paying back loans

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Bronte
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Re: paying back loans

Postby Bronte » Sun Oct 23, 2011 4:31 pm

quakeroats wrote:
Bronte wrote:1) I don't know anything about the reason why most people worry about paying back loans. What we're talking about here is that, given that you do have to pay back your loans, investing in paying down your loans is likely the best investment opportunity available to you in the market. When you don't pay them, you forgo that investment opportunity. This has the real effect of increasing your loan balance by 8% per year. This is money you have to pay back.


Over the long term, you can get more than 8%--a very favorable interest rate--in other investments. If we're just talking about getting the best return on average, you shouldn't go out of your way to pay off your loan quickly. This also has the advantage of providing liquidity in case of emergency, but even without that, you should pay your loans slowly.

2) Assuming you'll be in big law long term is not the same as assuming you'll get a high LSAT score. That analogy is bad because you don't make any important financial decisions in reliance on your LSAT score. A better analogy would be assuming you'll be top 10% at your law school.


It's not in strict reliance--that is, things falls apart financially if the condition fails. I'd argue that most people graduating from top schools should take my approach, but I'd also argue that the super majority of people who plan to stay in biglaw should too.


On what investment (besides, of course, paying down your student loans) can you get a risk and tax adjusted rate of 8% per year? Your whole argument rests on this premise, and the answer is "nowhere." The highest the 10-year Treasury rate has been in that past century is 14.00%, which is about 10.00% after taxes. That was in 1981. http://www.federalreserve.gov/releases/h15/data.htm. Today, the 10-year Treasury rate is 2.21% before taxes. http://finance.yahoo.com/bonds/composite_bond_rates. The 10-year AAA municipal rate is 2.20% and is not taxed. The stock market is risky as hell and has earned shit over the last decade. Where is this investment you're talking about?

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Bronte
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Re: paying back loans

Postby Bronte » Sun Oct 23, 2011 4:34 pm

c3pO4 wrote:
RMstratosphere wrote:
Apologies to the financial wizs in this forum that will rightfully throw up in response to my question.


There are no finance wiz's ITT. Just a bunch of words strung together meaninglessly.


I won't call myself a financial wiz, but I beg to differ. Some people are blabbering meaninglessly. (I won't name names.) Others of us are having a productive discussion, and there's more than just words! There's numbers now too: https://docs.google.com/spreadsheet/ccc ... n_US#gid=0. If you care to refute the fact that your best investment is paying your loans, please do so.

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sun Oct 23, 2011 4:34 pm

FWIW, the buy v. rent NYT calculator allows you to account for the lost opportunity cost from "investing" the downpayment - which, if you set to the right number, can emulate the effects of paying off student loans (though it can't replicate it exactly, and it actually understates the 'buy' side of things in the long term). The more I consider how hot (i.e., high-priced) the rental market is right now vs. how buyer-friendly the buying market is, the more I'm seriously tempted to pay my IBR minimums this year and throw my savings and clerkship bonus into a house downpayment.

Risky risky, though:/ Not sure I could stomach it.
Last edited by ToTransferOrNot on Sun Oct 23, 2011 4:36 pm, edited 1 time in total.

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RMstratosphere
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Re: paying back loans

Postby RMstratosphere » Sun Oct 23, 2011 4:35 pm

ToTransferOrNot wrote:FWIW, the buy v. rent NYT calculator allows you to account for the lost opportunity cost from "investing" the downpayment - which, if you set to the right number, can emulate the effects of paying off student loans (though it can't replicate it exactly, and it actually understates the 'buy' side of things in the long term). The more I consider how hot (i.e., high-priced) the rental market is right now vs. how buyer-friendly the buying market is, the more I'm seriously tempted to pay my IBR minimums this year and throw my savings and clerkship bonus into a house downpayment.


Link?

