Paying Off Loan vs. Retirement Savings

[4n6]

Hi everyone,

First time poster although I have lurked here for quite a while. I have a dilemma and I am hoping to get some advice. I am playing mental monetary gymnastics as to what to do. Currently, between a 403b and a 401(a) I maximize my retirement contributions at $18,000. However, I have a personal loan that is $11,500 at 2.39%. I have 42 months left on the loan (out of 32000). I am currently paying about $600-$900 for a loan payment per month. So the loan is scheduled to be paid off by mid-2017.

My question is this I really hate this debt. I want it gone. I was thinking about suspending my 403(b) contributions (I can't suspend the 401(a) because they are mandated by my employer), which would add about $700 to my paycheck each month. I could use that extra money to pay off the loan quicker. If I really buckle down I think I could have it paid off my June or July.

However, during this 6-8 month (or more) financial sojourn I am not contributing as much money to my retirement savings and the loan is at such a low interest rate that it seems mathematically stupid to pay extra and pay off the loan quicker. Accordingly, I think I should just stick with my current payments and keep contributing to my retirement savings at my current rate.

My question to you all is what would you do? Should I suspend the 403(b) contributions and pay down the debt quicker or just keep my payment at what it is currently and just keep plugging away and try to find extra money to pay it off quicker or stop paying it down so quickly with my low interest rate and flexible loan terms?

Any advice is helpful.

[disneysteve]

Welcome.

People always present these scenarios as having only 2 options - all or nothing.

There's no reason why you can't do a little of both. Rather than stopping your 403b contributions entirely, you could just reduce them, perhaps by 50%. That would give you an extra $350/month to use for the loan repayment.

Mathematically, assuming your 403b is well invested, you are correct that keeping the loan is probably the better option in the long run, but I totally understand where you are coming from. In the past, I have prioritized repaying low interest debt over investing because I hated having the debt. Was it the best decision financially? No. But it was the best decision mentally for me at that time.

[Jovanny]

I think you should go for investment at present an repay the loan according to its preset duration.

[snafu]

I hope you've looked at your 403b facts. How much did value increase thus far 2015? Since the loan significantly bothers you, I suggest you review your figures for the past year with a new column for anticipated 2016 spending. You may see categories whose costs were lower than anticipated like transportation for possible reduction. Are there reductions possible for categories that didn't deliver the satisfaction level anticipated? Some 2016 categories mays be costlier since government keeps threatening increased interest rates which causes higher costs to product providers.

The challenge is to free up small, extra sums, along with former 403b to accelerate loan payout. Check exact dates as it's possible to make 403b contributions for 2016 until March 2017.

[Goldy]

The savings on interest you would make pales in comparison to the additional tax liability of reducing your retirement savings so I would just keep doing what you are doing. Max the retirement stuff and find the extra money in your budget.

[myntra]

Interesting dilemma. I hate loans too.

My investing philosophy:

If you are making more interest on your retirement savings and your interest outgo on the loan is lower, then you should continue investing in the savings at your current levels. Especially those plans that offer compound interest where the more you save the more you earn in the long term.