Retirement or Student Loans?

Hoping to gather a little advice here as I have two primary goals. Pay off student loans, and start saving for retirement.  For some context, I am 29 and have ZERO in retirement.

Here are my options as I see it. Any other options or advice is welcomed!

 

1. Pay off student loan balances aggressively (160K). I can snowball these payments with $4k extra each month and have them paid off in 3yrs 5months. However, In order to snowball this much, I must continue to defer contributing to retirement. 

2. Divide $4k snowball amount equally between retirement contributions and student loans, and chip away at student loans at slower rate while simultaneously contributing to retirement.

3. Max out retirement, pay the minimum on student loans and just let them ride along for the next 20 years. 🤷‍♀️

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  • You cannot finance your retirement. (ETA: to be clear, that means option 3 is the way to go. They can't get blood from a turnip. If you save for retirement, you'll probably get a deduction on your taxes for a while, and the sooner you start saving the better off you'll be. I basically had nothing saved at 38, aside from a state pension I pay into, so I would love to have started at 29!)

    Like 1
    • nolesrule
    • Stealing From the Future fix is an improvement but is incomplete....
    • nolesrule
    • 2 yrs ago
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    First things first. Do you have an employer retirement plan? And if so, does it have employer matching?

    Second, what is the interest rate on the student loans?

    Like 1
      • Courtney Lane
      • Mother. Lover. Budgeter.
      • cocolove
      • 2 yrs ago
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      nolesrule Yes. 50% match up t 6%.  Interest on student loans is 6.3%.

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 2 yrs ago
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      Courtney Lane At the very least you should contribute 6% to your workplace plan. The match is free money you'll never get back if you miss out on it.

      If the student loans are your only debt, I'd probably work on those as much as possible, but not to the point where you give up your sanity.

      Like 3
  • Get the full 401(k) match and throw all the rest at the student loans. That's a guaranteed 6.3% investment return, which would be crazy to turn down.

    Here's one way to think about it: If I offered to loan you money at 6.3% interest so you could fund your retirement account, would you take it? Of course not. This is exactly the same thing. 

    Like 1
      • chahan
      • chahan
      • 2 yrs ago
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      mamster Absolutely agree on getting the match because that is a guaranteed 50% return that you will not find anywhere. 

      There are arguments to be made about contributing more than that to the 401(k). Based on OP's age, we are looking at >30 year time horizon to invest for retirement and a return of 6.3% can be matched and even more likely exceeded in the 401(k) so they don't exactly have to put all of the rest to the student loans. Then there is the benefit of starting the retirement savings early - even a couple extra years at the beginning can make big differences in the amount you end up with at retirement age. 

      Also, $4k per month available to pay down student loans suggests an income level that can benefit from tax advantage savings - by making larger contributions to the 401(k), even maxing it out can save several hundreds, maybe thousands in taxes. If OP is disciplined enough, these savings can be applied to the student loan payment. 

      Courtney Lane , eventually, it is upto how you feel about it on whether you want to balance out retirement / student loan payments and how much. That is all debatable. The one thing that everyone here will agree with though, is make the minimum contribution to retirement plan to get the 50% match because that is free money  and beats all other (guaranteed) investments out there.

      Like 2
      • mamster
      • mamster
      • 2 yrs ago
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       chahan First of all, I'm assuming you're a fellow fried rice fan...? Excellent!

      Here's what I think you're missing: The student loan balance has to be subtracted from the retirement savings. Carrying a large loan balance while investing has a name: leverage. Of course it can result in additional savings, because it's riskier. However, consider the downside. Student loans in retirement are hell:

      https://loans.usnews.com/how-to-cope-with-student-loan-debt-in-retirement

      Again, the right way to think about it is this: are you willing to take on debt at 6.3% in order to increase your retirement contributions? I would say, "If it gets me that risk-free 401(k) match, absolutely. Beyond that, not one penny. It's an unconscionable level of risk."

