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2 Kids, Lots of student loans, Retire in less than 20 years?
Old 05-15-2013, 10:03 PM   #1
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2 Kids, Lots of student loans, Retire in less than 20 years?

So I've been reading this forum for a while, but haven't posted yet. I'm looking for some opinions on my situation, I'd like to retire around 2033. I don't plan on buying bonds until I pay off my student loans. I'm planning on accelerating paying on them now that the stock market has risen recently.

2 kids under age 4, wife just finished her Masters

65 K income, saving at least 10%. Hopefully this income increases when my wife finds a job.

The positive
99 K in retirement accounts and 529 plans (Berkshire Hathaway and index funds)
170 K in taxable accounts (Berkshire Hathaway)

The negative
183 K in Loans (165 K student loans/18 K personal loan) 6.8% to 3% interest
133 K in Mortgage 5% interest (144 K value). If I try to refinance this FHA loan to a lower %, I get hit with a PMI payment higher than the savings.
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Old 05-16-2013, 01:34 AM   #2
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Welcome Yachi. Your taxable and tax deferred balances are excellent for a couple with young kids, one still working on a degree.

Some thoughts, in no particular order...

I wouldn't sweat the mortgage refinance too much. As long as you have other debt at rates higher than 5% you can pay down , you are probably better off starting there. See Dave Ramsey and his debt snowball concept...

There are many roads to financial independence. No one path is best - if you are LBYM the specific choices aren't as critical as you might think when reading posts from some of the super-optimizers here.

One of many general approaches to consider: set a timetable for a 2104 goal of getting back to even on your net worth.

Don't go overboard on debt reduction if there are more effective ways to increase your net worth. For example, don't give up free money. If you can, make sure you and the wife are continuing to contribute enough to earn any available employer matches in a tax-deferred savings plan at work.

Berkshire is a fine stock, but it appears it is also serving as an emergency fund? The conventional wisdom is to keep several months' salary in something less likely to go down in the event that a market dip coincides with a need for quick funds.
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Old 05-16-2013, 10:28 AM   #3
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Either or both of you getting jobs with pensions would be a plus towards early retirement, since your savings will be limited while you repay the student loans.

If you can continue to live on one income and save the other once your wife gets a job that would be another push towards ER. If your wife could save 50K a year after taxes there is a million in savings after 20 years, not including compound interest.
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Old 05-16-2013, 11:15 AM   #4
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Welcome Yachi!

Quote:
See Dave Ramsey and his debt snowball concept...
+1

I'm a big fan of most of what Mr. Ramsey preaches.

And, as others have said, if/when the wife gets a job just pretend like you don't have that income to live on. Use most (while socking away some in her 401(k)) of it to pay down your debt.

We paid off EVERYTHING a couple of years ago, and it is a tremendous feeling. Then save her salary.

I agree with the Berkshire Hathaway being a little risky (for my taste) for an emergency fund. But to each his own. I don't see anything Warren Buffet does going down the tubes, but I wouldn't want that emergency money in any stock.

Good luck to you!
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Old 05-16-2013, 12:06 PM   #5
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Thanks guys
@ Htown:
You're right, it's been mostly LBYM getting us here first because I wanted to make sure we're set for the future, but also because my family comes from lower means and I don't want to "show them up" living more lavishly.
I'll definitely keep contributing up to the 401(k) match.
I had a separate emergency fund in a long-term CD, but I cashed it in to reduce a margin loan in the stock account. I have a fairly conservative job that doesn't seem too correlated to the stock market that I'm sure I could replace within a few months time. Should something happen I would need less than 8% of the Berkshire holdings to make it 3 months.

@ daylate:
Other than government work, I haven't found many employers offering pensions, but I'll keep my eyes open. We'll get Social Security if it's still available when the time comes. If I pay the minimums I think the student loans get repaid in 20 to 25 years, so I do have the option of investing instead of paying off loans.
I'm hoping she can find a job without us having to move far from family, but I keep thinking: "If we can make it on my income, why should we move far from family to have two incomes?"

@SumDay:
I guess I would have little debt, but no investments if I listened to everything Mr. Ramsey says, but any advice that strengthens individuals against effects of the vagaries of the markets is good advice.
My loans are so long-term that paying them off gives me a payback period of something like 6 years, and doesn't seem to motivate me much.
I'm trying to prepare myself psychologically for my 160 K berkshire investment dropping to 70 K or rising to 350 K within the next year or two. I figure either result could be reasonable. I see the lower end as a minimum based on the company's buyback price, and the upper end based on a reasonable valuation. I figure if everything collapses just as I lose my job, I can take my 70 K and try to find another in a year.
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Old 05-16-2013, 12:13 PM   #6
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Quote:
Originally Posted by Yachi View Post

I had a separate emergency fund in a long-term CD, but I cashed it in to reduce a margin loan in the stock account.

