Situaional Advice

[outsicktoday]

Ok here's my situation and what I am doing right now. I currently have student loan debt totaling about 90,000 (a lot I know, but grad school is expensive after all). These are all at about 6% average.

After that all I owe is a Mortgage set at 30 years fixed, 222,000 balance 5% with 25 years left.

No other debt. I have already paid off student loans that had a 7.8% rate at about 100,000 over the past 3-4 years.

For retirement I am in the Gov so I plan to work to 63 and walk out with a Gov pension and my wife's pension as a teacher. My job is very stable, hers is a bit more risky but not too much worry for the next few years.

I have about $75,000 in a high yield savings, and $5000 in a regular everyday savings account for normal emergencies that might arise. We have two young kids and a grandkid on the way. So some expenses. I want to keep that money in the bank and maybe build it up to about $100,000 so that I can afford to buy a vehicle with cash if need be, but no need within the next 5 years.

My current plan is to pay $2,000 each month towards the 90,000 student loans because they have the higher interest rate than the mortgage. I have about another $1,000 that I make from a part time job that I COULD send to bills but it reduces stress and makes life more comfortable to have that cash to improve the house, fix the things that break, and other surprises.

When the student loans are gone I will start to contribute more towards the mortgage to pay that off sooner, maybe even a decade earlier or more.

Does this all sound relatively rational? I probably should be contributing more to accounts that can supplement retirement, but I think I'm ok. I've been struggling with the temptation to pay off the mortgage and worry about the student loans later, but my rationale is that the house can be sold and the money I put towards it will not reduce my monthly expenses that quickly. Paying off the Student loans will free up $2000 every month in a matter of 4-5 years.

I've also thought that my savings is too high and I need to invest that money or use it to pay down debt and make money by not paying interest. However it's nice to have an accessible savings that I can use to put into the house or car repairs, kids clothes, all the normal things that can make some months heavier than others (car insurance premiums, registrations etc).

What would you do in my situation, the same thing? Looking for ideas here. Thanks!

[bjl584]

I'd say that you should supplement your retirement. Don't count solely on the pension. You should be investing some money outside of the pension in an IRA or ROTH IRA.

I'd tackle the student loans first. They can't be forgiven in the event of bankruptcy. Definitely get those out of the way.

[feh]

I don't understand why you have so much cash on hand. Have enough for an emergency fund (3-6 months of expenses); the rest should be invested for retirement, set aside for expected large purchases ($100K is way more than necessary for a future car purchase), or used to pay down debt.

Personally, I'd throw the extra cash at the student loans.

Also - click on the link in my signature below for more info.

[Bob B.]

I currently have student loan debt totaling about 90,000. These are all at about 6% average.

My current plan is to pay $2,000 each month towards the 90,000 student loans because they have the higher interest rate than the mortgage. I have about another $1,000 that I make from a part time job that I COULD send to bills but it reduces stress and makes life more comfortable to have that cash to improve the house, fix the things that break, and other surprises.

I've also thought that my savings is too high and I need to invest that money or use it to pay down debt and make money by not paying interest. However it's nice to have an accessible savings that I can use to put into the house or car repairs, kids clothes, all the normal things that can make some months heavier than others (car insurance premiums, registrations etc).

What would you do in my situation, the same thing? Looking for ideas here. Thanks!

Paying 2K/mo. toward the 90K SL debt at 6% int. will take 4 yrs., 3 mo. to retire the debt, with total cumulative interest of about 12K.

Paying 3K/mo. toward the 90k SL debt at 6% int. will take 2 yrs., 9 mo. to retire the debt, with total cumulative interest of about 7.8K.

I agree to cut back your savings to six months living expenses. Either use that money to invest toward retirement, or pay a big chunk of you SL debt.

[Eagle]

For retirement I am in the Gov so I plan to work to 63 and walk out with a Gov pension and my wife's pension as a teacher. My job is very stable, hers is a bit more risky but not too much worry for the next few years.

I would count on your pension as your sole means of retirement. Have you looked into a ROTH IRA like Brian suggested? Or perhaps even low cost index mutual funds?

