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32 year old, pay debts faster or continue saving?
Old 11-02-2017, 12:02 PM   #1
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32 year old, pay debts faster or continue saving?

Hello All. New to the forum after browsing around the last couple of weeks. Has been a great resource so far, reading from afar, and wanted to jump in and share my situation and gain whatever advice I can.

Family Details:
Me - 32, Wife - 32, Young Daughter with Plan to probably have one more in the next year or two.

Retirement Goals:
Main Goal: Wife and I retired by 55.
Stretch Goal: Wife and I retired by 50.
Realistic Goal: Wife and I retired by 60.

Financial Details:
Before Tax Household Income - $120,000 (75,000/45,000)

Debt Details (The Bad):
Roughly $150,000 in Student Loan (104,000), Car (6,500), and Debt Consolidation Loans (39,000).

We weren't very smart with our money for a few early years of our relationship compounded with some massive student loans and extended ourselves further than we should have. The consolidation will be paid off by 2020, the car by Dec 2018, and the student loans anywhere from 5-25 years from now. The loans will be prioritized as income comes available from other debts being paid off.

Savings Details (The Good):

401k

Me: Contribute 20% to company 401k. 17% PreTax, 3% Roth. 6% company match. $112,000 saved. Contributions set to increase 2% each year until 401k maxed out.

Wife: Contributes 5% to company 401k, all pre-tax. 5% company match. $14,000 saved. Contributions set to increase 1% every year until 12% reached (this is the year we expect her to stop accumulating raises, salary capped as a teacher).

Pension

As is currently stands, wife will get around $17,000 per year at age 60. If I pull my pension at 60, I would get around $36,000 per year. If I wait until 65 that would raise to $50,000 per year. I expect both values to increase if pension remains, as it's based on average salary, which I expect to increase through future raises.

Salary

Wife will top out at $60,000 at her job. Using historical company annual salary increases (well established Fortune 500 company) at or above inflation, with two raises before retirement (very structured with technical promotion levels). Next pay raise should put me around $85,000-$90,000 (hopefully next year) followed by ~$110,000 that I'm targeting to reach within 10 years.

Real Estate

We bought in a gentrifying area of our town for $96,000 5 years ago and have seen comparable houses selling for around $160,000 right now. Still have $85,000 left to pay off which I think will be done in 20 or so years. Paying off the house isn't a top priority right now as the interest rate is low and the payments are low compared to what we're shelling out for loan repayments.

Money priorities now are to knock out the bad debt as fast as possible, without impacting our contribution rates. My parents nailed home the concept of compound interest at a young age and while the bad debt stinks, in my opinion its worth less than the eventual value of future saved dollars, if that makes sense. Perhaps I am thinking about it all wrong, which is why I am here. Lack of an emergency fund also makes me somewhat worrisome, but I hesitate to pull back from retirement contributions because of the missed compound interest.

We have strictly used our 401ks as our retirement savings platform. My next goal, after maxing out my 401k is to create an emergency fund of 6 months expenses. Once done, the plan is to contribute towards a Roth IRA and attempt to max for both my wife and I. Will also plan on maxing out 401k and Roth IRA increases at 50 as well.

I am currently using an account manager for my 401k and am curious what peoples thoughts are on here about it. Charge is 0.4%, and it runs the algorithms based on retirement date, current status, risk profile to set fund percentages and scale back risk later in my working years. I guess it gives me piece of mind to not have to think about where or how to invest, but that 0.4% is going to be a big chunk of change in the future. Would it be wiser to just stick with a Target Date Fund or just eliminate the management right now until say, 40 years old, and then have them run the scenario again. I can opt out of the account manager at any time.

Ideally we'd like to have around $75,000/year in current dollars to spend in retirement, and I think I have a decent start to achieving that by my realistic goal, and maybe even the main goal.

Would appreciate any and all thoughts.

K
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Old 11-02-2017, 12:23 PM   #2
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OK, a lot to tackle here.