Well, that is a red flag!!!


Don't do margin.... it can kill your savings quickly....
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Old 05-16-2013, 12:19 PM   #7
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What I would do it (besides not having margin) is sell stock and pay off any loan that is over 5%... that is if you can not refinance at a lower rate...


I would think about paying down my mortgage and getting a 3% rate.... and spread it out over 30 years... (right now, cash flow is king)... I think I would do this first since we do not know how long low interest rates will stay...

I would then take my monthly savings from the refi and pay down the highest rate loan first, rinse and repeat....

Of course, I would make sure that I did contribute enough to get the company match.... and fund a ROTH... but after that... no savings until the high level of debt is gone... (of course you have your emergency fund)...
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Old 05-16-2013, 01:31 PM   #8
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I'd also stop contributing to 529 until student loans are repaid.
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Old 05-16-2013, 01:32 PM   #9
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What is so special about Berkshire? It is really a 1 missed hearbeat of an 85(?) year old man away from a huge drop.
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Old 05-16-2013, 06:03 PM   #10
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Quote:
Originally Posted by Texas Proud View Post
What I would do it (besides not having margin) is sell stock and pay off any loan that is over 5%... that is if you can not refinance at a lower rate...


I would think about paying down my mortgage and getting a 3% rate.... and spread it out over 30 years... (right now, cash flow is king)... I think I would do this first since we do not know how long low interest rates will stay...

I would then take my monthly savings from the refi and pay down the highest rate loan first, rinse and repeat....

Of course, I would make sure that I did contribute enough to get the company match.... and fund a ROTH... but after that... no savings until the high level of debt is gone... (of course you have your emergency fund)...
+1
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Old 05-17-2013, 10:23 PM   #11
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@Texas
Yours was one of the thoughts running thru my head. It would help if paying off one loan freed up a sizeable payment to help with the others, but they're all such long-term loans that it's mostly just me throwing my savings at it. I understand the disdain for the margin loan, but it's not my highest interest rate.

@hsv
I guess I have a soft spot for old textile companies. Mr. Munger is 89, but I'm sure when he passes, Mr. Buffett will name someone to replace him . I agree that Berkshire will not be the same without him, but I think the drop will be limited to 15% at today's prices. The Company board has already approved repurchases at 1.2 x book value, this puts a floor of around $96 on the stock.
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Old 05-18-2013, 04:26 AM   #12
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@Yachi

Berkshire is my largest holding but it is less than 8% of my net worth. Buffett is an amazing guy and I think he has built a remarkable company. But there is just too much risk to have 2/3 of your assets in one company.

It is very straightforward to turn your A share in 1500 B shares just a phone call to your broker, I've done it. I would sell roughly 1/4 of them. In particular I think you should take advantage of the historic low rates for 15 year mortgages 2.5-2.75% and refi the house. The 20K you could use toward paying doing the loan so your are less than 80% loan to value so you don't have to pay PMI . (FHA loans sort have a PMI built into them.) That move would save you more than $3,000 interest cost in a year and your payments would roughly the same as your current 30 year loan. $3,000 on interest saving for 20K in stock sales is 15%. I'll bet Warren would would approve of this transaction. If you are planning on retiring in 20 year, having a paid off house makes it easier.

I'd take the remaining $20k and use it to pay down your other highest interest rate loans.
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Old 05-18-2013, 08:35 AM   #13
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First off, you have managed a great nestegg for your age (which I am guessing is early 30's). Much more than I had at that age.

Stay married and don't have more kids....and do all the great financial stuff those above have suggested, and you will find yourself in a good place.
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Old 05-19-2013, 04:57 AM   #14
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To the OP : if you want to retire early, keep living below your means. Keep healthy. Don't take too many risks. Don't forget to enjoy life also.
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Old 05-19-2013, 10:51 AM   #15
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We moved to TX in 1999, making $110k total. Bought a home for $145k (20% down). DD was 14.

Paid for 2 years college (her choice), paid for modest wedding. Paid off the house in 2005. No cash...
2013...living in Playa del Carmen w*rking 20 hrs/wk & no commute. For DW's POM.

42 and finished with the rat race with our savings complete IMO. We also live very simple...

You have a big debt load, but with your big shovel (income) you can dig your way out.

We lived on 1 salary (small one) for 15 years and made it. Ending salary of approximately $250k for point of reference.
We volunteer...
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Old 05-19-2013, 10:57 AM   #16
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Did anybody say sell that Berkshire Hathaway in taxable and pay off debt?

Also do not contribute to 529 plans at all. What's up with that? 529 plans are for wealthy folks who need tax shelters. With your income, you probably don't pay any income taxes now anyways.
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