### Author Topic: Pay it off, or Save it up?  (Read 1213 times)

#### tycanis

• Posts: 19
##### Pay it off, or Save it up?
« on: December 19, 2016, 01:43:20 PM »
Looking to understand exactly how best to use the formula provided in the introductory posts to allow my husband to not only retire in a reasonable number of years, but also to step out of the job he currently has which, after 14 years with the company, and working his way up the ranks, is really wearing him down (note, I am a stay-at-home with our 2 children, 4 and 1).

If I understand what is being said in the initial post by saving 70% of his take home he can retire in approximately 10 years. Now I did some math and figured that at the moment we are on average saving around 50-60% of his take home.  Which is good, but obviously could be better.

Now we currently have enough in savings that we could pay off our only two remaining loans (one school, and current home) and still have a nice save buffer amount in the bank.  However the question is this: would it be best to pay off both loans, or to put that money into investments instead?

By my math if we pay off both loans our regular monthly expenses could go down to be around 700-1000\$ a month, which would mean even saving the 70% he'd only need a job paying around 9\$ an hour (I figured the 1000\$ as 30% of monthly income).  But to pay them off would take 2/3 of our current savings, so is it worth it?

Any advice appreciated,especially if I'm misinterpreting how the savings math works.

• Walrus Stache
• Posts: 6728
##### Re: Pay it off, or Save it up?
« Reply #1 on: December 19, 2016, 01:56:51 PM »
If you are shooting for the 4% SWR rule you need to have 25 times your annual expenses including taxes in your investment portfolio so he can retire. Of course if you save say 18 times your annual expenses he could then take a part time job and you can let your investments grow on their own until they hit 25 x your annual expenses.

The charts you refer to are rules of thumb that assume the savings is invested and earning a standard return. That may or may not happen so you can only use them as a rough gauge of what to expect.

Whether or not to pay off loans comes down to how much the interest rates are and what the expected return is of your investment plan. You also need to factor in your risk tolerance as investments that offer higher returns [stocks] tend to be volatile.
« Last Edit: December 19, 2016, 01:59:27 PM by Retire-Canada »

#### nereo

• Senior Mustachian
• Posts: 10792
• Location: Just south of Canada
##### Re: Pay it off, or Save it up?
« Reply #2 on: December 19, 2016, 01:57:02 PM »
Quote
If I understand what is being said in the initial post by saving 70% of his take home he can retire in approximately 10 years. Now I did some math and figured that at the moment we are on average saving around 50-60% of his take home.  Which is good, but obviously could be better.

This is a very broad-stroke, ballpark way of estimating how long it will take you to hit FIRE.  Things that will severely change this calculation include changes to your retirement spending (it assumes you'll spend roughly the same) and rate of return (I believe it assumes 7%/year; it could be higher or lower, especially for shorter time frames).

To best answer your questions it would help if you did a full case study.  See the guidelines provided here.

Quote
Now we currently have enough in savings that we could pay off our only two remaining loans (one school, and current home) and still have a nice save buffer amount in the bank.  However the question is this: would it be best to pay off both loans, or to put that money into investments instead?
More details are needed to really answer this question, but in general if the interest rate is >6% you should pay them off ASAP, <4% you should pay the minimum and maximize your savings, and between 4-6% is a personal call.  Unless your loans are very high its a good idea to keep some money in an ER fund until you reach a point where you can have no debt + enough investments to cover unexpected "bad things".  Otherwise you might end up in a debt spiral that's even harder to get out of.

Provide details in a full case study and we can help more.