Author Topic: Reader Case Study - Retirement vs Medium Term Goals on Low Salary  (Read 2927 times)

Aly

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Reader Case Study - Retirement vs Medium Term Goals on Low Salary
« on: September 11, 2016, 02:49:07 PM »
Life Situation: I'm in grad school in a STEM PhD program, so I'm funded but at a pretty low salary. I live with my boyfriend and split expenses, so I've be able to save for both medium term anticipated expenses and for retirement.

Salary: I made $24,500 for the last three years but my stipend was raised this year (so far they've announced a $3,000 raise for the school year, I'm assuming they'll raise our summer stipend by $1,000 but no one has confirmed that yet). I get paid different amounts during the fall, spring and summer terms because of the number of weeks per term.

Assets:
$9,218.89 in a high-yield savings account with 0.9% interest (this is my emergency fund and my medium-term goals fund). I've been putting ~$200/month in this account.
$12,226.01 in a regular IRA
$2,179.01 in a Roth IRA (I switched when I realized my income is currently the lowest it will ever be). I've been putting ~$200/month in this account.
I try to keep ~$1,000 in my primary checking and savings accounts for short term emergencies/money I can get from an ATM. The interest is basically zero but there aren't any fees.

Liabilities:
$12,500 in federally subsidized student loans. They're on hold because I'm a full time student and are not accruing interest while I'm in school.

Medium term (1-5 year) liabilities are where my question comes in. I'm going to graduate in a year or two and at that point I will have to: 1) pay my student loans, 2) move, 3) buy a car (depending on where we move) 4) get married (? doesn't have a deadline but depending where we move might have to happen for immigration purposes). All of those things take money, and I'm not sure how I should split saving for these things that I know will be expensive but don't have an actual price tag or deadline, vs contributing to my retirement accounts. So far I've just taken all the money I have to save and split it down the middle, but I'm anticipating and extra $3-4 k this year and I'm not sure what to do with it.
Should I continue splitting the money I save in half for both goals or max out my Roth IRA?
How much is it reasonable to having sitting in a savings account for potential expenses? Is there somewhere better to put the money until the potential expenses become real expenses?

marty998

  • Walrus Stache
  • *******
  • Posts: 6371
  • Location: Sydney, Oz
Re: Reader Case Study - Retirement vs Medium Term Goals on Low Salary
« Reply #1 on: September 11, 2016, 03:13:36 PM »
Is your boyfriend on the same page as you financially? What are his savings like? Are you going to pay for all of your student loans, your move, a car and your wedding, or will he chip in? Does he have student loans too?

A STEM PHD should translate into a fairly highly paid career yes? If so I don't think you need to be putting away money for every future medium term expense you can think of. I'd focus on building good habits now, and try and avoid any major blow ups (credit card debt, personal loans, car loans, dipping into emergency funds etc).


minimalistgamer

  • Bristles
  • ***
  • Posts: 265
  • Location: United States of America
  • Gamer and minimalist.
    • Minimalist Gamer
Re: Reader Case Study - Retirement vs Medium Term Goals on Low Salary
« Reply #2 on: September 11, 2016, 04:22:43 PM »
So far I've just taken all the money I have to save and split it down the middle, but I'm anticipating and extra $3-4 k this year and I'm not sure what to do with it.
Should I continue splitting the money I save in half for both goals or max out my Roth IRA?
How much is it reasonable to having sitting in a savings account for potential expenses? Is there somewhere better to put the money until the potential expenses become real expenses?

I am fairly anti debt. So my main focus would be on eliminating the debt as soon as possible.

However before you start attacking your debt, you will need to build a foundation. I would consider Dave Ramsey's baby steps here. First have $1000 in your savings or checking account. Next, focus on buying a cheap car (this may or may not be in line with the baby steps, but you will need some form of transportation). I would strongly advice you against getting a car loan. You can buy a cheap and reliable car without having to take a loan.

Once you have the car situation taken care of, you can focus on the housing situation. Save enough for a deposit for an apartment (consider going a little cheap here till you eliminate your student loan).

You need to figure out how much money you are going to need to accomplish this. Come up with some number and be conservative - by that I mean over estimate a little bit. Once you know this number, you can figure out how much you can save, and how much you can invest. Keep one thing in mind though, all your hard work will be a waste if you do not pay off your student loans quickly. The interest you will gain on your IRA will be offset by the interest you will pay on your student loans.

So my final piece of advice, come up with some estimates. Without that, planning would be very difficult. Make sure you have enough money to build yourself a foundation after you graduate. I would not recommend putting money away into an IRA if you are going to need money for some life related expense. So its OK even if you do not contribute to your IRA in the short term because you are ensuring that you have cash to pay for life expenses, and you have a solid plan in place to pay off the debt. Once do this, you can aggressively invest in your IRA.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4837
  • Age: 34
  • Location: Seattle, WA
Re: Reader Case Study - Retirement vs Medium Term Goals on Low Salary
« Reply #3 on: September 11, 2016, 04:36:24 PM »
I guess my biggest questions would be how likely is it you and/or your SO will find a job immediately after graduation, and how much do you expect to get paid?

