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Old 01-17-2009, 10:07 AM   #21
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About 2 years ago I sold a boat-load of Citigroup stock at right around $50 / share and used the money to repay my 5.25% mortgage. At the time many people said that was a stupid trade. Citi was paying a ~4% dividend yield, after all. Well 24 months forward, my mortgage is repaid and I've saved 5 figures in interest. Meanwhile Citi is trading at ~$4 per share and they've cut the dividend to just $0.04 annually. That was one of the best trades I ever made.

Sometimes a sure thing is a sure thing. Nothing wrong with being happy with a bird in the hand.
Hindsight is wonderful.

If it was such a "sure thing" why didn't you short Citi? When you look at it that way, I'd bet that it didn't quite look like a "sure thing", did it?

In the long run, I doubt that it'll make much difference what the OP decides, but I found this line interesting (and relevant to the above):
Quote:
but this year is the first year the market has me so ... unenthused ...
Well, the time to pay off the debt would have been when the market was at highs. The current dip would *typically* be a better time to invest. You seem to have a bit of a "Buy High, Sell Low" mentality here. I would be more inclined to keep investing now, and pay off the debt when the market looks less attractive. And, if you think the market is not going to go up over the life of that student loan, you should go 100% to cash anyway. Are you doing that?

Just some things to consider.

-ERD50
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Old 01-17-2009, 10:40 AM   #22
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Well, the time to pay off the debt would have been when the market was at highs. The current dip would *typically* be a better time to invest. You seem to have a bit of a "Buy High, Sell Low" mentality here. I would be more inclined to keep investing now, and pay off the debt when the market looks less attractive. And, if you think the market is not going to go up over the life of that student loan, you should go 100% to cash anyway. Are you doing that?

Just some things to consider.

-ERD50
Good point, ERD50. I guess I should have stated that my lack of enthusiasm for this year's IRA contribution is due to two things: (a) the current stock market bear and (b) the fact that this would be my first non-deductible IRA contribution.

If I could contribute to a Roth, or a deductible IRA, I don't think I would be struggling with this decision -- I'd make the IRA contribution.

I realize I'm probably doing a little market timing here, which is why I suspect this is a form of market capitulation for me. But it's only a partial capitulation -- I'm sticking with maxing out my 401(k) at least.

But I hadn't thought about the question of "what annual return do I expect on the stock market?" I think a long term annual growth of between 5% and 6% is the best I can hope for (I've had essentially earned zero return during my first decade of investing, but I'm hoping for improved performance that will in the end equal somewhere between 5% and 6% average annual returns). So I guess looking at it that way, paying down the 5.075% student loan is almost like a risk-free way to get exactly what I was hoping to get from the stock market.

Brewer - I do have other student loans at lower rates that I'm not even considering paying off yet (they're at 2.875% ... not as good as yours, but not too bad). I agree, for some of those very low interest rate loans, it makes sense to pay them off as slowly as you can.

Thanks for the replies, all!
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Old 01-17-2009, 11:10 AM   #23
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Hindsight is wonderful.

If it was such a "sure thing" why didn't you short Citi? When you look at it that way, I'd bet that it didn't quite look like a "sure thing", did it?
Wow, pretty snarky for someone who clearly misunderstood what I said.

So I'll rephrase . . . Paying down debt of x% coupon is a sure thing (in my case it was a 5.25% before tax return). Investing money in any risky asset (in my case Citigroup stock) is not a sure thing . . . thus the term "risky asset".

Often times people confuse "expected returns" for actual returns when comparing various investment alternatives. The logic goes, 10% long-run returns for stocks beats a measly 5% cost of debt, so keep the debt and put your cash to work for higher returns. But the actual comparison is between a guaranteed 5% return versus a probability distribution of returns that has a historical mean of ~10%. Put differently, would you prefer a 5% bird in the hand, or 2x in the bush?

