduce our tax liability while paying down the student loans.  It doesn't need to be a one or the other choice, maybe something in the middle would work well for you.  Your loans are high interest so I agree that some of the extra cash should certainly go towards those but I would also think hard about increasing your retirement savings to lower your tax bill.

Neustache

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #8 on: November 26, 2015, 09:49:15 AM »
From a health perspective, I'd rather you keep the dang car and cut out all that junk food you are eating.  The fast food plus eating out budget is just...wow.  I would bump up the groceries a bit to about $500 until you get the hang of cheap, delicious, healthy meals and try to slow WAY WAY down on the eating out and fast food.  I'm older than you, and my metabolism has slowed considerably, but if I ate out that much I'd weigh about 50 pounds more than I do now. 

ColaMan

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #9 on: November 26, 2015, 09:58:28 AM »
Q1 -- Retirement savings -- I think it's sensible to concentrate on paying down student loans now, though I will point out that, if I understand your savings summary correctly, you are not saving 17% of your total income for retirement.  You added, rather than averaged, the percentage contributions of you and your wife.  Assuming you each make the same amount of money ($110k per person), your total savings rate would be closer to 8.5%.  But, tax savings aside, that's ok for now, if you want to focus on the loans.  You probably will want to increase your contributions over time, especially as pay raises, etc. accrue.

Q2 -- Retirement savings probably are more important than home loan payoff (especially in light of the tax benefits mentioned by Neustache), though there is much psychology involved here, and lots of debate about the relative merits of investment vs. mortgage payoff.  If the need to be debt free is strong enough for you, that's probably ok, though not what I would do personally.

Q3-4 -- lots of loans, but your income is great.  You're doing fine, especially if you ramp up you savings in the intermediate-term future.  The car loan is suboptimal, but it sounds like your wife is not willing to address that right away.

jengod

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #10 on: November 26, 2015, 10:21:30 AM »
(1) Do a debt snowball.

Put all the student loans and the car on a list, ordered from smallest to largest, and put it on your fridge.

Maybe put your wife's school loans, your school loans and the car in three different colors.

Pay the minimums on car and student loans, and then if you have extra money, pay off the littlest ones first. As you do so, strike through the paid debts with giant red Sharpie pen.

The momentum this garners will likely push your wife in the direction of "Less TV! Cheaper car!" and may push both of you in the direction of "Cook at home!"

(2) I might have missed it, but I don't see a childcare expense listed. Is parent still home full-time with the 3mo? Who will care for it when the parent returns to work?

toad767

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #11 on: November 26, 2015, 10:52:51 AM »
Good idea genGod, I will do that!

We both set up a dependent care savings account to pay for childcare so I did not include that in my budget.  That $11,400 is what we take home after that money is deducted.

I am curious about SoFI and the potential savings if we refinance using them.  Say we refinance the $168k @ 6.42% to say....3.21%.  Will we be able to pay extra and have it applied to the principal without any penalties?

I did screw up the savings %.  We are saving 8.5% of our total income.  Whomp whomp  :(

Dee18

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #12 on: November 26, 2015, 11:23:24 AM »
Your cell phones, internet/tv, and iPhones total $437 per month and your eating totals $ 1050 per month.  Those may be the highest numbers I've ever seen on this forum for two adults and a babe.  Perhaps you are not in the US, but if you are  you can easily cut each of those in half.  Read the many helpful posts about inexpensive phone service, ditch cable for something like Apple TV, and eat at home and you'll easily save $9000/ year.

thingamabobs

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #13 on: November 26, 2015, 11:24:50 AM »

I am curious about SoFI and the potential savings if we refinance using them.  Say we refinance the $168k @ 6.42% to say....3.21%.  Will we be able to pay extra and have it applied to the principal without any penalties?