1. What are the interest rates on your student loan, consolidation loan and mortgage?
2. Why are you contributing much less to your wife's 401k than yours?
3. Not having an emergency fund can derail a savings plan in a NY minute. I'd build up this fund before anything else. What happens if your car dies tomorrow and you need a new one, or one of you loses your job? You'll have to accrue more debt, which you are trying to get out of now.
4. There is no reason to pay the 0.4% for a manager. You're right, it has a huge impact on long term returns. Move it all to target date fund, then read everything you can on here, bogleheads and other useful sites and figure out how to manage it on your own.
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Old 11-02-2017, 12:29 PM   #3
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Originally Posted by brokrken View Post
OK, a lot to tackle here.


1. What are the interest rates on your student loan, consolidation loan and mortgage?
2. Why are you contributing much less to your wife's 401k than yours?
3. Not having an emergency fund can derail a savings plan in a NY minute. I'd build up this fund before anything else. What happens if your car dies tomorrow and you need a new one, or one of you loses your job? You'll have to accrue more debt, which you are trying to get out of now.
4. There is no reason to pay the 0.4% for a manager. You're right, it has a huge impact on long term returns. Move it all to target date fund, then read everything you can on here, bogleheads and other useful sites and figure out how to manage it on your own.
Thank you for the response.

1. Interest rate for student loans are between 3-6%. Loan 10%. Mortgage 3.5%.
2. The only reason the 401k numbers are so skewed we had separate bank accounts when we initially started investing. She wasn't putting anything in so I convinced her to at least get the match. I went in head first and contributed as much as I could.
3. This one keeps me up at night sometimes. Do I pull back all non-matched contributions to build this up?
4. Guess it's time to start reading.
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Old 11-02-2017, 12:53 PM   #4
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The short answer is: look at the ‘real’ risk-adjusted return* & put $$$ where it’s highest first, second highest second, and so forth.

I think the only exception to this is to ensure you have an emergency fund first. But, personally, I wouldn’t give up 50-100% returns (from employer 401k matching) for a long time to build up an emergency fund. I’d opt for a short (3 mos) emergency fund first, then max any 401k matching followed by whatever emergency fund additions you can manage until you get 6 mos worth.

Also, IMHO, a couple with $150k of debt shouldn’t have a car loan. Buying a reliable 2-5 yo vehicle for cash is more appropriate for your age & situation.

* For example, paying off your 10% loan is better than an investment that historically returns 10% because the loan payoff is 10% “guaranteed.”

EDIT: Also had the thought that you could evaluate whether it makes sense to use a low interest, no/low closing cost HELOC to pay off your 10% consolidation loan; which would lower your % rate significantly, especially when considering the tax break on the HELOC.
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Old 11-02-2017, 01:13 PM   #5
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Originally Posted by Huston55 View Post
The short answer is: look at the ‘real’ risk-adjusted return* & put $$$ where it’s highest first, second highest second, and so forth.

I think the only exception to this is to ensure you have an emergency fund first. But, personally, I wouldn’t give up 50-100% returns (from employer 401k matching) for a long time to build up an emergency fund. I’d opt for a short (3 mos) emergency fund first, then max any 401k matching followed by whatever emergency fund additions you can manage until you get 6 mos worth.

Also, IMHO, a couple with $150k of debt shouldn’t have a car loan. Buying a reliable 2-5 yo vehicle for cash is more appropriate for your age & situation.

* For example, paying off your 10% loan is better than an investment that historically returns 10% because the loan payoff is 10% “guaranteed.”
I appreciate your thoughts.

With regards to the car, like I previously stated, we made some poor financial decisions in the past to get where we are. Luckily, with the car, we got a 0% loan 4 years ago that will be paid off at the end of next year, so that payment will continue until complete.
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Old 11-02-2017, 01:32 PM   #6
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Huston makes a good point about giving up those huge returns on the matching. So, yes, I would cut back contributions to the level that is being matched and put that extra towards an emergency fund. I'd also consider a few months of extreme saving to help build this emergency fund up quicker.
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Old 11-02-2017, 01:40 PM   #7
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Do you have the ability to borrow from your 401k? That can be a source of 'emergency fund' if needed.

