Is my financial goal achievable?

[CardinalGirl210]

So here's my situation - 26yo new grad. Licensed now for 4 months. In the 4 months since being licensed I've saved 10K in my emergency fund, started contributing to my company's 401K as an intern but only have about 4K in there (saving 8% every 2 weeks). I have loans from 4 years of undergrad and 4 years of pharmacy school that total to about 200K at 7.1% interest rate. I consolidated with the extended fixed option and my payment should be about $1500/month. Currently living at home with my mom but may move out in January 2015 - no big credit card debt, my biggest expense is my car payment of $202 every 2 weeks, and I help out my mom with rent. I really want to pay off my loans by 2020 hopefully (pay off about $30K per year) - I know it will be a stretch, but I'm a pretty down-to-earth person. I'm not an extravagant spender - my reward for graduating and getting a job just came last month. I bought a gently used Michael Kors purse - my only and most expensive purchase thus far of $140. I saved my first whole paycheck to try to build up my emergency fund. If anyone has paid off high loan debt or is close to paying it off, I would appreciate your opinion.

My plan: My base salary is 122K. My management is impressed with me so far and preparing me for a PIC role, so I hope that will increase my base pay - I'm also eligible for a bonus this year. I know it will probably only be a $1200 but at least it's something! Basically I plan to pay the monthly minimum payment automatically. Save my reimbursement from my floater mileage (~$220/month tax-free) to put it towards loans at the end of each year and any other extra funds after expenses and put it towards the loans every month.

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[BMBiology]

I think it is a mistake to extend your student loan payment. You are not going to get a guaranteed 7.1% rate of return anywhere.

Pay it off as soon as you can. You can do it in 4 years. Avoid buying big things (did you just buy a brand new car?). Be careful where you spend your money but don't forget to also have a life outside of work. You are 26 so if you are planning to start a family in the near future, it is time to make those life commitments! It would also be nice if he is financially able to help you pay off your loans once you guys are married **hint hint!

This is how I see work: every dollar you spent is an extra minute of working.

 

[CardinalGirl210]

I think it is a mistake to extend your student loan payment. You are not going to get a guaranteed 7.1% rate of return anywhere. Do you really want to have this debt around your neck for the next 16 years?

Pay it off as soon as you can. You can do it in 4 years. Avoid buying big things (did you just buy a brand new car?). Be careful where you spend your money but don't forget to also have a life outside of work. You are 26 so if you are planning to start a family in the near future, it is time to make those life commitments! It would also be nice if he is financially able to help you pay off your loans once you guys are married **hint hint!

This is how I see work: every dollar you spent is an extra minute of working.

I extended it, but I did that only because my financial advisor convinced me that if I set a high minimum payment and have an unexpected emergency and for some reason am unable to pay the loan minimum I would be financially screwed!!! So I went for an extended plan knowing that I will be committed to paying extra every month - my goal is to sacrifice now and have this paid in 6 years so that I can be financially free and live well later.

 

[BMBiology]

I never trust financial advisors and I certainly don't think they are necessary.

I am not talking about your case. Financial advisors love to tell people to avoid going full speed at their debt because then they would have more money to invest in their suggested investments (hint: they get a cut)

Next time, ask him where can you get a guaranteed rate of return of 7.1% (after tax)?

Also ask him what would happen if something happened to you at year 6? If you got fired at year 8? If you wanted to stay home with the kids at year 10?

 

[Gombrich12]

Ideally you would save up a years worth of expenses say 30-40,000 and then throw everything at your loans. I don't know if you are married or in a relationship, but if you can stay at home a little longer it will save you a lot of money. Depending on things while living at home you should be able to send $4000-4500 to your loans each month.

 

[CardinalGirl210]

Ideally you would save up a years worth of expenses say 30-40,000 and then throw everything at your loans. I don't know if you are married or in a relationship, but if you can stay at home a little longer it will save you a lot of money. Depending on things while living at home you should be able to send $4000-4500 to your loans each month.

Actually that is what he suggested - save up 30-40K and pay a lump sum at the end of each year so that I'm not without money in case of a major emergency. The 10K I have saved I'm not counting on it going toward my loan right now - it is truly an emergency fund. He hasn't asked me for any money to put towards investment and I pay him nothing for his advice. The only thing I worry about in saving a lump sum is that I will be accumulating interest on the loan all while I have money to actually pay it off just sitting in the bank.

 

[Gombrich12]

Also I agree with BMBiology in that you don't need a financial advisor right now. Really what you need to do is simple.

1. Create an emergency fund that can last a year
2. Each year contribute up to the match in your company's 401k
3. Put all other funds towards the loans

You need to attack the loans now because of the uncertainty of the future due to kids or the job market. If you need motivation remember that 200,000 at 7.1% is generating about $1200/month in interest alone. That's a mortgage payment a month going towards nothing!

