Author Topic: Investing Strategy - Pay off loans vs. refinance and invest  (Read 2371 times)

OneCoolCat

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Investing Strategy - Pay off loans vs. refinance and invest
« on: December 30, 2014, 11:04:05 AM »
I'm (nearly) 28 years old and new to the whole investing thing, actually I've only done research up to now.  I recently finished my studies and have about 50k in student loan debt, all federal loans at 6.8% interest.  My plan was to aggressively pay off my student loans, while matching my employers 401k contributions.  I figured I could do this in about 2 years at my current salary since i'm fortunate enough to not have a mortgage on my home.

After reading some stuff on here about compounding interest and going to fidelity and seeing the aggressive growth even from moderate funds, I have reconsiderations about whether rushing my loans is the best decision.  If the past few years have been any indication of how the markets will act going forward, I question whether I would be better off: 1) refinancing my loans to hopefully 4%, 2) paying them off over the next 10 years making minimum payments, 3) maxing out a Roth IRA (5.5k), 4) maxing out on my 401k (17k), 5) invest the rest in some other fund/stock (maybe 10k/year).

My previous plan was (and I have actually already begun this): 1) max out on the Roth IRA and 2) dump everything else into my loans.

My goal is to invest as much as possible for long term growth.  I'm not really looking to retire early and I'm not looking to get interest from my investments for another 30 years.  I guess I want to be able to retire in 15 years or so, but chose not to if that makes any sense.

OneCoolCat

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Re: Investing Strategy - Pay off loans vs. refinance and invest
« Reply #1 on: December 30, 2014, 11:07:45 AM »
I'm also concerned because I believe in the whole "buy low, sell high" philosophy.  I feel like the market is pretty high at the moment, but I guess with long term investments its not big of a deal and still better to invest as much as you can.  Any thoughts to comfort me on this?

GGNoob

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Re: Investing Strategy - Pay off loans vs. refinance and invest
« Reply #2 on: December 30, 2014, 11:15:06 AM »
If you can actually refinance to 4% or less, then I'd personally do that and make minimum payments while maximizing my tax-advantaged investments. Otherwise just pay off the loans as soon as possible and stick with your current plan of maxing your Roth IRA and up to the match for your 401k.

I guess I want to be able to retire in 15 years or so, but chose not to if that makes any sense.

Sounds like we have similar goals. I'll be 28 in February and we are aiming to be FI (financially independent) no later than age 50. But with our current investment plan, we should be FI by 45 or earlier. We'll most likely keep working for a while after that (I'm thinking at least 50 for me), but we will at least have the ability to retire whenever we get sick of working.

Dicey

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Re: Investing Strategy - Pay off loans vs. refinance and invest
« Reply #3 on: December 30, 2014, 11:33:25 AM »
I... have about 50k in student loan debt, all federal loans at 6.8% interest...I'm fortunate enough to not have a mortgage on my home...

My goal is to invest as much as possible for long term growth.  I'm not really looking to retire early and I'm not looking to get interest from my investments for another 30 years.  I guess I want to be able to retire in 15 years or so, but chose not to if that makes any sense.
Since you asked...
1. Take out a nice, long mortgage or HELOC on your home at or below 4% and kill the student loans.
2. Max out your retirement options.
3. Start investing in non-retirement accounts.
4. Once your investment accounts are fat and healthy, you could consider paying off the home loan early, but not before.

It really doesn't matter if you are planning to retire early...
1. The earlier you save for retirement, the less you have to save.
2. Attaining FI early opens up a world of possibilities. You will never feel stuck in a job or endure a bad boss again in your life.

OneCoolCat

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Re: Investing Strategy - Pay off loans vs. refinance and invest
« Reply #4 on: December 30, 2014, 11:45:34 AM »
I... have about 50k in student loan debt, all federal loans at 6.8% interest...I'm fortunate enough to not have a mortgage on my home...

My goal is to invest as much as possible for long term growth.  I'm not really looking to retire early and I'm not looking to get interest from my investments for another 30 years.  I guess I want to be able to retire in 15 years or so, but chose not to if that makes any sense.
Since you asked...
1. Take out a nice, long mortgage or HELOC on your home at or below 4% and kill the student loans.
2. Max out your retirement options.
3. Start investing in non-retirement accounts.
4. Once your investment accounts are fat and healthy, you could consider paying off the home loan early, but not before.

It really doesn't matter if you are planning to retire early...
1. The earlier you save for retirement, the less you have to save.
2. Attaining FI early opens up a world of possibilities. You will never feel stuck in a job or endure a bad boss again in your life.

The HELOC would be perfect, but the house is actually in the wife's name (along with her mother) and I don't want to ask them for that.  I think refinancing my loans would be the way to go.  I don't qualify for student loan forgiveness as I work for the private sector so I dont see any real benefit to staying with the government servicer. 

What are non-retirement accounts?  Are they just mutual funds that are less tax efficient? 

You are spot on about the last point.  I work in a high stress field so it will be great to have more flexibility in my hours (taking less pay and only working 40 hours).  I do enjoy my job though and I have great bosses for the time being.

Dicey

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Re: Investing Strategy - Pay off loans vs. refinance and invest
« Reply #5 on: December 30, 2014, 12:15:44 PM »
Non-retirement accounts are anything that's not in retirement accounts. If you're going to retire early, you need to have penalty-free money to live on until the rest kicks in. Yes, there are ways to tap into retirement accounts early, but leaving them to accrue tax-free is a top strategy.

As to the loan on the house, I think you might consider discussing this with your wife and MIL, but I do see your point. Also, the interest on a HELOC might not be enough to get you past the standard deduction. IIRC, student loans are not subject to that test, which could make it a wash anyway. Do everything you can to reduce the rate and then kill it, but not at the expense of other savings, especially with the tax breaks.

So smart of you to be figuring this out early.