Author Topic: Debt vs IRA  (Read 1905 times)

Rasputin

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Debt vs IRA
« on: December 29, 2018, 05:03:31 AM »
Everyone says, regarding the order to get your sh*t together, to have emergency fund, then pay off debts, then invest for retirement. On the other hand, regarding investing, the mantra is ďinvest early and often.Ē Iím 42. $80,000 in student loans. Just getting started. If I only work on paying off my loans, do I not lose out on a ton of money by not putting it in the Roth IRA? Is it possible to do both at the same time?
Thanks.

oldmanintech

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Re: Debt vs IRA
« Reply #1 on: December 29, 2018, 05:10:42 AM »
 Not an expert but we probably need to know the interest rate of your student loans.

Rasputin

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Re: Debt vs IRA
« Reply #2 on: December 29, 2018, 05:41:05 AM »
Not an expert but we probably need to know the interest rate of your student loans.

3.99%. $80K. All direct loans.
I earn $74K gross, have TSP, pension, and IRA. Just started though so irA is $5,100, TSP around $500

TomTX

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Re: Debt vs IRA
« Reply #3 on: December 29, 2018, 07:26:19 AM »
Not an expert but we probably need to know the interest rate of your student loans.

3.99%. $80K. All direct loans.
I earn $74K gross, have TSP, pension, and IRA. Just started though so irA is $5,100, TSP around $500

3.99% non-callable debt? I'd pay the minimum on the debt and invest the maximum.

We're not Dave Ramsey simpletons here. We can distinguish between CC debt at 30% and student loan (or mortgage) debt at 4%.

Dicey

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Re: Debt vs IRA
« Reply #4 on: December 29, 2018, 08:22:21 AM »
Also, the Roth has income caps. Do it while you can. You can never regain the lost years of compounding. This is similar to the mortgage payoff debate, because your SL's interest is fixed. The "Don't Pay Off..." folks are looking at the big picture. The longer your green soldiers are deployed, the fewer of them you will need to reach your goals. If you start early enough, they will do the heavy lifting for you, including outearning your interest payments. It's pretty amazing, but it's not the easily digested sound-bite that DR and others advocate.

Paying for your past decisions while keeping your focus on the future is the most efficient way to go. Note that I'm on the other end of the spectrum. I am old(-ish) and FIRE. I actually took this route, so I know this shit works. To all the people who say how deliciously good it feels to kill.all.the.debt first, I respond that being FIRE feels infinitely better.

Now I'm going to duck to avoid the naysayers. Good luck to you In your life and your FIRE journey.

Rasputin

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Re: Debt vs IRA
« Reply #5 on: December 29, 2018, 08:36:00 AM »
Also, the Roth has income caps. Do it while you can. You can never regain the lost years of compounding. This is similar to the mortgage payoff debate, because your SL's interest is fixed. The "Don't Pay Off..." folks are looking at the big picture. The longer your green soldiers are deployed, the fewer of them you will need to reach your goals. If you start early enough, they will do the heavy lifting for you, including outearning your interest payments. It's pretty amazing, but it's not the easily digested sound-bite that DR and others advocate.

Paying for your past decisions while keeping your focus on the future is the most efficient way to go. Note that I'm on the other end of the spectrum. I am old(-ish) and FIRE. I actually took this route, so I know this shit works. To all the people who say how deliciously good it feels to kill.all.the.debt first, I respond that being FIRE feels infinitely better.

Now I'm going to duck to avoid the naysayers. Good luck to you In your life and your FIRE journey.
Right now my loans are in deferment while Iím in grad school, which Iím paying for as I go. My IRA is in a vanguard 2045 target date fund. I may put a little of that into VTSAX and a little into a bond fund as well. I guess the 2045 fund is good enough though. I just want to make as much as I can to be able to retire at a normal age.

TomTX

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Re: Debt vs IRA
« Reply #6 on: December 29, 2018, 10:39:24 AM »
Also, the Roth has income caps. Do it while you can. You can never regain the lost years of compounding. This is similar to the mortgage payoff debate, because your SL's interest is fixed. The "Don't Pay Off..." folks are looking at the big picture. The longer your green soldiers are deployed, the fewer of them you will need to reach your goals. If you start early enough, they will do the heavy lifting for you, including outearning your interest payments. It's pretty amazing, but it's not the easily digested sound-bite that DR and others advocate.

Paying for your past decisions while keeping your focus on the future is the most efficient way to go. Note that I'm on the other end of the spectrum. I am old(-ish) and FIRE. I actually took this route, so I know this shit works. To all the people who say how deliciously good it feels to kill.all.the.debt first, I respond that being FIRE feels infinitely better.

Now I'm going to duck to avoid the naysayers. Good luck to you In your life and your FIRE journey.
Right now my loans are in deferment while Iím in grad school, which Iím paying for as I go. My IRA is in a vanguard 2045 target date fund. I may put a little of that into VTSAX and a little into a bond fund as well. I guess the 2045 fund is good enough though. I just want to make as much as I can to be able to retire at a normal age.

Piddling around with a variety of funds is a mistake and a waste of time at low dollar amounts.

Pick a simple asset allocation (target date fund or stock index like VTI) - just dump everything in there until you get to AT LEAST $50k in assets. Waiting til $250k is fine too.

Rasputin

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Re: Debt vs IRA
« Reply #7 on: December 29, 2018, 11:07:11 AM »
Also, the Roth has income caps. Do it while you can. You can never regain the lost years of compounding. This is similar to the mortgage payoff debate, because your SL's interest is fixed. The "Don't Pay Off..." folks are looking at the big picture. The longer your green soldiers are deployed, the fewer of them you will need to reach your goals. If you start early enough, they will do the heavy lifting for you, including outearning your interest payments. It's pretty amazing, but it's not the easily digested sound-bite that DR and others advocate.

Paying for your past decisions while keeping your focus on the future is the most efficient way to go. Note that I'm on the other end of the spectrum. I am old(-ish) and FIRE. I actually took this route, so I know this shit works. To all the people who say how deliciously good it feels to kill.all.the.debt first, I respond that being FIRE feels infinitely better.

Now I'm going to duck to avoid the naysayers. Good luck to you In your life and your FIRE journey.
Right now my loans are in deferment while Iím in grad school, which Iím paying for as I go. My IRA is in a vanguard 2045 target date fund. I may put a little of that into VTSAX and a little into a bond fund as well. I guess the 2045 fund is good enough though. I just want to make as much as I can to be able to retire at a normal age.

Piddling around with a variety of funds is a mistake and a waste of time at low dollar amounts.

Pick a simple asset allocation (target date fund or stock index like VTI) - just dump everything in there until you get to AT LEAST $50k in assets. Waiting til $250k is fine too.

Two questions:
1. What does one do when he gets to $50K?
2. What do I do with money after Iíve put my $6,000 limit in my Roth for the year in? Like, should I open an individual account to invest extra monies? Iím thinking an extra grand or two per year.

TomTX

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Re: Debt vs IRA
« Reply #8 on: December 29, 2018, 11:53:18 AM »
Piddling around with a variety of funds is a mistake and a waste of time at low dollar amounts.

Pick a simple asset allocation (target date fund or stock index like VTI) - just dump everything in there until you get to AT LEAST $50k in assets. Waiting til $250k is fine too.

Two questions:
1. What does one do when he gets to $50K?
2. What do I do with money after Iíve put my $6,000 limit in my Roth for the year in? Like, should I open an individual account to invest extra monies? Iím thinking an extra grand or two per year.

1) Well, sticking with the one fund is fine for quite awhile. Hopefully by then you have had time to develop a proper IPS, and read all the references around here so that you can make an intelligent decision.

I think diversifying too early is risky in that it can tempt the novice investor into market timing, or more obscure/risky "investments". Or just "analysis paralysis" where they don't do ANYTHING.

Keep it simple, keep on track. No decisions, no rebalancing, no thinking about it. Just buy VTI when you have money to put in.

2) https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Rasputin

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Re: Debt vs IRA
« Reply #9 on: December 29, 2018, 11:57:50 AM »
Piddling around with a variety of funds is a mistake and a waste of time at low dollar amounts.

Pick a simple asset allocation (target date fund or stock index like VTI) - just dump everything in there until you get to AT LEAST $50k in assets. Waiting til $250k is fine too.

Two questions:
1. What does one do when he gets to $50K?
2. What do I do with money after Iíve put my $6,000 limit in my Roth for the year in? Like, should I open an individual account to invest extra monies? Iím thinking an extra grand or two per year.

1) Well, sticking with the one fund is fine for quite awhile. Hopefully by then you have had time to develop a proper IPS, and read all the references around here so that you can make an intelligent decision.

I think diversifying too early is risky in that it can tempt the novice investor into market timing, or more obscure/risky "investments". Or just "analysis paralysis" where they don't do ANYTHING.

Keep it simple, keep on track. No decisions, no rebalancing, no thinking about it. Just buy VTI when you have money to put in.

2) https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Iím currently in vanguard 2045 fund. Is VTI better?

Telecaster

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Re: Debt vs IRA
« Reply #10 on: December 29, 2018, 12:24:05 PM »

Iím currently in vanguard 2045 fund. Is VTI better?

Short answer...probably.  The main thing is actually investing, and you are doing that.   The rest is fine tuning.   Most people here would say that Vanguard 2045 is a bit more expensive and a bit more conservative than necessary.   But investing in Vanguard 2045 isn't a mistake or anything like that.   You have a long time until your target retirement date, so you can afford to go cheaper and more aggressive for now. 


Rasputin

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Re: Debt vs IRA
« Reply #11 on: December 29, 2018, 12:56:14 PM »

Iím currently in vanguard 2045 fund. Is VTI better?

Short answer...probably.  The main thing is actually investing, and you are doing that.   The rest is fine tuning.   Most people here would say that Vanguard 2045 is a bit more expensive and a bit more conservative than necessary.   But investing in Vanguard 2045 isn't a mistake or anything like that.   You have a long time until your target retirement date, so you can afford to go cheaper and more aggressive for now.
Iím purposely being a little conservative with my IRA, because Iíll always have that. However, my TSP is 85% C fund and 15% G fund. You never know, I could find a really lucrative private sector job after grad school. Iíll probably stay in the government, but you never know. If I do, Iíll change that to something more conservative.
« Last Edit: December 29, 2018, 12:59:26 PM by Rasputin »

TomTX

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Re: Debt vs IRA
« Reply #12 on: December 29, 2018, 02:29:21 PM »
Iím currently in vanguard 2045 fund. Is VTI better?

Either is fine. Depends on your comfort level. VTI is a pure US stock market play. The 2045 (VTIVX) fund has about 35% international stocks and 10% bonds. VTI has somewhat lower expenses, but not enough that 2045 would worry me.

TomTX

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Re: Debt vs IRA
« Reply #13 on: December 29, 2018, 02:33:09 PM »
Iím purposely being a little conservative with my IRA, because Iíll always have that. However, my TSP is 85% C fund and 15% G fund. You never know, I could find a really lucrative private sector job after grad school. Iíll probably stay in the government, but you never know. If I do, Iíll change that to something more conservative.

Unless you are retiring in the next few* years, investing in bonds is LESS conservative.

Yes, I mean that.

Sure, stocks have more volatility risk (which is reduced by time held) - but bonds have much more inflation risk (returns don't outpace inflation by much if at all) - if you're holding long enough, bonds are very likely to leave you worse off than if you were in stocks. Especially if you are buying medium to long term bonds with historically low yields.

We've seen "volatility risk" lately - stock market gyrates up and down. If you don't sell the stocks until years later, it's typically irrelevant.

*How many "few" is - is debatable.

Rasputin

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Re: Debt vs IRA
« Reply #14 on: December 29, 2018, 02:45:27 PM »
Iím purposely being a little conservative with my IRA, because Iíll always have that. However, my TSP is 85% C fund and 15% G fund. You never know, I could find a really lucrative private sector job after grad school. Iíll probably stay in the government, but you never know. If I do, Iíll change that to something more conservative.

Unless you are retiring in the next few* years, investing in bonds is LESS conservative.

Yes, I mean that.

Sure, stocks have more volatility risk (which is reduced by time held) - but bonds have much more inflation risk (returns don't outpace inflation by much if at all) - if you're holding long enough, bonds are very likely to leave you worse off than if you were in stocks. Especially if you are buying medium to long term bonds with historically low yields.

We've seen "volatility risk" lately - stock market gyrates up and down. If you don't sell the stocks until years later, it's typically irrelevant.

*How many "few" is - is debatable.

But everyone says you should own your age in bonds. Should I go like 80/20 C/S in my TSP then? I want that account to be aggressive in case I only have a couple years.

TomTX

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Re: Debt vs IRA
« Reply #15 on: December 29, 2018, 04:52:28 PM »
Iím purposely being a little conservative with my IRA, because Iíll always have that. However, my TSP is 85% C fund and 15% G fund. You never know, I could find a really lucrative private sector job after grad school. Iíll probably stay in the government, but you never know. If I do, Iíll change that to something more conservative.

Unless you are retiring in the next few* years, investing in bonds is LESS conservative.

Yes, I mean that.

Sure, stocks have more volatility risk (which is reduced by time held) - but bonds have much more inflation risk (returns don't outpace inflation by much if at all) - if you're holding long enough, bonds are very likely to leave you worse off than if you were in stocks. Especially if you are buying medium to long term bonds with historically low yields.

We've seen "volatility risk" lately - stock market gyrates up and down. If you don't sell the stocks until years later, it's typically irrelevant.

*How many "few" is - is debatable.

But everyone says you should own your age in bonds. Should I go like 80/20 C/S in my TSP then? I want that account to be aggressive in case I only have a couple years.

I'm 45 and 100% stocks, as always.

"Everyone says" is a really poor justification.

What's this "only have a couple years"? Your TSP should exist even if you leave Fed service.

The real benefit of having bonds during accumulation phase is if they keep you from panicking and selling off stocks in a downturn. Maybe some benefit from rebalancing, but you don't know what I'm talking about with that.

Rasputin

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Re: Debt vs IRA
« Reply #16 on: December 29, 2018, 05:08:00 PM »
Iím purposely being a little conservative with my IRA, because Iíll always have that. However, my TSP is 85% C fund and 15% G fund. You never know, I could find a really lucrative private sector job after grad school. Iíll probably stay in the government, but you never know. If I do, Iíll change that to something more conservative.

Unless you are retiring in the next few* years, investing in bonds is LESS conservative.

Yes, I mean that.

Sure, stocks have more volatility risk (which is reduced by time held) - but bonds have much more inflation risk (returns don't outpace inflation by much if at all) - if you're holding long enough, bonds are very likely to leave you worse off than if you were in stocks. Especially if you are buying medium to long term bonds with historically low yields.

We've seen "volatility risk" lately - stock market gyrates up and down. If you don't sell the stocks until years later, it's typically irrelevant.

*How many "few" is - is debatable.

But everyone says you should own your age in bonds. Should I go like 80/20 C/S in my TSP then? I want that account to be aggressive in case I only have a couple years.

I'm 45 and 100% stocks, as always.

"Everyone says" is a really poor justification.

What's this "only have a couple years"? Your TSP should exist even if you leave Fed service.

The real benefit of having bonds during accumulation phase is if they keep you from panicking and selling off stocks in a downturn. Maybe some benefit from rebalancing, but you don't know what I'm talking about with that.

But if I leave government service, I wouldnít be able to contribute to the TSP any more. Wouldnít it make more sense to roll that into another product if I left?
I know a little something about rebalancing. Isnít 85/15 stock/bond still pretty good though?

Rob_bob

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Re: Debt vs IRA
« Reply #17 on: December 29, 2018, 05:09:33 PM »
Iím purposely being a little conservative with my IRA, because Iíll always have that. However, my TSP is 85% C fund and 15% G fund. You never know, I could find a really lucrative private sector job after grad school. Iíll probably stay in the government, but you never know. If I do, Iíll change that to something more conservative.

Unless you are retiring in the next few* years, investing in bonds is LESS conservative.

Yes, I mean that.

Sure, stocks have more volatility risk (which is reduced by time held) - but bonds have much more inflation risk (returns don't outpace inflation by much if at all) - if you're holding long enough, bonds are very likely to leave you worse off than if you were in stocks. Especially if you are buying medium to long term bonds with historically low yields.

We've seen "volatility risk" lately - stock market gyrates up and down. If you don't sell the stocks until years later, it's typically irrelevant.

*How many "few" is - is debatable.

But everyone says you should own your age in bonds. Should I go like 80/20 C/S in my TSP then? I want that account to be aggressive in case I only have a couple years.

No not everyone says to own your age in bonds or some other such formula.  I have heard a number of financial advisers say your bond/fixed income level is determined entirely by your risk tolerance. One adviser said they have a 30 something client with a high bond allocation because they are extremely risk adverse and another 80 something client with an extremely high stock allocation because they can handle volatility.

Rasputin

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Re: Debt vs IRA
« Reply #18 on: December 29, 2018, 07:10:21 PM »
Iím purposely being a little conservative with my IRA, because Iíll always have that. However, my TSP is 85% C fund and 15% G fund. You never know, I could find a really lucrative private sector job after grad school. Iíll probably stay in the government, but you never know. If I do, Iíll change that to something more conservative.