 

[BMBiology]

^ listen to the wise man (hence, listen to me).

 

[Momus]

So here's my situation - 26yo new grad. Licensed now for 4 months. In the 4 months since being licensed I've saved 10K in my emergency fund, started contributing to my company's 401K as an intern but only have about 4K in there (saving 8% every 2 weeks). I have loans from 4 years of undergrad and 4 years of pharmacy school that total to about 200K at 7.1% interest rate. I consolidated with the extended fixed option and my payment should be about $1500/month. Currently living at home with my mom but may move out in January 2015 - no big credit card debt, my biggest expense is my car payment of $202 every 2 weeks, and I help out my mom with rent. I really want to pay off my loans by 2020 hopefully (pay off about $30K per year) - I know it will be a stretch, but I'm a pretty down-to-earth person. I'm not an extravagant spender - my reward for graduating and getting a job just came last month. I bought a gently used Michael Kors purse - my only and most expensive purchase thus far of $140. I saved my first whole paycheck to try to build up my emergency fund. If anyone has paid off high loan debt or is close to paying it off, I would appreciate your opinion.

My plan: My base salary is 122K. My management is impressed with me so far and preparing me for a PIC role, so I hope that will increase my base pay - I'm also eligible for a bonus this year. I know it will probably only be a $1200 but at least it's something! Basically I plan to pay the monthly minimum payment automatically. Save my reimbursement from my floater mileage (~$220/month tax-free) to put it towards loans at the end of each year and any other extra funds after expenses and put it towards the loans every month.

1. Max out your 401k. If you get paid 122k a year, you need to bump up contribution to 15%/paycheck. For a total tax saving at least 35% of 17,500 immediately = $6125/year. On top of that you get a free money from your employer, what's not to like?
   
2. Throw the rest of your money to your loan and emergency saving
   
3. Live at home if you can, there is no greater saving than cutting down on some home expenses.
   
4. Continue being as frugal as possible

I think it is a mistake to extend your student loan payment. You are not going to get a guaranteed 7.1% rate of return anywhere.

Pay it off as soon as you can. You can do it in 4 years. Avoid buying big things (did you just buy a brand new car?). Be careful where you spend your money but don't forget to also have a life outside of work. You are 26 so if you are planning to start a family in the near future, it is time to make those life commitments! It would also be nice if he is financially able to help you pay off your loans once you guys are married **hint hint!

This is how I see work: every dollar you spent is an extra minute of working.

Yes, get married to the right man. There are a lot of us out there that look someone who makes similar income. I don't want sugar daddy relationship. I want a partnership.

Every dollar you spend, it actually worth more than a dollar after 30% effective tax. For every dollar you spend, you need to earn $1.41. Buying Starbucks, and lunch everyday, having monthly membership to anything (car payments, gym, high cell phone bill, magazine subscription, cable bill) is like being sand paper to death. Reduce your expenses, find ways to cut to get what you need (not want) without sacrificing quality of life. A small leak can sink a great ship.

Actually that is what he suggested - save up 30-40K and pay a lump sum at the end of each year so that I'm not without money in case of a major emergency. The 10K I have saved I'm not counting on it going toward my loan right now - it is truly an emergency fund. He hasn't asked me for any money to put towards investment and I pay him nothing for his advice. The only thing I worry about in saving a lump sum is that I will be accumulating interest on the loan all while I have money to actually pay it off just sitting in the bank.

You don't have to save lump sump. Get the best of both worlds. Contribute into both accounts (pay off loan and emergency savings) slowly. Most young single person with no kids and a house has no need to save up large emergency saving in the bank.

 

[CardinalGirl210]

1. Max out your 401k. If you get paid 122k a year, you need to bump up contribution to 15%/paycheck. For a total tax saving at least 35% of 17,500 immediately = $6125/year. On top of that you get a free money from your employer, what's not to like?
   
2. Throw the rest of your money to your loan and emergency saving
   
3. Live at home if you can, there is no greater saving than cutting down on some home expenses.
   
4. Continue being as frugal as possible

Yes, get married to the right man. There are a lot of us out there that look someone who makes similar income. I don't want sugar daddy relationship. I want a partnership.

Every dollar you spend, it actually worth more than a dollar after 30% effective tax. For every dollar you spend, you need to earn $1.41. Buying Starbucks, and lunch everyday, having monthly membership to anything (car payments, gym, high cell phone bill, magazine subscription, cable bill) is like being sand paper to death. Reduce your expenses, find ways to cut to get what you need (not want) without sacrificing quality of life. A small leak can sink a great ship.



You don't have to save lump sump. Get the best of both worlds. Contribute into both accounts (pay off loan and emergency savings) slowly. Most young single person with no kids and a house has no need to save up large emergency saving in the bank.

I only have 4 more pay checks left in 2014, but I went ahead and adjusted it so that I get the full company match (free money!). Thanks for that advice! It will be a sacrifice, but worth it. I am good about taking my lunch to work, but sometimes if I'm starving after work I stop at Chipotle - i'll work on that. My bf is a pharmacist, but we will not live together until we're married and there's no ring yet. He graduated with no education loans, but has some other debts. Right now I'm just trying to make sure that I can take care of my debts myself though. Thanks for the great advice!

 

[farmadiazepine]

What Momus said is exactly what I think too:

Max out your 401k so that you are contributing $17,500 a year. The max you can contribute in 2015 will be $18,000. If you can't max it out now, at least contribute exactly how much your employer will match.

You should be paying everything you have into loans and put the rest into savings. When I graduated, I started paying about $4,000 a month to my student loans. That's almost $50,000 a year. I paid it off really fast.

Stay at home, and live with your parents until you are financially capable of living on your own.

Don't spend money like you are a rock star. Spend your money like you are still in college getting paid $8/hr as an intern.

 

[confettiflyer]

I think it is a mistake to extend your student loan payment. You are not going to get a guaranteed 7.1% rate of return anywhere.

Unlike a mortgage, which does have different rates for 15 vs. 30 year loans, there's no inherent "penalty" for signing up for an extended plan.

The only risk is that someone will justify not paying more than just the minimum ("Ooh I'll take this trip this year and not pay down my loans.")

I think having the flexibility is smart, 4 months on the job doesn't exactly scream security. You start seeing the risk of missed payments and damaged credit scores in the face of any catastrophic event where you need to conserve cash for things like living expenses (food, rent), so having a lower minimum is like a built-in safety net.

I assume there are no parents to run to or other "rent free" options.

 

[confettiflyer]

Stay at home, and live with your parents until you are financially capable of living on your own.

Ugh no, don't use parents as a crutch. You're a professional making good money, no need to impose on your parents.

If you do, consider the social costs. Women not so much, but if you're a guy (yes I know the OP is female, but in general), consider the inability to woo a suitable mate, having to pay for sex (disease and arrest risk) because bringing home someone is kind of weird, or being viewed as a mooch further driving away potential mates.

But mostly because being a grown man at home is weird unless you're some unemployed hipster.

 

[zelman]

Ugh no, don't use parents as a crutch. You're a professional making good money, no need to impose on your parents.

If you do, consider the social costs. Women not so much, but if you're a guy (yes I know the OP is female, but in general), consider the inability to woo a suitable mate, having to pay for sex (disease and arrest risk) because bringing home someone is kind of weird, or being viewed as a mooch further driving away potential mates.

But mostly because being a grown man at home is weird unless you're some unemployed hipster.

You view solicitation of prostitutes as a likely outcome to an inconvenient living situation? That's kind of messed up. Maybe I'm just more experienced at being a loser, but that did not seem like an appealing option during my adult years of celibacy. Your point isn't invalid otherwise, but I think you're being a little extreme.

 

[pezdispenser]

I actually recommend NOT maxing out your 401(k) while you are paying off your loans, and only putting in enough to get the full employer match. Because if you max it out every year over a 40 year career, you could end up with a very large amount in there, like $8+ million. Then when you retire, you will have to take large withdrawals (withdrawals are mandatory from a 401(k) after age 70.5) and you will have to pay full income taxes on this entire amount. Say you withdraw $320,000 per year, this will push you into a high tax bracket and will probably make your Social Security taxable as well. It may even be a higher tax rate than what you save now from the 401(k) tax deduction.

So at our income level, I don't think it's necessary or wise to max out a 401(k) every year for 40 years to save an adequate amount for retirement. But you do have to consider other things in your life such as:

- Student loans. Can you throw all of your income at just your loans to pay them off in a reasonably short time like 5 years, and still have time left afterwards to save for retirement?

- Starting a family or reducing your hours. Will you even be working full time for the whole 40 years? You can only contribute to a retirement account while working, so you may indeed have to max it out in the years that you work.

 

[BMBiology]

^^ great post as always.

I would also want to add Roth IRA into the mix because it is taxed free when you cash it out.

 

[Momus]

If you dont max out your 401k is there any reason to do a roth ira instead of just contributing more to your 401k except into a roth?

Tax diversification. You can choose which bucket you want to withdraw from during retirement and minimize tax impact. I contribute to both max out every year.

There is no reason not to max out 401k when you can. If you think you are going to be in higher tax bracket later, you can always scale down your contribution. Do it when you can, when you are able to without breaking a sweat, not when you have 4 kids, a house payment, aging parents and a spouse to feed.