You are contributing 20% (of 75K income) into your 401K? Is the company match 6% on the whole thing? Or a 1:1 match on the first 6%?

I just looked at my 401K plan. I can borrow 1/2 of my balance, up to $50k. The amount is repaid over 60 months with an interest rate of 10%. The interest goes back into your own account. I would consider doing something like this to knock out that consolidation loan at 10% interest. The alternative would be to cut back slightly on the 401K and put more money towards the consolidation loan.

I would leave the student loans and mortgage alone.
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Old 11-02-2017, 01:41 PM   #8
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Originally Posted by brokrken View Post
Huston makes a good point about giving up those huge returns on the matching. So, yes, I would cut back contributions to the level that is being matched and put that extra towards an emergency fund. I'd also consider a few months of extreme saving to help build this emergency fund up quicker.
Appreciate the responses. I will work to get the emergency fund at least to 3 months asap.
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Old 11-02-2017, 01:43 PM   #9
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Do you have the ability to borrow from your 401k? That can be a source of 'emergency fund' if needed.

You are contributing 20% (of 75K income) into your 401K? Is the company match 6% on the whole thing? Or a 1:1 match on the first 6%?

I just looked at my 401K plan. I can borrow 1/2 of my balance, up to $50k. The amount is repaid over 60 months with an interest rate of 10%. The interest goes back into your own account. I would consider doing something like this to knock out that consolidation loan at 10% interest. The alternative would be to cut back slightly on the 401K and put more money towards the consolidation loan.

I would leave the student loans and mortgage alone.
I do have the option of taking out a loan on the 401k. Looks like I am good for $50,000 if needed. Not a bad idea to consider paying the consolidation with. I hadn't thought about it before and the interest rate is only 5.25% on it.
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Old 11-02-2017, 01:57 PM   #10
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Sorry to be blunt, but I think borrowing from your 401k is a terrible idea.


8 Reasons To Never Borrow From Your 401(k)
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Old 11-02-2017, 01:59 PM   #11
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Richard Thaler (recent Nobel recipient) and other behavioral economists talk about a phenomenon they call "mental accounting." This is our tendency to separate our (fungible) money into categories based on things like where it comes from. For example, if you go into a casino with $100 and get lucky, you might put that $100 back into your wallet and consider the $200 balance of your winnings as "house money" and thus be inclined to bet aggressively with it, maybe even losing it all. Then on the drive to your house you might shop hard to save a nickel a gallon on a tank of gas.

Closer to home, it might be economically sensible to pay down a large debt with the highest interest rate while making the minimum payment on a small and less expensive debt. But mental accounting might push a person towards the satisfaction of paying off the small debt completely.

I'd suggest that you google "mental accounting" and so some reading. I have no specific suggestion on the subject except to believe that if you factor that understanding into your thinking you might make better economic decisions. Thaler's paper ("Mental Accounting Matters" /Journal of Behavioral Decision Making; Sep 1999) might be a bit much but there are many other simpler things to read.
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Old 11-02-2017, 02:20 PM   #12
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Richard Thaler (recent Nobel recipient) and other behavioral economists talk about a phenomenon they call "mental accounting." This is our tendency to separate our (fungible) money into categories based on things like where it comes from. For example, if you go into a casino with $100 and get lucky, you might put that $100 back into your wallet and consider the $200 balance of your winnings as "house money" and thus be inclined to bet aggressively with it, maybe even losing it all. Then on the drive to your house you might shop hard to save a nickel a gallon on a tank of gas.

Closer to home, it might be economically sensible to pay down a large debt with the highest interest rate while making the minimum payment on a small and less expensive debt. But mental accounting might push a person towards the satisfaction of paying off the small debt completely.