If you asked the average guy on the street, would you rather have a 5% annual return guaranteed for the next 30 years or a probability distribution of returns with a historic mean of 10%, I think you'd find a lot of takers for that 5% investment.

Therefore:

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Sometimes a sure thing is a sure thing. Nothing wrong with being happy with a bird in the hand.
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Old 01-17-2009, 11:39 AM   #24
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Wow, pretty snarky for someone who clearly misunderstood what I said.
Sorry, Yrs_to_go, but I didn't intend to be any more "snarky" than your comment appeared to me to be "gloating".

When you say "That was one of the best trades I ever made.", it really isn't of any value for the OP looking forward. In fact, since markets tend to go in cycles, it could be looked at as a contrary indicator.

OK, I see now that I might have misinterpreted your "sure thing" comment as referring to Citi, rather than the 5% payoff. But it still is kind of the same thing. Had Citi gone up, paying off the loan would not have been an advantage, so is it really a "sure thing"? I guess you can say it is a "known thing", or a "predictable thing", but since there is another side to the equation (what you do with the money), the outcome is still unknown. Less risky? Yes, if you define risk as risk of losing your money ( most common usage, but sometimes you need to look at risk of opportunity cost).

Quote:
If you asked the average guy on the street, would you rather have a 5% annual return guaranteed for the next 30 years or a probability distribution of returns with a historic mean of 10%, I think you'd find a lot of takers for that 5% investment.
No doubt. But that doesn't necessarily mean it is the best long term decision. Lot's of people make poor financial decisions. I'm not saying that example would be a poor one, it depends on your goals, risk/reward tolerance, etc. But I wouldn't go with the popular vote when it comes to making financial decisions for myself.

Probability is what it is, no less, no more. Getting an education in a good field will probably get you a higher lifetime income, not smoking, eating right, keeping fit will probably help you live a longer healthier life, etc, etc, etc.... And, investing in equities over the long term will probably provide higher returns than fixed income sources.

What else can we do, other than chose the path we are most comfortable with (hopefully, after understanding the consequences of the decision)?

-ERD50
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Old 01-17-2009, 03:07 PM   #25
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Ok Ok enough already for this whiney thread. It's "copulation" not "capitulation." We established that several months ago.
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Old 01-17-2009, 03:11 PM   #26
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I'd put it in my retirement account. If you don't add your yearly contribution by the deadline, you can't go back and add it later when you have more money. You can pay off your student loan whenever you want.

Besides, this is (probably) one of those opportunities to buy low.
Yep - second that.

heh heh heh -

'God Looks After Drunkards, Fools and The United States of America.'

Psst - If I'm wrong and she doesn't the student loan debt will probably be wiped out also.
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Old 01-17-2009, 03:46 PM   #27
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If you asked the average guy on the street, would you rather have a 5% annual return guaranteed for the next 30 years or a probability distribution of returns with a historic mean of 10%, I think you'd find a lot of takers for that 5% investment.
You'd find a lot of takers because the average man in the street has no flipping idea what the hell you are talking about WRT "a probability distribution of returns with a historic mean of 10%." Maybe after a long, painful session of remedial statistics 101 you might get intelligible answers out of your men on the street, but I would not bet the half glass of port sitting next to me on it.
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Old 01-17-2009, 04:05 PM   #28
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'God Looks After Drunkards, Fools and The United States of America.'

Psst - If I'm wrong and she doesn't the student loan debt will probably be wiped out also.
Hmmmm ... good point; maybe I should just wait around for my bailout. "I bought more education than I could afford -- can someone else pay for it please?"
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Old 01-17-2009, 04:19 PM   #29
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Yep - second that.

heh heh heh -

'God Looks After Drunkards, Fools and The United States of America.'