 

[Gombrich12]

"There is no reason not to max out 401k when you can. "

She shouldn't max out her 401k because she can get a guaranteed 7.1% return (after tax) by paying off her loans. She should only contribute up to employer match. Also, I forgot to mention do not consolidate your loans because it removes some of the flexibility in paying off loans. You don't want to have one giant 200,000 loan, it's much better to have 8-9 20,000 loans or whatever. You can knock each loan out and in turn your minimum monthly payment will drop leaving you with more flexibility.

 

[confettiflyer]

I actually recommend NOT maxing out your 401(k) while you are paying off your loans, and only putting in enough to get the full employer match. Because if you max it out every year over a 40 year career, you could end up with a very large amount in there, like $8+ million. Then when you retire, you will have to take large withdrawals (withdrawals are mandatory from a 401(k) after age 70.5) and you will have to pay full income taxes on this entire amount. Say you withdraw $320,000 per year, this will push you into a high tax bracket and will probably make your Social Security taxable as well. It may even be a higher tax rate than what you save now from the 401(k) tax deduction.

Whoa whoa whoa, cool it on the math for a moment. You're saying maxing out a 401(k) for 40 years = $8M? Are you assuming a 10% annual ROR? Because that's pretty high.

And you're assuming someone will work until 70.5? Most of us don't do that...we have the luxury to retire much earlier.

I'd advise anyone to think twice before NOT maxing out a 401(k)/403(b) given our high income levels. There are certain instances where it can make sense, but consider your own lifestyle.

So at our income level, I don't think it's necessary or wise to max out a 401(k) every year for 40 years to save an adequate amount for retirement. But you do have to consider other things in your life such as:

- Student loans. Can you throw all of your income at just your loans to pay them off in a reasonably short time like 5 years, and still have time left afterwards to save for retirement?

- Starting a family or reducing your hours. Will you even be working full time for the whole 40 years? You can only contribute to a retirement account while working, so you may indeed have to max it out in the years that you work.

Okay you kind of summed up my issues with the first part of your post here, so there you go.

 

[confettiflyer]

"There is no reason not to max out 401k when you can. "

She shouldn't max out her 401k because she can get a guaranteed 7.1% return (after tax) by paying off her loans. She should only contribute up to employer match. Also, I forgot to mention do not consolidate your loans because it removes some of the flexibility in paying off loans. You don't want to have one giant 200,000 loan, it's much better to have 8-9 20,000 loans or whatever. You can knock each loan out and in turn your minimum monthly payment will drop leaving you with more flexibility.

Having student loans is not a legitimate reason not to save in a tax-advantaged account for retirement.

My mantra is pay yourself first before anyone else, contributing to a retirement account is the most tax efficient way to do that. Considering the worst case scenarios favor maxing out retirement accounts first -- If the OP spends 5-10 years knocking out the loan and finds herself permanently/totally disabled, she will have zero assets (but zero debt) whereas if she had prioritized paying herself first (via 401k), the student loans are dischargeable in that case and she would have $90-$180k to subsist on for a period of time.

Extreme thinking and highly unlikely, but it should be brought up in the OP's risk assessment. This isn't a straight either/or situation...you can always augment risk with insurance (disability, life, LTC, etc...) or live somewhere in between saving for retirement or paying off loans.

In my own personal case (which is different from the OP's), I derive a lot more benefit from maxing out the 401k/403b than paying off loans (but that's for another thread to discuss).

 

[pezdispenser]

Whoa whoa whoa, cool it on the math for a moment. You're saying maxing out a 401(k) for 40 years = $8M? Are you assuming a 10% annual ROR? Because that's pretty high.

- Contributions: $17.5k, $18k, ... , $46k
I increased the limit every year with 2.5% inflation and rounded to the nearest $500. I did not even include catch-up contributions after age 50 which currently are an additional $5,500.

- Match: $7,500, ... , $20k
About 6% of $122k, and also increasing by 2.5% each year assuming that you get a raise of that much.

- Compounded investment returns: 8%
========
I made a spreadsheet and added all of those lines up for 40 years, and actually it comes out to $9.4 million.

And you're assuming someone will work until 70.5? Most of us don't do that...we have the luxury to retire much earlier.

No, I assumed working from age 26 to 65 (39 or 40 years). The $320k was a quick and dirty 4% of $8 mil, which is the commonly recommended withdrawal rate at age 65.

Also, the earliest you can take withdrawals from a 401(k) is age 55 if you stop working. 59.5 if you are still working, but the withdrawals will be taxed on top of your salary so this is not really a good idea.

I'd advise anyone to think twice before NOT maxing out a 401(k)/403(b) given our high income levels. There are certain instances where it can make sense, but consider your own lifestyle.

Okay you kind of summed up my issues with the first part of your post here, so there you go.

I think you, Momus and I sort of agree on the same thing: that you should not max out a 401(k) for 40 years. So all I'm saying is why not take the first 5 years off, but still contribute enough to get the full match, so that you can concentrate on paying off your student loans? You still have 35 years and an ample contribution limit to save enough for retirement.

I don't even think the tax advantages of the 401(k) are that great. It is just tax deferred. You will still have to pay full income taxes on the entire amount when you take withdrawals. It's sort of setting yourself up for a different kind of 'tax bomb'.

Instead, the tax advantaged account that I really recommend is the Roth IRA. This one you really should max out because the limit is only $5,500 and they could very easily take away the 'back door Roth' method that we have been using to get around the income limit these past few years. With the Roth you alread paid income taxes on the money you put in (at today's relatively low tax rates), so even if it grows and compounds over several decades to $1.7+ million, the entire amount is completely tax free.

Overall, I think it is better to determine the amount you need to save for retirement first, and then figure out the best tax advantaged accounts to use. Don't just max out the 401(k) for the sake of maxing it out. So, say you worked out for the current year in your life (taking into account current balances and everything else going on in your life) that you need to save 15% for retirement, or $18.3k. I would (copied from Dave Ramsey):

1. Contribute to the 401(k) to get the full match, let's say
$7,500

2. Do a Roth IRA
$5,500

3. Go back to the 401(k)
$5,300
======
$18,300

 

[confettiflyer]

- Contributions: $17.5k, $18k, ... , $46k
I increased the limit every year with 2.5% inflation and rounded to the nearest $500. I did not even include catch-up contributions after age 50 which currently are an additional $5,500.

- Match: $7,500, ... , $20k
About 6% of $122k, and also increasing by 2.5% each year assuming that you get a raise of that much.

- Compounded investment returns: 8%

Ah employer match, didn't consider that in calculations. I also tried to model 2.5% increases in the max allowable portion but didn't have the fortitude to create a spreadsheet. Kudos to you.

No, I assumed working from age 26 to 65 (39 or 40 years). The $320k was a quick and dirty 4% of $8 mil, which is the commonly recommended withdrawal rate at age 65.

Wonder what the present value of $320k 40 years from now is, hmm.

I think you, Momus and I sort of agree on the same thing: that you should not max out a 401(k) for 40 years. So all I'm saying is why not take the first 5 years off, but still contribute enough to get the full match, so that you can concentrate on paying off your student loans? You still have 35 years and an ample contribution limit to save enough for retirement.

There's different ways to cut the cake, I remember discussing this a while ago in another finance thread. I really need to revise/clean up the spreadsheet I made that modeled waiting 5-10 years to make 401(k) contributions to pay down debt (or giving the minimum for a match) vs. going full bore into contributions and maximizing the # of years of compounding interest.

There was an article some time ago about the potential risk of over-saving, which a funny thing to consider.

In the end, it depends on everyone's individual situation. I have a slightly different set-up with employer, loans & incentives, and access to a deferred compensation plan. What I do personally would be a disaster for the OP, and vice versa.

I don't even think the tax advantages of the 401(k) are that great. It is just tax deferred. You will still have to pay full income taxes on the entire amount when you take withdrawals. It's sort of setting yourself up for a different kind of 'tax bomb'.

At least there's control over it, and with the new rules that were promulgated with respect to annuities, I'm starting to tell people closing in on retirement to look into annutizing a portion of their 401(k) accounts in-plan and deferring payment by ~20-25 years. The ultimate safety net, if you will...and it would in turn reduce that person's RMD.

Instead, the tax advantaged account that I really recommend is the Roth IRA. This one you really should max out because the limit is only $5,500 and they could very easily take away the 'back door Roth' method that we have been using to get around the income limit these past few years. With the Roth you alread paid income taxes on the money you put in (at today's relatively low tax rates), so even if it grows and compounds over several decades to $1.7+ million, the entire amount is completely tax free.

If you use BMB's line of thinking, they could even tax Roth IRA withdrawals in the future.

But again it depends what people plan to do...my plan is to semi-retire/reduce work hours significantly in my 50's with minimum expenses at that point, and I expect to need significantly less income than I generate now.

But that's all just a plan and reality can be completely different.

So my advice to the OP, to piggy back on to you, is to (a) max out the 401(k), (b) submit to the backdoor Roth, and (c) send the leftover money to retire debt.

Overall, I think it is better to determine the amount you need to save for retirement first, and then figure out the best tax advantaged accounts to use. Don't just max out the 401(k) for the sake of maxing it out. So, say you worked out for the current year in your life (taking into account current balances and everything else going on in your life) that you need to save 15% for retirement, or $18.3k. I would (copied from Dave Ramsey):

1. Contribute to the 401(k) to get the full match, let's say
$7,500

2. Do a Roth IRA
$5,500

3. Go back to the 401(k)
$5,300
======
$18,300

You're advising to save $18,300, I'm advising $23,500. That's a difference of $200 per biweekly pay period... or $14/day. It's up to the OP to decide whether they value that difference in a retirement account in-hand, or retiring debt.