With over USD $17.6 Trillian in U.S. national debt and the GDP-to-debt ratio over 100% for the first time ever in the U.S. I wouldn't count solely on my pension.

As a side note it was during the Reagan Presidency that the U.S. national debt increased the most by 188% from 1980 to 1988 - $1 to $2.68 Trillion. During Bush W's it increased 89% from 2000 to 2008 - $5.95 to $10.7 Trillion. And with Obama it has gone from $10.7 to $17.6 trillion from 2008 to 2014. Still 2 more years to go though. Perhaps we'll get close to $20 trillion in debt by 2016. Fun stuff.

[autoxer]

With no immediate plans for that big amount in a savings account, I would consider throwing a big chunk of it at your worst debt. $90k in student loans at 6% interest is costing you $450 / month in interest alone.

I would also consider supplementing your pension, with some other retirement savings. Depending on your tax situation, you may want to use a traditional ira or a roth ira. Or if either employer offers a 403b, that would allow you to stash more than an ira would.

[outsicktoday]

Agree

I agree with a lot of the comments, especially the ones about paying off the debt which is costing me additional interest every month.

I think I am going to slow the savings and increase the amount paid to the debt.

I'd like to save more in a retirement plan, but my retirement plan is based heavily off being debt free by then. I have about 20 years left, and I can pay off all debt including loans and then the mortgage within that time (or sell and downsize).

I think I will look at the IRA when taxes come up again this year and see how that might help my return.

Great info. After all those dicey years it's hard to not try and hoard as much cash as possible. I think many people end up being too conservative as a result. Myself included.

[autoxer]

I think I will look at the IRA when taxes come up again this year and see how that might help my return.

You don't have to wait until it is time to file your taxes. You can make changes now.

If you decided to put $5,500 into a traditional ira, and you are in the 25% tax bracket, then it'll reduce your tax liability by $1,375.00. In order to get that money now, you can adjust the withholding from your paycheck. If you are in a lower tax bracket, then you may want to choose a ROTH ira.

[outsicktoday]

Ira

I don't think I qualify for a traditional IRA because I have a retirement plan at work. So I would have to do the ROTH IRA and it looks like I can't deduct the contributions from my taxes.

[youshallliveinoverflow]

Makes Sense

First congratulations on paying off student loans that you had a 7.8% rate at about 100,000 over the past 3-4 years. I think you have a solid plan. I would most definitely pay the mortgage off. That will free you to make other investments to earn income such as a rental property to give you more cash flow.

[autoxer]

I don't think I qualify for a traditional IRA because I have a retirement plan at work. So I would have to do the ROTH IRA and it looks like I can't deduct the contributions from my taxes.

You don't have to do a ROTH IRA, you can use the retirement plan at work. What is your marginal tax rate?

[outsicktoday]

It would be a 457 plan at work and it's not matched. I have a pension that can be run up to 100% of my income, I got in years ago and grandfathered in before they went after public employee pensions. So for retirement I am heavily banking on that.

Regarding the mortgage, I would love to pay that off but I am also in an area that reacts VERY badly to economic problems. This area was hit very hard by foreclosures but I was lucky enough to get a new home at a lower price and so the mortgage ended up being about half of what it would have been pre-2008. I can line that up to be paid off after the student loans.

Right now I suppose I am "Saving" for retirement because I contribute %7 of income to my pension plan that the Gov more than matches. They were paying it all but the pension reform required more contributions from us, so that was a 7% hit. SO my investments are sort of packaged together and invested for me by the GOV and I get a % based off the number of years I work and the amount I make. No medical tho, so that will have to be supplemented later. My wife also is a teacher so she gets a defined contribution plan to.

If the Gov goes under we are in trouble, but my bet is that it won't and I will really collect my pension. If not then dog food (or cat) for me, but so goes risks.

Right now I'm thinking balance, pay down debt but also save and see what happens. One thing I like about saved money is that it can always be spent later, but once it's spent it's gone.

[outsicktoday]

It would be a 457 plan at work and it's not matched. I have a pension that can be run up to 100% of my income, I got in years ago and grandfathered in before they went after public employee pensions. So for retirement I am heavily banking on that.