Psst - If I'm wrong and she doesn't the student loan debt will probably be wiped out also.
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Hmmmm ... good point; maybe I should just wait around for my bailout. "I bought more education than I could afford -- can someone else pay for it please?"
The student loan bailout is already happening. (unfortunately it's not you they are interested in bailing out)

The Student Loan Bailout

"Nonetheless, faced with rising budget deficits and a recessionary economy, the federal government recently moved to prop up the sagging private loan market. This past year, the Department of Education announced plans to support the FFEL program by creating a "private market financing vehicle" to provide capital directly to lenders. At the same time, the Department began buying up $6.5 billion in private FFEL loans, to provide a short-term bridge until the financing vehicle is operational. Supporters of the bailout argue that if the program collapsed, the fallout would overwhelm the government's resources. "A lot of these lenders are getting close to the edge. They're on very thin ice. And it wouldn't take much to push them over," says Mark Kantrowitz, publisher of FinAid.org. "

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Old 01-17-2009, 10:28 PM   #30
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I don't always like what Suze Orman recommends as financial strategies (though I do get a kick out of her in other ways), but one thing she commonly repeats has always seemed like a good idea: if you are torn between two different investment/debt repayment options, why not put half your money toward one and half toward the other? Seems like it might be a good strategy in this case -- you will pay off your loans quicker in the long run, but also still get the potential benefit of a market rebound on your longer-term investments. And if the market continues to tank you haven't sunk everything into the IRA.

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Old 01-18-2009, 04:35 AM   #31
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[QUOTE=Lusitan;773150]Good point, ERD50.
(b) the fact that this would be my first non-deductible IRA contribution.

Lusitan,

I'm sure many on this board would not consider the "bookkeeping" issues of non-deductible IRAs as a consideration. Having dealt with those issues, I at least bring up the subject as something to consider. The rules, while not unfair, do cause you more work when you start to change things around later. A singe ND contribution can "haunt" you for the rest of your life!! Every time you take a distribution or move from Trad. to Roth IRA, you have to figure out how much of it was from the ND and how much from everything else. Again, I'm sure many here take this in stride. For me, I'd never do it again. Fortunately, the ND I'm involved with was only in DW's IRA "collection" and I've now moved all her IRAs to Roths, so it's no longer an issue. Just a thought from a guy who hates such esoteric tax-time issues. But, YMMV
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Old 01-18-2009, 04:50 AM   #32
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I tend to want to have no debt - and then you could also invest the $100 you free-up every month - best of both worlds.....but then, the others bring up good points of doing the analysis.
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Old 01-18-2009, 08:00 AM   #33
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Committment my friend, Committment is what drives us to Acheive More..
Meaning? Don't pay off The Loans.. and keep maxing out the #401k ..
It will force you to Live more Within your means and motivate you to work harder and achieve more.. and The "opportunity" to just go Buy something else dumb like a New Car or take a Cruise will not be an option...Unless you go work for it..

Paying off Debt is not All it's cracked upto be.. Get lower Rates for it? Sure..but Not paying it all off .

Eg: After Getting the house paid for ( 15 yr mort)? I went and Planned to put that $ into savings? Not a Chance.. their was always "a Home" for it in the family, once the Wife knew it was available.. So, I went out and Got a New Mortgage for just $100k on our $300k Place, Took that $ and Invested it, in A Reit Fund way back in 2003
They were Giving $ away for Home Mortg. ....pay 3% and make 7%? A no Brainer..
by end of 07'? Doubled the $ after txes
Then i decided to get off that Train and At least pay off that Mortg from the Reit Fund and Diversify the rest into my Reg. Portfolio of Balanced Funds..
yes, It lost about -15% last yr, but from 125k profits left over after paying off the mort. ? Still have over $100k of it.. in What I figure is Free $ we would have never had.. al thanks to the Subprime Business and Extremely low rates we got..

A Neighbor of mine did the same thing, but with $300k and he ended up with over $300k extra now.. and they just took 50% of it and bought a Real nice Retirement Place at 50% Less than it was 2 yrs ago..and put the other 50% in their Reg. retirement Portfolio..