Without knowing what your exact field of study is, I would think you should easily expect to at least double your income when you get a full-time job, if not more. The added income should be more than enough to cover the added monthly expense of student loan payments. The $9k you have in your savings should likely be enough to cover short-term expenses when you transition out of your PhD program (moving expenses, buying a decent used car). If you need to get married immediately for immigration purposes a courthouse wedding should suffice; if you want to have a big party, save up your higher salary for it.

In the meantime you can't go back to max out this year's IRA contribution later when you're making the big bucks, so you might want to make sure you do that this year before beefing up the savings account. I think you have enough in there for the time being.

Aly

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Reader Case Study - Retirement vs Medium Term Goals on Low Salary
« Reply #4 on: September 11, 2016, 05:08:18 PM »
Thanks for the input so far everyone!

Boyfriend is not as gung ho about FIRE/saving as I am, but he has pretty good habits. He has a job making $50,000 right now and he's contributing 15% of that to his work 401k. He has a good emergency fund and we're working on saving for other goals. We only share one account that we pay our bills from so I'm not managing his finances for him.

Now that you're helping me think the expenses through it's obvious that we would split wedding/moving expenses. He doesn't have any student loans so I'm uncomfortable making that his financial burden (plus mine are so low I can easily pay them myself). He has a car (that I use) that is paid off and predates us splitting finances so we haven't had to talk through how we would split buying a car.

It's likely that I will have a job by the time I graduate or very shortly after (I can't imagine being unemployed for more than 6 months at the absolute most. They arrange the graduation dates so that you have time to look for a job after you defend and lots of people in my department are kept on as post-docs until they get another job). If I go into industry I'll be making at least $70k. If I do a post doc it'd be more like $50 k. We also wouldn't move until I had a job lined up, and it's likely he has some flexibility with remote work at his current company so we would have at least one income between my graduating and getting a new job.

cats

  • Handlebar Stache
  • *****
  • Posts: 1134
Re: Reader Case Study - Retirement vs Medium Term Goals on Low Salary
« Reply #5 on: September 11, 2016, 08:45:16 PM »
In terms of your 4 things:

1) loans, yes you have to repay them
2) moving, if you go into industry, your new employer may offer a relocation package (mine did...they paid to move all my stuff, put it in storage for 30 days, and also gave me a lump sum of cash which was sufficient to cover moving expenses)
3) car, need for it depends on where you move.  Do you have any ideas of where you are likely to wind up?
4) wedding--there's getting married and then there is having a wedding.  If you guys want to get married to satisfy an immigration requirement, you can always do that in a civil ceremony at the courthouse, very cheap.  If you want the big party/wedding, yes that might cost you a bit more.

The money you have in savings is certainly enough to handle a move and buying a beater car, if it turns out you need to fund your move AND buy a car ASAP.  On a salary of $50-70k, you can probably repay a good chunk (if not all) of your student loans within 6 months of graduating (if you start working immediately)...do student loans still have a six month grace period after graduation?  So really, it seems like the only thing you need to be saving for is a wedding (assuming you actually want to have one).  I would probably prioritize maxing out an IRA over throwing a party, personally :)

minimalistgamer

  • Bristles
  • ***
  • Posts: 265
  • Location: United States of America
  • Gamer and minimalist.
    • Minimalist Gamer
Re: Reader Case Study - Retirement vs Medium Term Goals on Low Salary
« Reply #6 on: September 11, 2016, 10:02:27 PM »
If I go into industry I'll be making at least $70k. If I do a post doc it'd be more like $50 k. We also wouldn't move until I had a job lined up, and it's likely he has some flexibility with remote work at his current company so we would have at least one income between my graduating and getting a new job.

Its awesome that you have such good prospects once you graduate.

The fact that your boyfriend/future husband will have an income during your transition period is great. Focus on saving enough money so that you can land on your feet once you have to move out, and aggressively pay off debt once you get settled in.

If I were in your situation, I would stop retirement contributions right now, and save enough cash to make a big lump sum payment towards your student loans once they start accruing interest. The only retirement contribution I would make would be the company 401k match. Everything else will go towards paying off the loans.

Also make sure that you do not accrue any new debt like auto loans. They are not worth it. With your new found wealth, it would be very easy to fall into a spending trap. Avoid it.

