Author Topic: Fund an unmatched 401k or pay down debt  (Read 2144 times)

donedeal511

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Fund an unmatched 401k or pay down debt
« on: November 02, 2016, 01:09:51 PM »
Is it worth putting 5% into an unmatched 401k or that money be better spent paying down student loans between 4-4.5%?

NoStacheOhio

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Re: Fund an unmatched 401k or pay down debt
« Reply #1 on: November 02, 2016, 01:25:01 PM »
We need more info. If they're huge loans, then you're probably doing yourself a disservice by not contributing to the 401k. If you could reasonably pay them off in less than 2 years (just my random, gut-feeling time period), then it might make sense to suspend retirement contributions, then take the money you were spending on loan payments and plow it all into retirement savings.

How good is your 401k plan? What kind of funds and fees do you have? What's your overall spending/income picture? Could you reduce spending elsewhere to make those extra loan payments? Earn extra money doing something else? Lots of options, but hard to make a recommendation without all the info.

seattlecyclone

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Re: Fund an unmatched 401k or pay down debt
« Reply #2 on: November 02, 2016, 01:30:52 PM »
4-4.5% is an interest rate where you're really not wrong either way. If your income is low enough to deduct the student loan interest, that brings the effective interest rate lower, which could be a point in favor of 401(k) contributions. Another point in favor of the 401(k) is that if your income rises you can't go back later to put money toward your 2016 401(k) limit, but you can put more money toward your loans at that time if you wish.

But as I said, both choices are good. Investing is likely to come out a bit ahead, but it might not, and the difference probably won't be huge either way.

donedeal511

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Re: Fund an unmatched 401k or pay down debt
« Reply #3 on: November 02, 2016, 01:32:22 PM »
Student loan debt is 90k with variable 4.3% and another 40k at 3-5%, slightly under 8 years left on a 10 yr pmt plan but I'm fairy diligent about throwing any extra money (per diem shifts etc ) towards the loans so hopefully will shave a couple yrs off that.  For funds I usually pick something similar to a lifecycle target retirement. I can always pick up extra shifts and actively do to increase my income. My salary prohibits me from getting a tax refund on intert paid.

NoStacheOhio

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Re: Fund an unmatched 401k or pay down debt
« Reply #4 on: November 02, 2016, 01:36:01 PM »
Student loan debt is 90k with variable 4.3% and another 40k at 3-5%, slightly under 8 years left on a 10 yr pmt plan but I'm fairy diligent about throwing any extra money (per diem shifts etc ) towards the loans so hopefully will shave a couple yrs off that.  For funds I usually pick something similar to a lifecycle target retirement. I can always pick up extra shifts and actively do to increase my income. My salary prohibits me from getting a tax refund on intert paid.

At those levels I would absolutely contribute to the 401k, and look for ways to reduce spending to improve savings.

donedeal511

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Re: Fund an unmatched 401k or pay down debt
« Reply #5 on: December 21, 2016, 12:13:07 PM »
I have an update on this front and need some more advice. In lieu of a 401k match my Department is giving us around a 5-8% raise to be determined. Given I have all my current monthly expenses covered, this is extra income. I'm currently contributing 5% to my unmatched 401k in a lifecycle account. Is this extra income best just funneled into that 401k or used to pay down my highest student loan debt which is at an interest rate of 5%?

khangaroo

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Re: Fund an unmatched 401k or pay down debt
« Reply #6 on: December 22, 2016, 05:48:01 PM »
Are your student loans your only debt? My personal finance foundation is formed by Dave Ramsey's principle and he says to stop all retirement contributions if you can pay off your debt in 2 years or less.

If I were you, I would stop contributing that 5% and put my focus on paying off those student loans ASAP. But if you can't pay off the $130k in 2 years (definitely a HUGE mountain to climb) then I would consider investing some in the 401k. What Dave would say is to invest up to the match but since you don't have one, the percentage would be up to you although I would honestly put every single penny that I had left over in my budget to pay off that debt.

Hopefully with $130k in loans, you have a corresponding income to match it.

Here's my insight on why I stopped my 401k contributions to pay off debt, hopefully it will help you decide.
http://khang-nguyen.com/?p=564

VoteCthulu

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Re: Fund an unmatched 401k or pay down debt
« Reply #7 on: December 23, 2016, 08:18:02 PM »
I would make minimum payments on the fixed loan, and put all of my money towards the variable loan.

After the variable rate loan was paid off I would only then start contributing to the 401k, unless I found another job that had a match before that point.

SwordGuy

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Re: Fund an unmatched 401k or pay down debt
« Reply #8 on: December 23, 2016, 09:54:18 PM »
Aren't interest rates starting to go up now?  If so, that variable rate loan will start being more expensive.   I would pay it down unless it can't go up very much based on loan terms.

pumpkinlantern

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Re: Fund an unmatched 401k or pay down debt
« Reply #9 on: December 24, 2016, 01:02:31 PM »
I think you could go either way.  To a large part it will depend on your personality.  If you extremely debt-adverse, then you can pay off the debt first. 

If not, I would do a combination of both.  The interest rate is low-ish.  Although rates are expected to rise over the next few years, that should happen relatively slowly.  When are you planning to FIRE?  You want to have all your debt paid off before then.  I would stretch out your repayment such that you will pay off your debt a few years before you reach financial independence.  The advantage of having a bit more money in the investment account over time is diversification - diversification over time.  It reduces the likelihood that you will contribute most of your money right before a crash (basically the same idea as dollar-cost averaging).

LAGuy

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Re: Fund an unmatched 401k or pay down debt
« Reply #10 on: December 24, 2016, 02:54:08 PM »
I would make the decision based upon my income tax bracket. If you're deep into at least 25% and you're in a state with a hefty state income tax I'd probably favor the 401k at least as far down until it gets you to the 15% bracket. At that point I'd probably pay the debt and fund a Roth.

chasesfish

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Re: Fund an unmatched 401k or pay down debt
« Reply #11 on: December 26, 2016, 11:52:24 AM »
Is your income above the limit that makes the student loan interest deductible?  If it isn't, can you contribute to the maximum in your 401k and get it below the deductibility limits?

The main point is to earn more than you spend, both options are better than blowing the money.