Author Topic: Stop saving for retirement for the next 12 months to pay off student loans?  (Read 5207 times)

latebloomingonion

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Hi there,

Appreciate this site.  I little background.  I am 37.  Married.  No kids.  I have a work related pension that I may or may not want to stick around there long enough to use.  So I am trying to be as mustachian as possible and get out of dodge hopefully in the next 17-20 years.  And as you will see below my "portfolio" is not great but I am determined to make it much better. 

I read somewhere on the site (from a google search) that MMM recommended to pay off ALL loans first before saving for retirement?  But, I wanted to confirm that this still was the prevailing thought? 

A little specifics. 

I have $40k in student loan debt average of all the loans is 5.29% .  I applied for a loan forgiveness program that offers UP TO $10k in forgiveness which I would know if I was accepted in March 2018.  I have $37k in 403b+457B plans and 12+k in Roth IRA. 

Thoughts?


Valhalla

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #1 on: September 01, 2017, 01:54:25 AM »
5.29% is a shockingly high amount... yes I'd recommend you pay off the debts before investing, as you are getting a guaranteed 5.29% return on your pay-off.  You'd have to make 8% - 10% or more on investments, imho, factoring in risk and taxes, before you come out ahead investing instead of paying off debt.  Good luck.
« Last Edit: September 01, 2017, 01:57:24 AM by Valhalla »

DebtFreeinPhilly

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #2 on: September 01, 2017, 06:21:36 AM »
I agree with Valhalla. Pay off the student loans as fast as possible. Then take those monthly payments and fast track your retirement investments. There is a lot of great articles on here about investment order.

Raenia

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #3 on: September 01, 2017, 06:26:50 AM »
You said the average rate is 5.29% - can you give a breakdown of the exact amounts at the exact rates?  That could change the payoff plan.  For example, if you have one loan at 7% and one at 3%, you'll want to pay off the 7% one, then fund an IRA, then pay off the 5% one.  For more detail see MDM's Investment Order: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Quote
WHAT           
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)           
6. Fund mega backdoor Roth if applicable           
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account with any extra.

Dee18

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #4 on: September 01, 2017, 06:52:15 AM »
Some 403(b) plans have employer matching.  If yours does, keep contributing to get the match as it is free money.  However since you mention a pension, I am guessing the 403(b) account is supplemental or from a former employer and does not include a match now.

Proud Foot

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #5 on: September 01, 2017, 08:14:49 AM »
I second what Raenia said. You could also look at refinancing those loans into a lower interest rate. MMM had a writeup about SOFI and you would get $300 for using his affiliate link.  Others on here have posted about SOFI as well and have their own link.

latebloomingonion

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #6 on: September 01, 2017, 05:42:47 PM »
Thank you all for your replies.  I sincerely appreciate it.  As far as specifics my 403b and 457b are supplemental -- not employer match. I applied perhaps a year ago for SOFI and was denied (but perhaps since I have paid off my car and my credit score is over 750+ it will change that?)

Here's a breakdown on my loans

Group A: 4.50% - Balance: 4,712.87
Group B: 6.80% - Balance: 6,990.61
Group C: 2.875% - Balance:3,388.63
Group D: 2.875% - Balance:1,735.64
Group E: 5.60% - Balance: 4,527.85
Group F: 6.80% - Balance: 6,791.04
Group G: 3.40% - Balance: 4,550.20
Group H: 6.80% - Balance: 6,724.68

MDM

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #7 on: September 01, 2017, 06:12:25 PM »
Thank you all for your replies.  I sincerely appreciate it.  As far as specifics my 403b and 457b are supplemental -- not employer match. I applied perhaps a year ago for SOFI and was denied (but perhaps since I have paid off my car and my credit score is over 750+ it will change that?)

Here's a breakdown on my loans

Group A: 4.50% - Balance: 4,712.87
Group B: 6.80% - Balance: 6,990.61
Group C: 2.875% - Balance:3,388.63
Group D: 2.875% - Balance:1,735.64
Group E: 5.60% - Balance: 4,527.85
Group F: 6.80% - Balance: 6,791.04
Group G: 3.40% - Balance: 4,550.20
Group H: 6.80% - Balance: 6,724.68
Based on that and Raenia's post, you might
- Pay off the 6.8% loans in step 2
- Pay off the 5.6% loan in step 7
- Pay only the minimums on the other loans

Khan

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #8 on: September 01, 2017, 06:35:37 PM »
I applied perhaps a year ago for SOFI and was denied (but perhaps since I have paid off my car and my credit score is over 750+ it will change that?)

I would definitely check on loan consolidation with 1 year since last check and your improving credit situation and score, and I fully agree with MDM's recommendation on prioritization.

CheapScholar

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #9 on: September 01, 2017, 06:44:22 PM »
Wouldn't the answer to this question depend on OP's marginal tax rate (federal and state)?

I haven't paid off all my student loans but I'm sure as shit not paying 25% federal income tax on those upper dollars that I'd rather kick into my 403b.

Raenia

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #10 on: September 03, 2017, 10:00:12 AM »
Thank you all for your replies.  I sincerely appreciate it.  As far as specifics my 403b and 457b are supplemental -- not employer match. I applied perhaps a year ago for SOFI and was denied (but perhaps since I have paid off my car and my credit score is over 750+ it will change that?)