I'd suggest that you google "mental accounting" and so some reading. I have no specific suggestion on the subject except to believe that if you factor that understanding into your thinking you might make better economic decisions. Thaler's paper ("Mental Accounting Matters" /Journal of Behavioral Decision Making; Sep 1999) might be a bit much but there are many other simpler things to read.
In the attempt to tackle debt I've read about several strategies; pay down highest interest first, pay down largest amount first. I am not sure which side I fall on, but I do know I'm paying it. Where I guess I struggle is, am I willing to sacrifice saving now for paying that debt down, with the knowledge the money I don't save now cannot grow in the future and I am able to make all payments as they currently stand (sans not having emergency fund which will be prioritized). As large as the debt seems, we have paid down a considerable amount from where we started 4 years ago.

I will take a look at your recommended readings and appreciate the insight.
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Old 11-02-2017, 03:27 PM   #13
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If it were me, I'd cut down my retirement to the minimum...to get the match. And at your age I'd have all of it in Roth 401k, if that's available. Then, buckle down and knock out the debt as quickly as possible. Like $50k per year for 3 years. You'll have no life but, with kids, you have no life anyway! If you're not willing to do the $50k per year, I'd sell the house and knock it out that way in less than 3 years. My advice is to get the debt behind you as fast as you can. Good luck!
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Old 11-02-2017, 03:48 PM   #14
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If it were me, I'd cut down my retirement to the minimum...to get the match. And at your age I'd have all of it in Roth 401k, if that's available. Then, buckle down and knock out the debt as quickly as possible. Like $50k per year for 3 years. You'll have no life but, with kids, you have no life anyway! If you're not willing to do the $50k per year, I'd sell the house and knock it out that way in less than 3 years. My advice is to get the debt behind you as fast as you can. Good luck!
+1 for the Roth 401k focus.
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Old 11-02-2017, 03:57 PM   #15
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If it were me, I'd cut down my retirement to the minimum...to get the match. And at your age I'd have all of it in Roth 401k, if that's available. Then, buckle down and knock out the debt as quickly as possible. Like $50k per year for 3 years. You'll have no life but, with kids, you have no life anyway! If you're not willing to do the $50k per year, I'd sell the house and knock it out that way in less than 3 years. My advice is to get the debt behind you as fast as you can. Good luck!
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+1 for the Roth 401k focus.
I have read articles on both sides. What is the advantage of Roth here if I don't plan on being in a higher tax bracket during retirement?
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Old 11-02-2017, 04:16 PM   #16
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I have read articles on both sides. What is the advantage of Roth here if I don't plan on being in a higher tax bracket during retirement?
At your current ages, Roth would have a long time to cook. I'd be willing to bet on the "ZERO" tax bracket being an advantage over a "not higher" bracket.
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Old 11-02-2017, 04:20 PM   #17
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At your current ages, Roth would have a long time to cook. I'd be willing to bet on the "ZERO" tax bracket being an advantage over a "not higher" bracket.
That is a very good point.
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Old 11-02-2017, 06:18 PM   #18
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Lots of variables & possibilities for tax changes between now and when you FIRE/begin withdrawing. IMO, trying to predict what they will all be 20+ yrs from now is a fool’s errand, and I think straight side-by-side comparisons are better. Below is a link to one such comparison. BTW, this website has lots of useful calculators.

https://www.calcxml.com/calculators/ret10?skn=#results
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Old 11-02-2017, 07:19 PM   #19
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Keep it simple:
1) Get the matching 401k benefit.
2) Build up a small emergency fund.
3) Pay down your 10% loan.
4) dump the money manager; transfer all monies into a target date fund. Fidelity and Vanguard are popular here.
5) take a breath and reevaluate.
6) Work on your investing self education.

Do those one at a time and roughly in order. I’m confident you’ll do splendidly.
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Old 11-03-2017, 07:57 AM   #20
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Thank you for the thoughts and information everyone. I think I have a good handle now on the path forward I need to take for the near future. Appreciate you all and look forward to being a part of this community.
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