So, Committment is the name of the game..

of course we are self employed and used to taking risks..and follow
"He Who Takes No Chance, Has No Chance" and You make $ from using OPM...not using your own..

Then you can go ReCharge those Credit Cards back up and Help Stimulate the Economy again...

and they will, the temptation will be too good to resist....with the "I want it Now" attitude in our society... and I believe in the "Keep them Broke and You'll Keep them Working" approach..

and I think they should.. It helps my Investments...
;>-)
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Old 01-19-2009, 09:38 AM   #34
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lhamo - this has generally always been my philosophy when faced with this type of decision. That way, I figure that when I look back in hindsight I can only have been half-wrong :-) It's good advice, thanks.

Koolau - I simply detest paperwork (completing paperwork and hanging onto old paper records) and I hadn't considered the hassle-factor of non-deductible IRAs. I need to read up on that -- it may be the deciding factor after all - thanks for bringing this up!

deserat and Dennis - my wife and I are on the same page when it comes to saving and LBYM, so I think that any extra available money that we have as a result of paying off these student loans will be consciously spent (or invested) in a way we're happy with. I look at it like deserat - the $100 extra we'll have each month by knocking out these loans will be put to good use, and not spent on junk we don't need. The immediate use will probably be to beef up our emergency fund more quickly and/or add to our "down payment on a bigger house stash" of money.

Thanks all!
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Old 01-23-2009, 11:16 PM   #35
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Assuming they don't change the rules, the paperwork won't be a big deal because in 2010 you will be able to rollover your non-deductible IRA into a Roth IRA and grow the money tax free until retirement. That's what I'm doing.
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Old 01-25-2009, 12:29 PM   #36
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Assuming they don't change the rules, the paperwork won't be a big deal because in 2010 you will be able to rollover your non-deductible IRA into a Roth IRA and grow the money tax free until retirement. That's what I'm doing.
I'm considering doing this myself in 2010. I have a large (to me anyway) amount of money in a rollover IRA from previous employers. My plan is to transfer this rollover IRA into my 401(k) plan with my current employer, thus reducing my "IRA money" to a much smaller amount in my traditional IRA. Then I'll convert that traditional IRA to a Roth IRA.

If I understand correctly, the conversion from a traditional IRA (say, consisting of both deductible and non-deductible contributions) to a Roth IRA will force me to deal with the basis issue at that time, but after that I would not have to worry about tracking any of that basis information going forward.
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Here's my analysis:
Old 01-25-2009, 01:42 PM   #37
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Here's my analysis:

Pay off debt early:
1. Worst case scenario: Will have less for retirement in thirty years - maybe.
2. Best case scenario: Will be debt-free in the nearer future with an effective 5+ percent return on your investment. Possibly avoid getting caught in some sort of financial desperation because you are debt-free. Sleep well at night. Resume saving for retirement after the dust settles. Live happily ever after.

Contribute to IRA:
1. Worst case scenario: Continue paying interest. Have to withdraw money from your IRA to meet some desperate financial need and wind up paying penalties. Invest in something in your IRA that loses value - quite possible, or doesn't yield 5% - virtual certainty. Pay the 5% interest on the loan now and still have even less for retirement in 30 years.

2. Best case scenario: Eventually pay off debt at 5% interest. Retire in 30 years with more money in your retirement account. The stock market soars so you make a good return on the money you put in the IRA assuming you invested in stocks. (Bad idea IMHO) The net present value of the extra return in 30 years exceeds the net present value of your 5% interest payments over the next few years.

I would pay off the debt.
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Old 01-25-2009, 04:55 PM   #38
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Or you could take a chance and use a HELOC (2.75%). The chance is that rates will increase beyond where you are comfortable. Of course the total funds (HELOC Withdrawals) needed are to pay income taxes on the converted Traditional IRA to ROTH. At least this is what I am considering right now and may do it next year.
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