Yes, you can still pre-pay. It doesn't have to be SoFi, there are a few different SL refinancing companies out there and the rates can differ.

orangewarner

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #14 on: November 26, 2015, 12:07:45 PM »
This is what I would do if it were mine, for a year or so, then reevaluate:

11,400 income
———
2000 retirement
1000 fixed household expenses
2600 mortgage
1000 food
1000 misc spending
2600 student loan
500 auto/gas/entertainment
Balance to student loan OR to emergency fund

You have great loan rates (except the student loans), so enjoy a comfy life while knocking the student loans out, then focus that attention on the mortgage

Shawn in st George ut

orangewarner

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #15 on: November 26, 2015, 12:21:57 PM »
One other comment:

Have your pool serviced less. You could have the company come every other week for half the money or do it yourself for even less

I can walk you through how to do it

Credentials: I own a pool service company

toad767

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #16 on: November 26, 2015, 12:43:10 PM »
orangewarner:  Why would you split the extra payments up and pay extra on student loans & mortgage instead of throwing it all at student loans to get rid of the higher percent loans?  As far as the pool maint, I am doing it myself.  I am anticipating having to buy a new pool cover at the end of 2016, hence the higher amount budgeted per month.

lhamo

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #17 on: November 26, 2015, 12:48:48 PM »
Some comments in the bold text below.

You've got a great income, but are kind of sloppy with your spending/budgeting.  A bit more precision/focus and less random unnecessary spending will get you much farther, much faster.

Good luck!

Here is my budget so far.  Yes, we will decrease the fast food & restaurant budget significantly.  Also, the spending money.  We do have to have some $ to budget for our child though.  So that money can be reassigned jobs to cover any expenses for him.

Monthly expenses
Mortgage   $1,675
Water   50
Utilities   220  This seems very high -- what does it include?  Breaking it out may help us identify places you can reduce use/cost.  For example, consider getting an energy audit for your house/investing in better insulation, reducing garbage can size to minimum, etc. 
Cell phone   155  Probably spending way more than you need to.  See IP Daley's cell phone guide for ideas on where to cut
Internet/TV   200 WHAAAAT?  High speed internet might be justifiable, maybe.  The rest?  Not so much
Car Ins   180Shop around if you haven't already.  Seems high, but insurance is highly location dependent
iPhones 82WHAAAT?  Why are you buying gadgets on credit?  Pay this off and stop early adopting
Radio 10WHAAAT?  yeah, ok, "only" $10/month, but this shit adds up.  Stop it.  You can stream Pandora for free (that's what I do)
Student loan-minimum   $1635
Car   $420I would downgrade car given your debt load.  We just bought a brand new 2015 Ford C-Max for around $20k, so it can be done.  Plenty of room for a 3-person family.  Getting around 45 mpg with mostly city driving.  Love the car.
Total   $4627
   
Rainy day funds  expenses we know we will have but just don't know when
Dog (food/2/week camp)   250
Pool Maintenance   170Learn to do this yourself.  House sounds a bit over the top for your debt load/stage of life (your kid is an infant, you don't need to worry about schools just yet.... 
Car maintenance   75
Total $495

Other expenses
Groceries   450
Fast food   250Is this for lunches?  Meals picked up on the way home?  Random eating out when out running errands?  Identify your weak points and do better meal planning.  Scrambled eggs and toast can be dinner.  So can some cheese, sliced veggies, fruit and some good bread.  Learn to be creative and stock your fridge/pantry with stuff for quick meals.  You can pretty much eliminate this category of spending while not pushing up your grocery budget by much, if anything
Eating out   350Extravagant given your debt load.  Reduce by half, if not more
Fuel    320What kind of cars/commute do you have?  Consider replacing at least one car with a more efficient model
Spending money   750WHAAAAT?  This is way too high for a random, unspecified category.  Don't fill your lives up with random crap. Track mercilessly, bring this down, and throw the savings at the debt
total   2120
   
Income   $11,400
Expense total   $7,242
Net   $4,158

$4,158 for unbudgeted expenses and for the extra payment towards student loans.


I anticipate working for quite sometime but I would like to know that I could retire early if I chose to.  However, my wife will work another 10 years or so, but she doesn't want to work for the rest of her life.

Dave definitely said 20-25% for your mortgage.  He also said that percentage if you can't pay off your loans with 1-2 years, which we can't.

Selling the vehicle to get another one is an option in my mind.  However, right now, it isn't an option in my wife's mind.  Maybe that will change.  We both want to get out of debt and are on the same page.  But there a few things that she won't budge on right now...car and the tv service (though I did cut the price down by $50/mo)

Exflyboy

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #18 on: November 26, 2015, 12:58:16 PM »
^^^this^^^

You have got way too lazy, this is classic lifestyle inflation.. You have plenty of income so spend what you want right?.. Wrong!

If you want to get to FI ASAP then use your considerable income to get there in double quick time. Remember if we have another big recession you might lose one or both your jobs.

