Author Topic: Yet another pay off debt or invest question  (Read 4795 times)

WGH

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Yet another pay off debt or invest question
« on: May 30, 2014, 08:49:54 AM »
Hell all,

First post and I wanted to refrain from a full on case study though I might do that later.

A little about me I have two jobs both with 401ks and this is where the question begins:

Job 1 is my full time job gross about $86,000 and has a unique retirement setup. I contribute 3% pretax and the company contributes 15%. Then I can contribute 4% after tax and the company contributes 2%.

So annually looks like this:
Pre tax employee - $2,580
Pre tax employer - $12,900
After tax employee - $3,440
After tax employer - $1,720
Total = $20,640 which works out to 24% a year

What's nice about this is only $2,580 is attributable to my $17,500 limit

So second job is part time and I earn about $18,500 a year. The company will match 20% of whatever I invest so I put in a dollar they put in 20 cents. So I could almost have 100% of my income withheld and earn 20% return on my money right off the bat.

The question is do that or pay off debt instead?

Debts:

House: $270k @ 3.25% appraised at $300k this mortgage is 1 year old, so prepayments would mean big savings

Student Loans: $45k @ 4.8% $45k @ 6.8%

Vehicles are paid off and no cc debt.

Other than the house assets include:

401ks @ $112,000
IBonds @ $3,000

I am 33 years old and would like to retire at 55 though I am here searching for ways to accelerate it.

So I am in a position to live off of paycheck # 1 and use paycheck # 2 to either throw all at savings or all at the student loans or all at the mortgage.

Now a 20% initial return plus capital appreciation seems to beat even the 6.8% I am currently indentured to via Sallie Mae. I am not as concerned with funding a Roth as I believe it to be more advantageous to get that 20% match.

Any thoughts would be appreciated!

JGB

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Re: Yet another pay off debt or invest question
« Reply #1 on: May 30, 2014, 10:05:32 AM »
With that level of income, I'd think that you could do both: pay off the loan AND invest fully in your retirement options. That's what I would do.

Am I missing something that prevents you from using large portions of the income you have left after fully funding your retirement as pay-off to the 6.8% loan?

WGH

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Re: Yet another pay off debt or invest question
« Reply #2 on: May 30, 2014, 10:30:09 AM »
With that level of income, I'd think that you could do both: pay off the loan AND invest fully in your retirement options. That's what I would do.

Am I missing something that prevents you from using large portions of the income you have left after fully funding your retirement as pay-off to the 6.8% loan?

Hi JGB,

Yes I do have some additional income that I am using to accelerate the pay down on the student loans. And I could do both. I don't plan on continuing the 60 hours a week lifestyle permanently so I was considering a scenario of say 5-7 more years and would it make more sense to just blast away the student loans to zero, the mortgage to half thus saving thousands in interest, or dump it all into into this second 401k which through years of compound interest would really add up....

I suppose I feel a need to concentrate on one of the three to maximize the benefits....

Maybe it's a scratch something of the list compulsion?

Ultimately I'm eyeing that 20% match and wondering if that's the route to go and if the other debts are not paid down super quick since they're relatively low interest that's ok?

I've even considered maxing out the 401k to 100k and then borrowing the max $50k to pay off the student loans. Thus trying to have my cake and eat it too...

Any thoughts are appreciated..

kallinan

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Re: Yet another pay off debt or invest question
« Reply #3 on: May 30, 2014, 12:35:25 PM »
More information would help. 

  • Is there any vesting schedule involved for either retirement plan?
  • Are the retirement plans tax-favored?  (e.g. a 401k)
  • What's the term on the mortgage & school loans?  By the interest rate, I'm guessing that mortgage is 15y fixed?

WGH

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Re: Yet another pay off debt or invest question
« Reply #4 on: May 30, 2014, 01:13:43 PM »
More information would help. 

  • Is there any vesting schedule involved for either retirement plan?
  • Are the retirement plans tax-favored?  (e.g. a 401k)
  • What's the term on the mortgage & school loans?  By the interest rate, I'm guessing that mortgage is 15y fixed?

Fully vested in both plans

Both plans are 401k and I included a breakdown of my full time job's plan the %s that are pre tax vs post tax and employee vs employer contributions.

The mortgage is on a 30 year note fixed. Yep managed to buy at the right time thank God!

Students loans are on a ten year note

Thanks!

JGB

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Re: Yet another pay off debt or invest question
« Reply #5 on: May 30, 2014, 05:06:15 PM »
I'm still not following... You talk about dumping 100k into the 401k. That isn't possible. You can only put in $17500 power year. So put in the full 17.5k and do it in the way that maximizes your matches. Then pay down the loan as aggressively as possible.