Regarding the mortgage, I would love to pay that off but I am also in an area that reacts VERY badly to economic problems. This area was hit very hard by foreclosures but I was lucky enough to get a new home at a lower price and so the mortgage ended up being about half of what it would have been pre-2008. I can line that up to be paid off after the student loans.

Right now I suppose I am "Saving" for retirement because I contribute %7 of income to my pension plan that the Gov more than matches. They were paying it all but the pension reform required more contributions from us, so that was a 7% hit. SO my investments are sort of packaged together and invested for me by the GOV and I get a % based off the number of years I work and the amount I make. No medical tho, so that will have to be supplemented later. My wife also is a teacher so she gets a defined contribution plan to.

If the Gov goes under we are in trouble, but my bet is that it won't and I will really collect my pension. If not then dog food (or cat) for me, but so goes risks.

Right now I'm thinking balance, pay down debt but also save and see what happens. One thing I like about saved money is that it can always be spent later, but once it's spent it's gone.

[outsicktoday]

Sorry for the double post, I have used this forum as a sounding board a couple of times in the past and it helps a great deal to process out what to do.

I bit the bullet today and decided to pay off one of the two student loans completely. Hope I am doing the right thing but here is my reasoning (we owe a total of about 90 some thousand in two loans, one that is about 23k and another at about 72 (I pay 2000 month towards the 72K loan and forbear the 23K one)

I am paying off the 23K one out of the savings of about 77K.

My reasoning:

1.) The 23K loan is costing me interest every month at the rate of about 5% with all the combined loans within in, the same money in the savings is only paying me less that 1% (maybe .80 APR). So I am basically losing 4% on that same money every year. If I keep things "as is" I pay $1,000+ a year just to keep loaning the money and gain far less by having it in the account. I have basically made money over the long term by paying off the debt and killing the interest payments.

2.) It will take me about 3 years to pay off the 72K loan at the rate I am going. I would not be able to contribute to the 23k loan unless I dig more into everyday spending (with kids and a grandchild, right?) or savings. Paying the lump sum buys me a year in my goal of being debt free besides the mortgage.

3.) I will still be able to save money each month to build the account back up over two years or so to where it one was. Also in two years I will likely owe just about the same that I will be paying (about 23K). I can pay for two years and save for two years and make a final lump payment that will pay off all my loans completely, buying me an additional year.

4.) The above turns a 4-5 year plan into a 2-3 year plan.

I credit the Avalanche method for the above, I started by paying off all credit cards, the highest % to the lowest, then the highest loan which was my old student loans that say while my wife was in school, and now hers.

The lowest and last to go will be the mortgage. But my wife just put houses she would like to move to in front of my face in better areas that I would like to move to, so maybe this isnt the last house I will live in??

I think this resolves it for now, I wont be buying anything large (no cars, etc) with big payments for five years and it looks like jobs are in ok shape. So it looks like a good gamble.

I was thinking about paying off the 72K loan after I ran the numbers, but that would not leave anything for emergency funds. 50K is enough for emergencies. If it's that bad an emergency it won't matter that much if it's 70 or 50.

A big earthquake? Then FEMA will save us, right???

[snafu]

I was about to mention the big elephant in the room...the difference between interest charges added to SLs and the interest paid to savings. I suggest you work through one of the personal risk evaluation questionnaires available on line. Leaving important sums of money in a savings account is problematic when inflation is creeping upward via increased food, gas and electric. Whether ROTH or non retirement investment portfolio, you need to be able to sleep at night without worrying about whether you are gaining or losing value.

Do you have a written out budget? It helps to assign every dollar a 'job.' It's a good starting point to name your categories and assign a sum as your target. For intermittent bills like vehicle insurance, many of us divide the annual sum by pay days [12 or 26 etc] and transfer sums needed to a linked, no cost savings account accumulated and held until the bill is due. When we bought our 1st house we were advised to accumulate 1% of it''s value to a home maintenance budget category for maintenance, repairs, upgrades/updates etc. While the actual dollars are all in the same savings a/c, a simple spread sheet tracks the sums held or spent for various categories.

If you check some blogs, you'll see many of us post monthly Net Worth outlines which are an effective tool to monitor our goals.