Unless you are retiring in the next few* years, investing in bonds is LESS conservative.

Yes, I mean that.

Sure, stocks have more volatility risk (which is reduced by time held) - but bonds have much more inflation risk (returns don't outpace inflation by much if at all) - if you're holding long enough, bonds are very likely to leave you worse off than if you were in stocks. Especially if you are buying medium to long term bonds with historically low yields.

We've seen "volatility risk" lately - stock market gyrates up and down. If you don't sell the stocks until years later, it's typically irrelevant.

*How many "few" is - is debatable.

But everyone says you should own your age in bonds. Should I go like 80/20 C/S in my TSP then? I want that account to be aggressive in case I only have a couple years.

No not everyone says to own your age in bonds or some other such formula.  I have heard a number of financial advisers say your bond/fixed income level is determined entirely by your risk tolerance. One adviser said they have a 30 something client with a high bond allocation because they are extremely risk adverse and another 80 something client with an extremely high stock allocation because they can handle volatility.

Iím a gambler by nature.

TomTX

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Re: Debt vs IRA
« Reply #19 on: December 29, 2018, 07:13:32 PM »
But if I leave government service, I wouldnít be able to contribute to the TSP any more. Wouldnít it make more sense to roll that into another product if I left?
I know a little something about rebalancing. Isnít 85/15 stock/bond still pretty good though?

Hard to find anything with expense ratio as low as the TSP. Is there any advantage to rolling it over?

If it's a token amount - sure. Not worth the mental overhead to maintain a separate account.

If it's meaningfully large, you should have a reason to roll it over.

TomTX

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Re: Debt vs IRA
« Reply #20 on: December 29, 2018, 07:14:47 PM »
Iím a gambler by nature.

all the more important that you should select a single index or target date fund, write down a plan and stick to it.

Individuals are remarkably bad at trying to outguess the market, and a "gambler" would be more tempted to do so.

AccidentalMiser

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Re: Debt vs IRA
« Reply #21 on: December 29, 2018, 07:33:15 PM »
I would split the difference.  There are a number of factors which no one has taken into account since you haven't disclosed them.  Don't screw around with date funds.  Stick to VTI and a little bit of bonds or cash if you feel you must.  Like TomTX, I am 100% equities for my liquid investments plus some rental houses. 

Debt is risk.  Period.  Call me a simpleton if you wish, that doesn't change the fact that life gets hard in a hurry when you have to make payments on a bunch of debt after losing a job (ask me how I know.)

Rasputin

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Re: Debt vs IRA
« Reply #22 on: December 30, 2018, 04:38:46 AM »
I would split the difference.  There are a number of factors which no one has taken into account since you haven't disclosed them.  Don't screw around with date funds.  Stick to VTI and a little bit of bonds or cash if you feel you must.  Like TomTX, I am 100% equities for my liquid investments plus some rental houses. 

Debt is risk.  Period.  Call me a simpleton if you wish, that doesn't change the fact that life gets hard in a hurry when you have to make payments on a bunch of debt after losing a job (ask me how I know.)

Excellent points. Just seems like there is never enough money. LOL. Iíll just stick with the 2045 fund for my Roth, and all C fund for TSP.
« Last Edit: December 30, 2018, 08:31:40 AM by Rasputin »

Fuzz

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Re: Debt vs IRA
« Reply #23 on: January 01, 2019, 12:54:50 PM »
4% student loan debt or invest in the market? I'd encourage you to do both, rather than just pay down the student loans. I used all available cash to pay down student loans from 2010 to 2016 and hardly invested in the market. Those were some good years to miss out on. Even so, it was more motivating for me to pay down debt (and get the balance to zero) than to invest (and watch a balance accumulate, or bounce around, or whatever). Your own psychology matters.

Rasputin

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Re: Debt vs IRA
« Reply #24 on: January 01, 2019, 01:31:51 PM »
4% student loan debt or invest in the market? I'd encourage you to do both, rather than just pay down the student loans. I used all available cash to pay down student loans from 2010 to 2016 and hardly invested in the market. Those were some good years to miss out on. Even so, it was more motivating for me to pay down debt (and get the balance to zero) than to invest (and watch a balance accumulate, or bounce around, or whatever). Your own psychology matters.
Iím just so old Iím afraid that not making out my IRA is bad. Once I have enough money set aside for my current degree, Iíll start working on the loans. But I feel if I want to retire on time I gotta keep plugging away at the retirement account.