The idea of taking a loan against your 401k to eliminate your higher interest debt is an option worth investigating. Run the numbers before you do this and make sure that the interest you pay goes back into the account. If everything makes sense, then go for it. I wouldn't use this to pay down your mortgage though. That's a great rate, and you can do far better by investing than by paying down the mortgage more quickly.

trailrated

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Re: Yet another pay off debt or invest question
« Reply #6 on: May 30, 2014, 05:15:39 PM »
The idea of taking a loan against your 401k to eliminate your higher interest debt is an option worth investigating. Run the numbers before you do this and make sure that the interest you pay goes back into the account. If everything makes sense, then go for it. I wouldn't use this to pay down your mortgage though. That's a great rate, and you can do far better by investing than by paying down the mortgage more quickly.

You have to watch out when you do something like this. I had a good friend that just did and then was offered a job at another company that he took. He did not realize he had to pay back the 401k loan in full within 60 days of leaving the initial company to avoid major tax penalties. Lucky for him his signing bonus covered the difference.

That being said, I would only advise if your job is incredibly stable.

TomTX

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Re: Yet another pay off debt or invest question
« Reply #7 on: May 30, 2014, 05:42:03 PM »
Max out the retirement matching, including all of the 20% match.

You will likely shock someone in HR over there when you do ;)

You should have enough left over to keep paying on your current debts at a reasonable rate.

Be very careful of 401(k) loans for the reason stated above.

Hotstreak

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Re: Yet another pay off debt or invest question
« Reply #8 on: May 31, 2014, 12:45:34 PM »
It sounds like you have good intuition.  Get the full match from your first employer, and use the second to reach your IRS contribution limit, then tackle the student loans.

Absolutely I would not recommend paying extra towards your mortgage at that low rate.  The only situation that might make sense is if you need to get the balance down enough to refi out of PMI.  Sure you could pay it off and save yourself some interest (looks like about $150k interest left on your loan) but at that rate, if you put it in to the market instead your average return on $270k over 20 years should be much higher than what you would save.

rmendpara

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Re: Yet another pay off debt or invest question
« Reply #9 on: May 31, 2014, 02:23:13 PM »
Hell all,

First post and I wanted to refrain from a full on case study though I might do that later.

A little about me I have two jobs both with 401ks and this is where the question begins:

Job 1 is my full time job gross about $86,000 and has a unique retirement setup. I contribute 3% pretax and the company contributes 15%. Then I can contribute 4% after tax and the company contributes 2%.

So annually looks like this:
Pre tax employee - $2,580
Pre tax employer - $12,900
After tax employee - $3,440
After tax employer - $1,720
Total = $20,640 which works out to 24% a year

What's nice about this is only $2,580 is attributable to my $17,500 limit

So second job is part time and I earn about $18,500 a year. The company will match 20% of whatever I invest so I put in a dollar they put in 20 cents. So I could almost have 100% of my income withheld and earn 20% return on my money right off the bat.

The question is do that or pay off debt instead?

Debts:

House: $270k @ 3.25% appraised at $300k this mortgage is 1 year old, so prepayments would mean big savings

Student Loans: $45k @ 4.8% $45k @ 6.8%

Vehicles are paid off and no cc debt.

Other than the house assets include:

401ks @ $112,000
IBonds @ $3,000

I am 33 years old and would like to retire at 55 though I am here searching for ways to accelerate it.

So I am in a position to live off of paycheck # 1 and use paycheck # 2 to either throw all at savings or all at the student loans or all at the mortgage.

Now a 20% initial return plus capital appreciation seems to beat even the 6.8% I am currently indentured to via Sallie Mae. I am not as concerned with funding a Roth as I believe it to be more advantageous to get that 20% match.

Any thoughts would be appreciated!

Mathematically, you are best off by doing the following:

1) Max out your 401k $17.5k limit. Job #2 may have a % of income contribution limit, or they may not. Regardless, contribute either up to $17.5k OR as much as the employer will allow (if less than $17.5k). This is basically a guaranteed 20% return vs <7% on any of your debts.
2) Put excess cash flow into the student loan at 6.8% until paid off.
3) Put excess cash flow into the student loan at 4.8% until paid off.
4) Put all excess cash flow into investments (Roth, taxable, whatever), and never pay off the mortgage early, as even a barely functional investor can outperform 3.25%.

I will say that it usually feels good to have no debt, so even though the math says don't pay off your mortgage, increasing your monthly payments and paying it off in 10 years will probably feel very good; however, this is not going to maximize your net worth over time.

WGH

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Re: Yet another pay off debt or invest question
« Reply #10 on: June 02, 2014, 07:14:35 AM »
I'm still not following... You talk about dumping 100k into the 401k. That isn't possible. You can only put in $17500 power year. So put in the full 17.5k and do it in the way that maximizes your matches. Then pay down the loan as aggressively as possible.

The idea of taking a loan against your 401k to eliminate your higher interest debt is an option worth investigating. Run the numbers before you do this and make sure that the interest you pay goes back into the account. If everything makes sense, then go for it. I wouldn't use this to pay down your mortgage though. That's a great rate, and you can do far better by investing than by paying down the mortgage more quickly.

Sorry I said dump but I meant over 5 years so kind of a rapid buildup by maxing it out.

I appreciate everyone's comments and while that debt is just annoying I also believe it makes the most sense to max out the 401k contributions and take advantage of the 20% match.