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sun Oct 23, 2011 4:36 pm

RMstratosphere wrote:
ToTransferOrNot wrote:FWIW, the buy v. rent NYT calculator allows you to account for the lost opportunity cost from "investing" the downpayment - which, if you set to the right number, can emulate the effects of paying off student loans (though it can't replicate it exactly, and it actually understates the 'buy' side of things in the long term). The more I consider how hot (i.e., high-priced) the rental market is right now vs. how buyer-friendly the buying market is, the more I'm seriously tempted to pay my IBR minimums this year and throw my savings and clerkship bonus into a house downpayment.


Link?


http://www.nytimes.com/interactive/busi ... lator.html

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RMstratosphere
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Re: paying back loans

Postby RMstratosphere » Sun Oct 23, 2011 4:36 pm

ToTransferOrNot wrote:
RMstratosphere wrote:
ToTransferOrNot wrote:FWIW, the buy v. rent NYT calculator allows you to account for the lost opportunity cost from "investing" the downpayment - which, if you set to the right number, can emulate the effects of paying off student loans (though it can't replicate it exactly, and it actually understates the 'buy' side of things in the long term). The more I consider how hot (i.e., high-priced) the rental market is right now vs. how buyer-friendly the buying market is, the more I'm seriously tempted to pay my IBR minimums this year and throw my savings and clerkship bonus into a house downpayment.


Link?


http://www.nytimes.com/interactive/busi ... lator.html


Thank you.

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quakeroats
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Re: paying back loans

Postby quakeroats » Sun Oct 23, 2011 4:39 pm

Bronte wrote:
quakeroats wrote:
Bronte wrote:1) I don't know anything about the reason why most people worry about paying back loans. What we're talking about here is that, given that you do have to pay back your loans, investing in paying down your loans is likely the best investment opportunity available to you in the market. When you don't pay them, you forgo that investment opportunity. This has the real effect of increasing your loan balance by 8% per year. This is money you have to pay back.


Over the long term, you can get more than 8%--a very favorable interest rate--in other investments. If we're just talking about getting the best return on average, you shouldn't go out of your way to pay off your loan quickly. This also has the advantage of providing liquidity in case of emergency, but even without that, you should pay your loans slowly.

2) Assuming you'll be in big law long term is not the same as assuming you'll get a high LSAT score. That analogy is bad because you don't make any important financial decisions in reliance on your LSAT score. A better analogy would be assuming you'll be top 10% at your law school.


It's not in strict reliance--that is, things falls apart financially if the condition fails. I'd argue that most people graduating from top schools should take my approach, but I'd also argue that the super majority of people who plan to stay in biglaw should too.


On what investment (besides, of course, paying down your student loans) can you get a risk and tax adjusted rate of 8% per year? Your whole argument rests on this premise, and the answer is "nowhere." The highest the 10-year Treasury rate has been in that past century is 14.00%, which is about 10.00% after taxes. That was in 1981. http://www.federalreserve.gov/releases/h15/data.htm. Today, the 10-year Treasury rate is 2.21% before taxes. http://finance.yahoo.com/bonds/composite_bond_rates. The 10-year AAA municipal rate is 2.20% and is not taxed. The stock market is risky as hell and has earned shit over the last decade. Where is this investment you're talking about?


I'm suggesting the stock market. Your time horizon isn't ten years, so I'd say that unimportant. The market isn't risky at all if you aren't using the money for 40 years.

Brassica7
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Re: paying back loans

Postby Brassica7 » Sun Oct 23, 2011 4:47 pm

c3pO4 wrote:
RMstratosphere wrote:
Apologies to the financial wizs in this forum that will rightfully throw up in response to my question.


There are no finance wiz's ITT. Just a bunch of words strung together meaninglessly.


I am by no means a finance genius, but nothing in this thread is just words strong together without meaning. How did you come to the above conclusion? If you disagree with something someone says, why not contribute to the thread by making a counter argument?

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Bronte
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Re: paying back loans

Postby Bronte » Sun Oct 23, 2011 4:50 pm

quakeroats wrote:I'm suggesting the stock market. You're time horizon isn't ten years, so I'd say that unimportant. The market isn't risky at all if you aren't using the money for 40 years.


You have to pick a maturity if you want to quote an interest rate, so I picked ten years. That's the standard rate. The 30-year Treasury rate is 3.26%. The six-month rate is 0.04%. