Debt vs Retirement savings

[crazydoglady]

This might be a stupid question, but I'd like input as to what makes the most sense in this situation.

Husband and wife, ages 29 and 27, both working full time.

Husband has $46,000 left in student loan debt @ 4.0% variable rate (which has increased twice in the past 2 years); no other debt aside from mortgage (shared).

Husband contributes 9% to employer account (current balance 26k), and is eligible for pension which would be based on his 5 highest consecutive earning years with the company(last estimate showed expected annual benefit to be around 50-70k depending on age of retirement). Also has old 401k from previous employer currently around 25k.

Wife contributes 9% to 403b (current balance 30k), and also has an old 401k with 5k.

Where we have retirement contributions in place, should we focus all additional resources towards the debt? DH seemed to think a Roth IRA or similar would be the next step, but with such a high amount of student debt remaining, would it be smarter to focus on reducing that balance? We are looking at about $1000 total monthly to work with - either towards student loan or additional retirement avenues.

What would you recommend?

[creditcardfree]

I would knock that student loan debt out as fast as you can so you can than continue on adding more to retirement. Saving 9% at your ages is a great start, but knock out that debt now!!

[kork13]

9% savings for retirement is a good start. Over time, you'll want to increase that to at least 10-15%. I'm normally a big proponent of Roth IRAs... But with $46k in student loans (at a variable rate no less, which can only go up at this point), I think it would probably be prudent to focus primarily on paying off the student loans.

With that said, it doesn't have to be an all-or-nothing solution. You have $1k/mo to play with here. Perhaps you could do $250/mo into a Roth IRA for each of you, then put the remainder ($500/mo) toward reducing the student loans (or some other mix that is acceptable to you both). That could at least be a starting point. Over time, if/when your income goes up with raises/bonuses/etc., you can increase the money that you're sending to both Roth IRAs, and the SL's. The first step is always hardest. Once you're on the road, inertia keeps things moving quite nicely.

[Gailete]

Yes, it certainly doesn't have to be all or nothing. One thought though, is the sooner you get school loans paid off, the better since if something not planned happens, you won't have that debt hanging over your head. It also is a bit of retirement planning to have all your bills paid off before retirement.

I too would be sticking some in retirement accounts for each of you (your choice of how much) and then the rest on those loans, depending on how much you are already paying monthly.

That school loan is a huge amount to be paying back but one thing to always keep back in your head is the possibility of the unexpected. Babies show up that way, babies with medical problems show up that way, someone ends up in an accident and can't work for a year or ever again, a health condition shows up and sidelines you for good (happen to me at 45). Obviously all those things can happen and that is why, you want to have no bills if at all possible, and money in the 'bank'. As long as you have a healthy emergency fund, and are in a good position to be paying into your retirement plans, getting those school loans paid off should be a priority - especially before the rates go up again.

I only bring up the unplanned events because I have actually run into young things on forums like this that seem to think if the eat their yogurt, do yoga, and limit their salt and sugar intact, that nothing bad will happen to them. That unfortunately isn't how life works.

[commoncentsmike]

I'd focus on the debts. Saving for retirement is great, but thats going to take place in 30+ years? The loans are detrimental to your finances right now.

[Jluke]

Where we have retirement contributions in place, should we focus all additional resources towards the debt? DH seemed to think a Roth IRA or similar would be the next step, but with such a high amount of student debt remaining, would it be smarter to focus on reducing that balance? We are looking at about $1000 total monthly to work with - either towards student loan or additional retirement avenues.

What would you recommend?

I agree with Kork13 and it is very similar to what I did early on.

Keep the 401k's at 9%; Contribute something to each of your Roth IRAs, starting now. For example, I did $150/month when I had debt. So that would leave you with $700/month - or $500/month if you follow Kork's suggestion - to pay down debt. It'll come down to whatever fits your mindset.

But there is also math involved. If you haven't already, download an amortization schedule (I use excel) for each loan and input your information.

This is a great tool for you to see how extra payments impact the loan(s) and you can manipulate it to pay off the loan when you want it to be done.

And of course, you say you have $1000 extra per month, but if you post your real budget I'm sure folks on here can help to find ways to cut other costs.