There are stories of Ferraris and the like showing up to foodbanks in California in 2008, people learned this lesson the hard way... Don't be a dumbass with what you been given!

Sorry to be harsh, but if your serious this is what you got to do.

okits

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #19 on: November 26, 2015, 01:09:09 PM »
Can you provide some more detail on what the $250/m dog expense covers?  It seems like a lot, so perhaps some aspects can be optimized.

For the "spending money" category, break it down into specific budgets.  Like, $2k for clothes, $3k Christmas and birthdays, etc.  That way you can a) cap your spending in each category and b) realize just how much you're spending on these things and actively hack the costs down further.  It's easy to get nicked $50 here, $100 there, and not really notice, but when you see the total cost it really makes you realize you need to do better than that.

Others have commented on the rest of your expenses, and I agree you should take a closer look as there's a lot of opportunity to optimize.

Your family has the potential to make massive progress very quickly, congratulations on looking at this, it is a large but worthwhile undertaking (especially with a 3m baby!)

FrugalFan

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #20 on: November 26, 2015, 01:17:52 PM »
You've gotten some great advice so far. With those salaries, you should be able to get rid of that crazy amount of debt relatively quickly.

orangewarner

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #21 on: November 26, 2015, 07:02:45 PM »
I just really like paying a little extra on my mortgage regardless of what other debt there is. My father-in-law taught me to do that and I've never been sorry that I did. So maybe take the mortgage payment down a little bit more and put extra on the student loan debt




 As far as the pool cover goes, maximum it will cost is $2000, and that's if you have a standard automatic pool cover and you were anticipating putting new material and ropes including installation.

 I do dozens of them a year and my cost is only about $700 but I mark it up to 2000

MDM

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #22 on: December 01, 2015, 01:09:08 PM »
I am a 31 yo male, married, 1 child (3month old).  The wife and I both work full time with a combined base salary of $220,000.
Congratulations - that should give you the flexibility to deal with the not insignificant debt discussed below.

Quote
Her student loans
13 different loans ranging from 1.86 - 8.00%
Total :$168,500
My student loans
8 different loans ranging from 5.05-6.55%
Total $120,000
Reducing the high interest rates would be worthwhile - previous comments about Sofi, etc., are good. 
See http://www.vertex42.com/Calculators/debt-reduction-calculator.html and download the spreadsheet to compare how much you would pay under different strategies.

Quote
My employer matches 1:1 up to 5% for my retirement TSP.  That is free money so I am doing 5% roth contribution to my TSP (current balance $33,000).  This has me putting away 10% of my salary to my retirement   My wife's employer gives her 7% of her salary regardless of what she contributes, and we are currently not contributing to hers.
Why Roth instead of traditional?  Why not $18K each?  Why not $11K total into Roth IRAs?  Note: there may be good answers - I'm just asking....

Quote
We are in the process of rolling over our 401k with previous employers into a rollover IRA with vanguard, which will total $42,000.  I haven't researched which funds to put the money into yet.  Any suggestions?
My default "one size fits all" (which of course it doesn't, but...) is VTTSX.  See also https://www.bogleheads.org/wiki/Three-fund_portfolio.

Quote
So my questions are:
1.  Our main focus is I want to pay off student loans by 2020 if not before.  Because of this, we are only contributing 17% of our salary to retirement.  Is this okay?
Paying off (or, even better, refinancing to a low rate) the high interest loans will help you achieve both the loan and FIRE goals (assuming that you have a FIRE goal).  For low interest loans, you choose between the goals.

Quote
2.  I think we can be debt free by 2023 if we continue to pay $5,000/mo to student loans and then pay extra $5,000 to the mortgage after the loans are paid off.  But should we?  Should we increase our retirement savings instead?
Depends on whether earlier debt freedom or earlier retirement is more important - assuming market returns continue historical behavior.

Quote
3.  Very broad question:  What are your thoughts about our situation?  How would you handle it?
Start by getting a clearer picture of where you are and where you are going financially.  E.g., the Vertex calculator above.  Have you tried putting your situation into the case study spreadsheet?

Good luck!

ShoulderThingThatGoesUp

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Re: Help a 31yo & his family get out of debt and retire early!
« Reply #23 on: December 01, 2015, 02:08:37 PM »
How much is that most expensive loan? How much loan principle could you eliminate if you sold your cars (you haven't told us what they are yet) and bought reasonable ones?

At least one of your current cars is not reasonable, because you owe $26,000 on it.