Vagabond76

  • Stubble
  • **
  • Posts: 226
  • Age: 42
  • Location: Destin, FL
Re: Reader Case Study - Retirement vs Medium Term Goals on Low Salary
« Reply #7 on: September 12, 2016, 04:15:01 AM »
If I were in your situation, I would stop retirement contributions right now, and save enough cash to make a big lump sum payment towards your student loans once they start accruing interest. The only retirement contribution I would make would be the company 401k match. Everything else will go towards paying off the loans.

I don't understand how one can give this advice without knowing the terms (interest rate, payment, interest-free deferment options, etc) of the loan.

Being "fairly anti-debt" means you are closed-minded to potential wealth-building strategies. $12k in federal subsidized student loans is very little. The tax-free return, over time, of a maxed out Roth IRA should be many times the interest payments of the student loan.

minimalistgamer

  • Bristles
  • ***
  • Posts: 265
  • Location: United States of America
  • Gamer and minimalist.
    • Minimalist Gamer
Re: Reader Case Study - Retirement vs Medium Term Goals on Low Salary
« Reply #8 on: September 12, 2016, 06:22:46 AM »

Being "fairly anti-debt" means you are closed-minded to potential wealth-building strategies. $12k in federal subsidized student loans is very little. The tax-free return, over time, of a maxed out Roth IRA should be many times the interest payments of the student loan.

This is exactly why I would pay it off as soon as I can - because the loan is so little. If the loan was $120,000 instead, I would definitely invest a little bit just so I could stay in the market.

Regardless, in my opinion, being debt free is a good thing. Peace of mind has some value :) Just my opinion though.

KCM5

  • Pencil Stache
  • ****
  • Posts: 869
Re: Reader Case Study - Retirement vs Medium Term Goals on Low Salary
« Reply #9 on: September 12, 2016, 06:34:48 AM »
If I were in your situation, I would stop retirement contributions right now, and save enough cash to make a big lump sum payment towards your student loans once they start accruing interest. The only retirement contribution I would make would be the company 401k match. Everything else will go towards paying off the loans.

Also make sure that you do not accrue any new debt like auto loans. They are not worth it. With your new found wealth, it would be very easy to fall into a spending trap. Avoid it.

I would be doing the opposite. Put all of your extra money into 401(k)/IRA. Your Roth is great - I'd increase that as long as you're feeling comfortable with your current savings account/e fund amount. The best part about the Roth is that you'll never get this contribution time back, so you might as well max it. But if you do need to take money out for an emergency, you can. You can always take out contributions from a Roth IRA tax free. Think of it as an extra SHTF emergency fund.

Your current savings may be enough to get you through the transition and buy a car if you need to. And, depending on the sort of car you want to buy (a more recent used model vs a beater), if you can find a car loan at less than 2% interest, it can make sense to take advantage of that. As long as you continue to have good savings habits and don't inflate your lifestyle, it can make sense to use the margin of the car loan to invest the money you would have had used for the car in your retirement/taxable accounts.

FIFoFum

  • Handlebar Stache
  • *****
  • Posts: 1842
    • Captain's Log - Mission to Puppy Waystation on Puppy Island
Re: Reader Case Study - Retirement vs Medium Term Goals on Low Salary
« Reply #10 on: September 13, 2016, 01:39:32 PM »
Thanks for the input so far everyone!

Boyfriend is not as gung ho about FIRE/saving as I am, but he has pretty good habits. He has a job making $50,000 right now and he's contributing 15% of that to his work 401k. He has a good emergency fund and we're working on saving for other goals. We only share one account that we pay our bills from so I'm not managing his finances for him.

Now that you're helping me think the expenses through it's obvious that we would split wedding/moving expenses. He doesn't have any student loans so I'm uncomfortable making that his financial burden (plus mine are so low I can easily pay them myself). He has a car (that I use) that is paid off and predates us splitting finances so we haven't had to talk through how we would split buying a car.

It's likely that I will have a job by the time I graduate or very shortly after (I can't imagine being unemployed for more than 6 months at the absolute most. They arrange the graduation dates so that you have time to look for a job after you defend and lots of people in my department are kept on as post-docs until they get another job). If I go into industry I'll be making at least $70k. If I do a post doc it'd be more like $50 k. We also wouldn't move until I had a job lined up, and it's likely he has some flexibility with remote work at his current company so we would have at least one income between my graduating and getting a new job.

I think you and your boyfriend just need to have open and honest communication about your future plans. That includes how you expect to handle or share money together. It sounds like you have similar values and a good system that is working for now. But if your relationship is serious enough that your boyfriend is likely to be moving with you for a job once you finish the PhD, then you are going to have to come up with a financial plan that acknowledges you both as a "joint" unit of working professionals. You mention not wanting to put the financial burden of your loans on him, but depending on what type of career you plan, being the follower for someone else's career can be way more of a financial and professional burden. This is not good or bad. It's the reality of dual-career life. At a certain point in the relationship, it's artificial to think of things as your own finances.