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. 🤷♀️
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!)
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.
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.
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. ☺️
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?
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.