Author Topic: Saving to a 401(k)  (Read 3581 times)

bigkid70

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Saving to a 401(k)
« on: August 13, 2015, 08:14:39 AM »
Hi all,

I'm in the process of paying down one fairly large cc debt (~$25K) and my school loans (~$30K), so most of my (post-tax) income is/will be going to pay those. That said, I've read from others here that because the rates on both are pretty low (3.74% and 4%, respectively), I should not be so aggressive about paying them off, but instead should pay the minimums of something close to it and put more money into my 401 since I'l get better returns.

To my thinking, that scenario means the debts will take way longer to pay off than I would want them to, but am I missing the bigger, long-term income picture?

Also, related to the question above. Do folks here (or should people in general) max out their allowable 401(k) contribution by default (up to $18K in 2015) and then work with their remaining net pay to pay other bills and expenses? Or does it make more sense to get more take home pay each week so I have more cash on hand to pay down debts?

hoodedfalcon

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Re: Saving to a 401(k)
« Reply #1 on: August 13, 2015, 08:21:28 AM »
I don't have cc debt, but I do have around $50K of private student loan debt (3.19%) I am trying to pay down. I also have about $90K of federal student loans (5%) which are on income based repayment and I am planning on PSLF. 

My plan is to split the baby. I am maxing out the 403(b) while also paying over $1000/month towards my loans. I worked up to this over a few years. I wasn't comfortable just paying down debt, and I also wasn't comfortable just saving/investing, even with the interest rates being relatively low. So, after a few years of busting ass and getting raises, I am able to do both.

I had to really work on reducing my expenses to make this possible though. YMMV.

forummm

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Re: Saving to a 401(k)
« Reply #2 on: August 13, 2015, 08:23:41 AM »
If your marginal tax bracket now is higher than your marginal tax bracket in retirement, then maxing out ($18k) your 401k usually makes sense. For us we maxed out both of ours and our IRAs and then paid off debts with the cash from our paychecks--even though some of our loans were 8.5%. We paid the high interest ones quickly and still have some low interest or no interest ones that we will keep paying the minimums on. The excess cash goes to taxable savings instead of paying the low interest loans.

Axecleaver

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Re: Saving to a 401(k)
« Reply #3 on: August 13, 2015, 09:42:56 AM »
You have to do the math on your tax savings. If you're in the 25 or 28% bracket or higher, max out your retirement accounts before paying down debt under 8% interest. This is even more true in states with an income tax. For every $1000 you save in a retirement account, which will average around 7-8% earnings per year, you'll also save $250 (or 280, or...) in federal taxes.

On the flip side, it feels good to be debt free, so it goes beyond the math. You have to decide what would make you feel better - paying less taxes, or living debt free? Sometimes the best return on investment isn't the choice that makes us the happiest.

robartsd

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Re: Saving to a 401(k)
« Reply #4 on: August 13, 2015, 02:26:32 PM »
3.74% APR credit card is very low. Sounds like a promotional rate - if it is I'd prioritized this debt based on the non-promotional rate (very likely over the 8% threshold mentioned above) until your plan to pay it off is sufficient to get rid of it before the current promotion ends. While you can probably keep on rolling that debt to a new promotion while you pay it off, I wouldn't want the risk. I would prioritize tax advantaged investing over paying off that nice safe 4% APR student loan.

AlwaysLearningToSave

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Re: Saving to a 401(k)
« Reply #5 on: August 13, 2015, 02:48:01 PM »
3.74% APR credit card is very low. Sounds like a promotional rate - if it is I'd prioritized this debt based on the non-promotional rate (very likely over the 8% threshold mentioned above) until your plan to pay it off is sufficient to get rid of it before the current promotion ends. While you can probably keep on rolling that debt to a new promotion while you pay it off, I wouldn't want the risk. I would prioritize tax advantaged investing over paying off that nice safe 4% APR student loan.

+1.  This also gives you "split the baby" as an earlier poster mentioned. 

bigkid70

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Re: Saving to a 401(k)
« Reply #6 on: August 16, 2015, 07:17:09 PM »
@robart and AlwaysLearning - the 3.74% rate on my cc is not a promo rate. I've had that rate for many years, so, based on what you said about prioritizing tax advantaged investing overr the 4% school loan, I assume the same logic applies to the cc.

@hoodedfalcon - your situation sounds similar to mine, and I think your "split the baby" approach makes good sense. Also, what does "YMMV" stand for?

Thanks to everyone for their posts!

Fuzz

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Re: Saving to a 401(k)
« Reply #7 on: August 17, 2015, 12:31:00 PM »
What credit card has a 3.74 percent rate? Is that an above prime rate? Is it secured by something? That doesn't make any sense.

bigkid70

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Re: Saving to a 401(k)
« Reply #8 on: August 17, 2015, 01:20:18 PM »
It's a Chase Sapphire Preferred card. Like I've said in previous replies, I've had it for many years, so I never thought much about the rate. I just knew it was really low. Based on many of the responses in this thread, it's apparently much more unusual than I thought. My guess is that rate is no longer available for new applicants, and it probably hasn't been for a long time.

Easye418

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Re: Saving to a 401(k)
« Reply #9 on: August 17, 2015, 01:47:58 PM »
It's a Chase Sapphire Preferred card. Like I've said in previous replies, I've had it for many years, so I never thought much about the rate. I just knew it was really low. Based on many of the responses in this thread, it's apparently much more unusual than I thought. My guess is that rate is no longer available for new applicants, and it probably hasn't been for a long time.

Wish my CSP was 3.74% and I have had it for years and spent $20k a year on it.

hoodedfalcon

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Re: Saving to a 401(k)
« Reply #10 on: August 17, 2015, 05:36:54 PM »

@hoodedfalcon - your situation sounds similar to mine, and I think your "split the baby" approach makes good sense. Also, what does "YMMV" stand for?


It's internet for "your mileage may vary"

bigkid70

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Re: Saving to a 401(k)
« Reply #11 on: August 17, 2015, 06:59:30 PM »
Thank you, interwebs!!