 

[xiphoid2010]

Don't forget to live a little too. I'm big on saving and paying off debt, paid of both me and my wife's loans in 3 yrs, got married, had 2 kids, bought a house, 3 cars...etc.

But now I'm kinda thinking maybe we should have taken couple of years out to enjoy the high income life. Now we have $7k/mo extra each month, well on track with retirement saving but life has become an endless cycle of work/chores/kids... You have money but havent the time to enjoy it.

It's with this, I'm starting to wonder if living the high life for 2-3 yrs during your 20's early 30's is worth delaying retirement by 5 yrs or so?

 

[confettiflyer]

Don't forget to live a little too. I'm big on saving and paying off debt, paid of both me and my wife's loans in 3 yrs, got married, had 2 kids, bought a house, 3 cars...etc.

But now I'm kinda thinking maybe we should have taken couple of years out to enjoy the high income life. Now we have $7k/mo extra each month, well on track with retirement saving but life has become an endless cycle of work/chores/kids... You have money but havent the time to enjoy it.

It's with this, I'm starting to wonder if living the high life for 2-3 yrs during your 20's early 30's is worth delaying retirement by 5 yrs or so?

You probably should have. In my youth before I went into pharmacy, every time I got a large commission check, me and my girlfriend at the time would book plane tickets and spend a week or two somewhere in Europe or Asia. I actually had to request extra passport pages. There were concerts, endless nights out, weekends in Vegas, cabins in the mountains, etc... Life was comfortable, always lived in luxury apartments/condos, not a worry in the world.

Obviously, there was a downside. If it weren't for automatic salary deduction, I would have left that industry with zero dollars to my name. I spent like a fiend, it was also the mid-2000s, everyone spent money like it was going out of style.

There was a lot of keeping up with the joneses. Compared to my peers, I spent less and made out pretty well. Some of them moved to New York City during that time and came back penniless or in serious debt.

In retrospect, this life turned me into someone superficial and hedonistic. Slowly, things just started getting old and hollow...but when I thought it was time to move on, I'd get back that rush and there was just no motivation to do anything else.

Eventually that gravy train ended, in pharmacy school, I maxed out student loans to maintain that similar lifestyle and used my intern money to go on at least 1-2 trips a year (east coast made Europe more accessible). I worked a lot but I didn't live the "poor student life" in the least. Ate out almost every other night...living in the city meant happy hour after rotations and lots of things to do and life to experience.

I never said no. It was great.

Do I regret it? Nope. Could I have saved more and done nothing these last 10 years? Probably, but I wouldn't be damn near as interesting as I am now. I'm lucky that I have a decent enough nest egg and that my new financial goals are more or less on track, and my salary now is conducive to both saving and living well.

I can always earn money, I can never earn my youth back.

 

[cnicolef08]

Jesus.... If you max out your 401k contributions, throw $$ into an emergency fund, contribute to a Roth IRA, how much money do you ACTUALLY take home? Can you even pay your rent? Lol! Maybe I'm just being naive but I contribute enough to get the match from my employer, live at home to pay off my loans more quickly (28yo, no kids, no husband, yes I'm a bum I know) and I am able to throw about $4000/month at my loans with just enough money left to pay for cell phone, gas, groceries, etc? I couldn't imagine being able to do all that you guys are doing..... Show me the way Master.....

 

[pezdispenser]

Wonder what the present value of $320k 40 years from now is, hmm.

Oddly enough, the present value assuming 2.5% inflation x 40 years is $122k, same as the OP's current salary. (320k / 1.025^39)

You're advising to save $18,300, I'm advising $23,500. That's a difference of $200 per biweekly pay period... or $14/day. It's up to the OP to decide whether they value that difference in a retirement account in-hand, or retiring debt.

$18,300 was just an example, probably for AFTER paying off student loans. With student loans, I would advise even lower like just the employer match $7,500, and maybe or maybe not doing the $5,500 Roth.

Because, like cnicolef08 just said above, we don't have enough money to do it all. You do have to ration it out. There may even be other things to consider like saving for a house.

 

[BMBiology]

Jesus.... If you max out your 401k contributions, throw $$ into an emergency fund, contribute to a Roth IRA, how much money do you ACTUALLY take home? Can you even pay your rent? Lol! Maybe I'm just being naive but I contribute enough to get the match from my employer, live at home to pay off my loans more quickly (28yo, no kids, no husband, yes I'm a bum I know) and I am able to throw about $4000/month at my loans with just enough money left to pay for cell phone, gas, groceries, etc? I couldn't imagine being able to do all that you guys are doing..... Show me the way Master.....