Here's a breakdown on my loans

Group A: 4.50% - Balance: 4,712.87
Group B: 6.80% - Balance: 6,990.61
Group C: 2.875% - Balance:3,388.63
Group D: 2.875% - Balance:1,735.64
Group E: 5.60% - Balance: 4,527.85
Group F: 6.80% - Balance: 6,791.04
Group G: 3.40% - Balance: 4,550.20
Group H: 6.80% - Balance: 6,724.68

I agree with others that it's worth reapplying for a consolidation, since it's been over a year and your score has improved.  Assuming that doesn't happen, go with what MGM said.  I'd recommend paying off Group H first (highest rate, lowest balance), then snowball that payment into F followed by B.  Once those three are paid off, then max your IRA followed by your 403b for the year.  Whatever's left after that goes toward loan E until that's paid off.

You'll be amazed how fast it goes once you get the snowball rolling.

Dicey

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #11 on: September 03, 2017, 10:25:19 AM »
Your Future Self will NOT thank you for doing that. You are way behind on retirement savings for your age, IMO. Don't stop now.

Try Earnest or So-FI (again).

Do you own your home? A refi or Heloc, if possible, might be a better tactic to kill the high interest groups.

Otherwise, focus on honing your frugality skills and just doing it the hard way, by paying off the highest interest loans first, while continuing to save for retirement. Time is the most crucial contributor to massive compound interest gains, and you seem to be off to a comparatively slow start. Don't lose any more time than you have.

A more detailed case study woild be even more helpful.


clarkfan1979

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #12 on: September 03, 2017, 10:49:16 AM »
Wouldn't the answer to this question depend on OP's marginal tax rate (federal and state)?

I haven't paid off all my student loans but I'm sure as shit not paying 25% federal income tax on those upper dollars that I'd rather kick into my 403b.

This has been my tax philosophy for the past 5 years as we have approached the 25% tax bracket. I always avoid the 25% tax bracket by putting extra money into tax sheltered accounts. I'm not going to take an extra 10% federal tax hit to pay off a 6.8% loan.

latebloomingonion

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #13 on: September 04, 2017, 09:15:43 AM »
Your Future Self will NOT thank you for doing that. You are way behind on retirement savings for your age, IMO. Don't stop now.

Try Earnest or So-FI (again).

Do you own your home? A refi or Heloc, if possible, might be a better tactic to kill the high interest groups.

Otherwise, focus on honing your frugality skills and just doing it the hard way, by paying off the highest interest loans first, while continuing to save for retirement. Time is the most crucial contributor to massive compound interest gains, and you seem to be off to a comparatively slow start. Don't lose any more time than you have.

A more detailed case study woild be even more helpful.

I don't own a home.
I applied and was accepted but the So-Fi is not any better. 

I know I am off to a slow start, but isn't it recommended to pay off the high interest loans even BEFORE saving for retirement?  I can pay off all the high interest by march 2018.  Then I would go right back into saving at least 50%. 

Appreciate any more feedback that you may have.

MDM

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #14 on: September 04, 2017, 09:27:33 AM »
I know I am off to a slow start, but isn't it recommended to pay off the high interest loans even BEFORE saving for retirement?  I can pay off all the high interest by march 2018.  Then I would go right back into saving at least 50%. 
Delaying the loan repayment for a few months, in order to fill the use-it-or-lose-it annual retirement fund bucket, may be worthwhile.

latebloomingonion

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #15 on: September 04, 2017, 09:34:28 AM »
I know I am off to a slow start, but isn't it recommended to pay off the high interest loans even BEFORE saving for retirement?  I can pay off all the high interest by march 2018.  Then I would go right back into saving at least 50%. 
Delaying the loan repayment for a few months, in order to fill the use-it-or-lose-it annual retirement fund bucket, may be worthwhile.

But, when I was doing that -- paying off student loans while saving approximately 44% I was on pace to pay off the loans in a few years.  So, now the suggestion is what?  To not immediately tackle the debt, but instead make conservative payments towards the high interest groups while saving for retirement? 

Thanks for clarifying!

MDM

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #16 on: September 04, 2017, 09:40:08 AM »
I know I am off to a slow start, but isn't it recommended to pay off the high interest loans even BEFORE saving for retirement?  I can pay off all the high interest by march 2018.  Then I would go right back into saving at least 50%. 
Delaying the loan repayment for a few months, in order to fill the use-it-or-lose-it annual retirement fund bucket, may be worthwhile.

But, when I was doing that -- paying off student loans while saving approximately 44% I was on pace to pay off the loans in a few years.  So, now the suggestion is what?  To not immediately tackle the debt, but instead make conservative payments towards the high interest groups while saving for retirement? 

Thanks for clarifying!
Don't read too much into this suggestion.  Take it literally, noting "months" not "years".

In other words, the difference of a few months in loan repayment will be minimal in terms of interest paid.  But you can't make up unused 401k and IRA contribution space in one year by contributing more in a later year.

latebloomingonion

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #17 on: September 04, 2017, 09:43:16 AM »
Okay, got it. Thanks MDM.

Dicey

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Re: Stop saving for retirement for the next 12 months to pay off student loans?
« Reply #18 on: September 04, 2017, 04:58:09 PM »
Yup.