      Like 2
      • Courtney Lane
      • Mother. Lover. Budgeter.
      • cocolove
      • 2 yrs ago
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      chahan  I am definitely seeking options for tax advantage savings due to my income, I have read up on 401k, traditional IRAs, 529s, HSA, and FSA accounts etc. It's all a little overwhelming. While I would like to max out my retirement account, I can't help but think that I don't really need that much money in retirement (not my prime years) as projection calculators put me at near $2M if I max out each year. I know this is against most traditional thoughts but I would like to spend some of my money during my younger years and enjoy it with family and my kids and perhaps invent the in other more accessible accounts. 

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      • Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 2 yrs ago
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      Courtney Lane Take a look at the calculators and the difference time makes. That's the reason you start investing young. For example, put $2,000 in every year for 40 years at 6% growth vs $4,000 in every year for 20 years at 6% growth. It's the same investment*, but the outcomes are way different. You get about half of the retirement account with the 20 years because it just wasn't in as long as the 40 years. You'd think you'd catch up by putting more in later, but you don't. 

      *The statement is made with the full understanding of time value of money and the investments aren't exactly equal due to inflation, etc. 

      Like 1
      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 2 yrs ago
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      Courtney Lane 

      Courtney Lane said:
      While I would like to max out my retirement account, I can't help but think that I don't really need that much money in retirement (not my prime years) as projection calculators put me at near $2M if I max out each year.

       2 million in what year?

      2 million in 30 years given 3% inflation is worth about $824k in today's dollars. That's good for $33k per year for a safe withdrawal rate in today's dollars or $2750 a month. Will that be enough?

      Like 4
      • Courtney Lane
      • Mother. Lover. Budgeter.
      • cocolove
      • 2 yrs ago
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      nolesrule  gosh I hope so, seeing that my home will be paid off by then and I shouldn’t have any debt. How in the world to people get this right?!? Lol

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 2 yrs ago
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      Courtney Lane It wasn't meant as a judgement. Just an illustration of the effects of inflation.

      Like 1
      • jenmas
      • jenmas
      • 2 yrs ago
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      Courtney Lane when you retire you will likely be at a point in your life with increasing healthcare costs. What if you choose to go into independent living or need to go into assisted living? Those cost thousands per month. Retirement is going to be more expensive than you think. I would split the difference between loan and retirement. I am not offended by the existence of debt and only paid the minimum on my student loans until I came in to a bit of a windfall and paid them off 5 years early. Of course my interest rate was maybe 1% after consolidating 2 years in and getting periodic rate reductions for paying on time so early payoff wasn’t worth it. 

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      • Courtney Lane
      • Mother. Lover. Budgeter.
      • cocolove
      • 2 yrs ago
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      nolesrule I didn’t receive it as a judgement, not one bit! There’s so many ways to do this and I just want to have a smart plan. 

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  • mamster said:
    are you willing to take on debt at 6.3% in order to increase your retirement contributions? 

     at 6.3% it is a toss-up. I would probably put the money towards the student loans. If the interest rate on the loan was lower, like 4.5%, the returns from the retirement account would be more than that and I may consider putting more money towards retirement and expect to make a higher return. 

    In OP's case, maxing out the 401(k) would take $1583/ month. That still leaves about $2400/month to pay down the student loan, that's about 7 years. Maxing out the 401(k) would also generate savings from income taxes - that can be snowballed to the loan payments. 

    That being said, would depend on risk tolerance of each individual and whether they are okay with carrying debt for a few extra years. Personally, I don't like seeing debt, and am actively trying to pay down the debts I have aggressively, so if I was in this situation, i would probably do as you said and contribute the minimum required to retirement and use the rest for debt paydown. 

    P.S: I am very much new to taxes, retirement plans, paying down debts (not new to creating debts though).  I've only been in the workforce for 3 years. So participating in discussions is very much a learning experience for me as there are many views I have not considered because of my limited knowledge. Thus, reading other views out here helps me increase my knowledge and consider other alternatives.

    Like 3
      • Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 2 yrs ago
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      chahan If you go with the paying down the loan, just make sure the loan company applies the extra payments to the principle. I had this problem, both my brothers had this problem. They loan company was taking the extra payment, but setting it off to the side and applying it when the normal payment was due, so all the interest was still collecting and the principle balance wasn't going down any faster. To get out of it, we had to move our loans to a company that allowed and accepted early payments. 

      Like 1
      • Courtney Lane
      • Mother. Lover. Budgeter.
      • cocolove
      • 2 yrs ago
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      chahan  I am new to this depth as well. I am desperately educating myself through multiple podcasts, forums, and finance blogs. The tax bracket I am now newly a member of is terrifying and I don't want to go about it all the wrong way. I want to use my money wisely and have it working for me as much as I can.

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  • As mentioned, with 4K, you can afford to do both easily. Do both! Yes, the SL will take a little longer but not thag much in the grand scheme of things. 

    Like 2
  • If there is a 4th option max retirement and pay above minimum I would definitely try to do it.  I am so glad that I did because after a few years I got angry about having student loans. 

    Like 1
      • bevocat
      • Sometimes, It Just Sucks to Be You
      • bevocat
      • 2 yrs ago
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      ebeth81 I feel like that is what WordTenor was saying. Save as much as you can for retirement, taking advantage of all free money from employer matching, and contributing up to the annual max allowed, which I think would be less than $4K per month, and then whatever is leftover can be sent to the student loans.

      Like 1
  • This is just my opinion, not to argue against one way or the other, but I personally would just focus on one at a time. There is power in completely focusing on one task. 

    That being said, I’d hate to have 160k staring me in the face for several years, so I’d pay off the debt, then go full steam ahead into retirement savings. 

    Debt stresses me out. I hate it with a passion, so to me it would be worth losing a match for a couple of years to be completely rid of it. But this is just how I feel, and my personality. If doing both at the same time works for you, then go for it. ☺️

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      • Courtney Lane
      • Mother. Lover. Budgeter.
      • cocolove
      • 2 yrs ago
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      bedebtfreegirl ideally that would be great, however, I’m not willing to miss out on 3 years of compounding interest when I’ve already waited so long to start saving toward retirement due to income restrictions and a single mother and schooling. 

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      • mamster
      • mamster
      • 2 yrs ago
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      Courtney Lane You still get the compound interest when you put money toward the loan. Remember that every dollar you don't repay on the loan grows at 6.3% per year, and that amount is subtracted from your savings. I know that this is unintuitive, but failing to earn negative interest (i.e., repaying the loan) is the same as earning positive interest (investing in the retirement account).

      You might try making a Google Spreadsheet and play around with some numbers. Even taking the tax consequences into account and assuming excellent investment performance, on a risk-adjusted basis you are very, very unlikely find a better strategy (in terms of net worth at retirement) than getting rid of the loan as soon as you can—after getting that 401(k) match, of course.

      I know paying off the loan feels like throwing money down a hole, whereas watching money grow in your retirement account feels like something you can put your arms around. That's an illusion, and it's a dangerous illusion that puts your retirement security at risk.

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      • Courtney Lane
      • Mother. Lover. Budgeter.
      • cocolove
      • 2 yrs ago
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      mamster yes, for sure. I have no intention on not paying the loan at all, instead looking for the best approach. I think it’s smart to max out my 401k and use the remaining snowball towards my loans. I’ll still be paying $2400 towards them monthly which is double the regular payment. This way I’m still tackling my loans aggressively and saving a lot of interest while simultaneously easing my retirement woes and using the time that I have on my side. Not to mention the tax savings from reducing my taxable income. Tripple win. 

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      • mamster
      • mamster
      • 2 yrs ago
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      Courtney Lane Agree 100%!

      Like 1
    • Courtney Lane I understand. That’s why I made pointed out it’s just how I’m wired. We also have some retirement savings, and never had an employer that does a match. I don’t think you’ll lose either way. ☺️

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  • It’s not an either/or choice. I would do both. You can never get that time back for your retirement account. It’s less than $1600 per month to max your 401k and you can snowball your loans with the remaining $2400 per month. Plus you’ll get a sizable tax break by maxing out your 401k.

    Any chance of refinancing the student loans down to a lower rate?

    Like 2
      • Courtney Lane
      • Mother. Lover. Budgeter.
      • cocolove
      • 2 yrs ago
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      Superbone you’re right. And I’m definitely swayed by that. I don’t want to give up the capital gains I can earn during this time. I could refinance my loans to probably 3 percent or so through a private lender but I am reluctant to do so as I would lose all benefits that federal loans provide such as income based repayments, deferment, etc. And as a single mother without any family support system I would like to have access to those options in the event of a life changing circumstance, disability, or injury. I don’t foresee my job ending but I also live in a highly litigious state, that in combination with my career could have me in a difficult spot if things were to go awry. 

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  • And no way do you give up the 6% match. That’s out of the question. At the very minimum, you contribute that 6% match to your 401k.

    Like 2
    • nolesrule
    • Stealing From the Future fix is an improvement but is incomplete....
    • nolesrule
    • 2 yrs ago
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    Courtney   So I've been thinking about this more.

    With the 401k you have $19,000 in space and additionally you can contribute to an IRA $6000. if you have $4000/month available to do something with, that IRA is like going to have to be Roth or Backdoor Roth. Total of $25k, which comes to just over $2k/month.

    I would max out the 401k and contribute to the IRA. This leaves you with just under $2k/month to snowball to the loan.

     

    If you aren't sure about IRA eligibility, PM me and I can go over it with you. It requires having actual income numbers on hand that you probably don't want to put out there.

    Like 1
      • Courtney Lane
      • Mother. Lover. Budgeter.
      • cocolove
      • 2 yrs ago
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      nolesrule  I’ve looked into these extensively as I’m working on finding the best approach and know that and transitional IRA contributions that I make will not be tax deductible as I phase out on the income requirements. I have looked into the Blackdoor Roth and from what I understand is I will need to find an IRA that does automatical rollovers for each contribution in order to prevent any gains from being taxed during the conversion. Once they are in the Roth they will be shielded and tax free upon withdrawal? Is that right? But this will not help reduce my taxable income. I think the only tax savings accounts I can participate in will be my 401k (19k max), my HSA (7k max for families) and my DSA (2k max for high earners) allowing me to reduce my taxable income by a total of 29k annually. 

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 2 yrs ago
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      Courtney Lane It takes 2 minutes to do a Roth conversion at vanguard. It doesn't need to be automatic. Don't be afraid of it. Or just save up and lump sum the contribution and conversion once per year. (YNAB is good at tracking that savings goal for you).

      Not to mention there would be little cost to pulling the Roth converted money out if absolutely necessary.

      Oh, and one other thing, depending on your tax bracket, the tax savings from maxing out 401k will cover the cost of some of your backdoor Roth IRA. So really you'll end up with more than $2000/month for the loan paydown compared to my original calculation.

      I would not skip out on maxing any and all tax advantaged accounts.

      Like 1
      • Courtney Lane
      • Mother. Lover. Budgeter.
      • cocolove
      • 2 yrs ago
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      nolesrule question for you. If I am contributing via backdoor Roth, the IRA is just a medium correct? So I can ultimately add 6k, convert it, add another, convert it, so on and so forth until I reach the 37k max?

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 2 yrs ago
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      Courtney Lane You can only contribute $6000 to an IRA for 2019. Although you can still contribute for 2018 until tax day of this year if you wanted to (2018 limit was $5500). There's no max, other than annual contribution limits.

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