The math is not going to add up. You can't do jack when you are knee deep in debt. You can't max out your 401 k. You can't put money in your Roth IRA. You can't buy your company stocks. Why? Because your investment returns need to be better than the 6.8% interest rate you are paying on your student loans. That is a huge bet.

 

[confettiflyer]

The math is not going to add up. You can't do jack when you are knee deep in debt. You can't max out your 401 k. You can't put money in your Roth IRA. You can't buy your company stocks. Why? Because your investment returns need to be better than the 6.8% interest rate you are paying on your student loans. That is a huge bet.

But sometimes it's not about sheer investment returns, there's additional non-numerical/non-financial factors to consider when allocating money.

Some of my actuarial/math heads will disagree since you CAN calculate the expected value of an unlikely event and incorporate it into a model, but that's over my head and everyone else here.

Funneling ALL available money toward debt does reduce/eliminate your risk of paying interest, but it's a zero-sum game and other risks rise accordingly. The additional costs of paying interest becomes the cost of diversifying risk.

Recommending this dogged pursuit of debt as the sole focus for individuals can be destructive, if it's not tempered or thoughtfully considered. Just look at xiphoid2010's post about the possibilities of regret, that's a risk some may find unacceptable.

 

[confettiflyer]

Jesus.... If you max out your 401k contributions, throw $$ into an emergency fund, contribute to a Roth IRA, how much money do you ACTUALLY take home? Can you even pay your rent? Lol! Maybe I'm just being naive but I contribute enough to get the match from my employer, live at home to pay off my loans more quickly (28yo, no kids, no husband, yes I'm a bum I know) and I am able to throw about $4000/month at my loans with just enough money left to pay for cell phone, gas, groceries, etc? I couldn't imagine being able to do all that you guys are doing..... Show me the way Master.....

A lot of those on the forum are highly compensated and/or married and have two incomes to play with (or have additional tax deductions such as a house or kids). Also many on here work multiple jobs or receive bonuses on top of their normal salary.

Considering an upper quartile gross compensation total of $150k/yr in California:

$150k gross - $18k pre-tax = $132k
Subtract 40% for taxes/etc.. = $79,200 or $6600/mo net pay.
Subtract $458/mo for backdoor Roth = $6142
Subtract a whopping $4k/mo for student loans (not my recommendation but okay)
What you're left with = $2142/mo for rent and living expenses

Obviously if you make less ($120k), you're left with roughly $642 for rent and living expenses, then the case can be made to save less for retirement.

 

[confettiflyer]

Because, like cnicolef08 just said above, we don't have enough money to do it all. You do have to ration it out. There may even be other things to consider like saving for a house.

This is the line I'm going to seize on right here for BMBiology and highlights my whole discussion on risk diversification. If you have kids entering school and you minimize everything in life to maximize loan payments, you run the risk of sending your kids to a poor school district (assuming you live in the 'hood). So there have to be considerations for that when considering how much to send your loan servicer.

The costs of poor schools have been well studied and are long lasting, and won't necessarily show up in a CBA when looking at debt vs. investment return in a traditional sense.

 

[All4MyDaughter]

Here's what I'm doing. I started with 180K in debt and have paid off close to 60K in the last few years (graduated 2011 and did a residency).

1. Put enough into 401K to get full employer match
2. Max out Roth IRA for me and my husband
3. Emergency fund of ~3oK (already have this, so not putting anything toward it)
4. Small amount toward college fund for our two kids (~$100 per month, per child)
5. Extended fixed repayment (just switched into that from IBR) - payment is ~$900 per month
6. Any additional cash at the end of the month goes toward loans.

I also chose the extended fixed repayment because I didn't want to get stuck with a huge monthly payment in case of job loss, illness, etc. There's no interest disadvantage for doing that. My interest rate is the same as it was on IBR and isn't dependent on payment term. Obviously, I've been paying a lot more than $900 per month, but if something comes up, I know that I can make the minimum and be fine.

Good luck!

 

[All4MyDaughter]

This is the line I'm going to seize on right here for BMBiology and highlights my whole discussion on risk diversification. If you have kids entering school and you minimize everything in life to maximize loan payments, you run the risk of sending your kids to a poor school district (assuming you live in the 'hood). So there have to be considerations for that when considering how much to send your loan servicer.

The costs of poor schools have been well studied and are long lasting, and won't necessarily show up in a CBA when looking at debt vs. investment return in a traditional sense.

Agreed. We just bought a house in a better neighborhood and this was one of the reasons.

 

[BMBiology]

This is the line I'm going to seize on right here for BMBiology and highlights my whole discussion on risk diversification. If you have kids entering school and you minimize everything in life to maximize loan payments, you run the risk of sending your kids to a poor school district (assuming you live in the 'hood). So there have to be considerations for that when considering how much to send your loan servicer.

The costs of poor schools have been well studied and are long lasting, and won't necessarily show up in a CBA when looking at debt vs. investment return in a traditional sense.

Let's be clear here. I am not against living a little (I actually encouraged it). I am against investing your money when you have student loan debt. Do you really think you are going to get a better return rate than 6.8% (after taxes) in the long run?

 

[297point1]

But now I'm kinda thinking maybe we should have taken couple of years out to enjoy the high income life. Now we have $7k/mo extra each month, well on track with retirement saving but life has become an endless cycle of work/chores/kids... You have money but havent the time to enjoy it.

This situation sounds oddly familiar...

 

[confettiflyer]

Let's be clear here. I am not against living a little (I actually encouraged it). I am against investing your money when you have student loan debt. Do you really think you are going to get a better return rate than 6.8% (after taxes) in the long run?

Again, like I wrote above, viewing it terms of rate of return is an oversimplification for most people. Other things need to be considered.

 

[BestDoctorEver]

Which one is better? Contribute to your college kids fund or invest that money; then use that money to help your kids with tuition etc... I know someone who is contributing $750/month for that for two kids... Wouldn't it be better to invest that money for 18 years? and then use that money to help your kids when they are ready to go to college...

I am kind of torn about this situation and I have a financial advisor who told me that it's better to invest that money in your retirement because you can't borrow money to retire, but kids can borrow money to go to college or they can go to a CC then 2 year university....

 

[All4MyDaughter]

Which one is better? Contribute to your college kids fund or invest that money; then use that money to help your kids with tuition etc... I know someone who is contributing $750/month for that for two kids... Wouldn't it be better to invest that money for 18 years? and then use that money to help your kids when they are ready to go to college...

I am kind of torn about this situation and I have a financial advisor who told me that it's better to invest that money in your retirement because you can't borrow money to retire, but kids can borrow money to go to college or they can go to a CC then 2 year university....

Personal preference, I think? We contribute a modest amount for the kids' college. Their funds are performing pretty well. I don't intend to fully pay for school for them. I paid for all my education myself. But I do want to give them a bit of a head start.

 

[confettiflyer]

Which one is better? Contribute to your college kids fund or invest that money; then use that money to help your kids with tuition etc... I know someone who is contributing $750/month for that for two kids... Wouldn't it be better to invest that money for 18 years? and then use that money to help your kids when they are ready to go to college...

I am kind of torn about this situation and I have a financial advisor who told me that it's better to invest that money in your retirement because you can't borrow money to retire, but kids can borrow money to go to college or they can go to a CC then 2 year university....

Normally I'd say don't listen to financial advisers, but yes you should prioritize your own ass because kids can take care of themselves. Maybe save a token amount to make yourself feel better, but I always recommend maximizing retirement funds over future college funds.

Maybe if you're really rolling in dough, you can contribute more than a token amount, but you also run the risk that a) a child passes away, b) they do not attend college/an eligible institution, and you could potentially have to spend that money on a beneficiary you didn't have in mind.

Retirement is a bit more of a sure thing and your beneficiaries have a bit more leeway should you also pass away prior to utilizing such funds.

Food for thought.

 

[297point1]

Normally I'd say don't listen to financial advisers, but yes you should prioritize your own ass because kids can take care of themselves. Maybe save a token amount to make yourself feel better, but I always recommend maximizing retirement funds over future college funds.

That is an interesting viewpoint. I'll offer that your views might change once you have kids. Mine did.

Supposedly my kids are entitled to free college tuition through my job, but I'm still socking away $$ every month for them because (a) there is no guarantee I'll stay in academia, (b) they might want to go somewhere that does not participate in tuition exchange, and (c) there is no guarantee the tuition exchange program will exist in the future.

 

[BMBiology]

Again, like I wrote above, viewing it terms of rate of return is an oversimplification for most people. Other things need to be considered.

I have not calculated the value of having a peace of mind after you have paid off your loans.

 

[All4MyDaughter]

That is an interesting viewpoint. I'll offer that your views might change once you have kids. Mine did.

Supposedly my kids are entitled to free college tuition through my job, but I'm still socking away $$ every month for them because (a) there is no guarantee I'll stay in academia, (b) they might want to go somewhere that does not participate in tuition exchange, and (c) there is no guarantee the tuition exchange program will exist in the future.

I'm with confetti. My kids can figure out how to pay for college, or they can go to a service academy, or they might not go to college at all. I expect to have some money to help them, but I'm funding our retirement first because no one else is going to be supporting us in our old age.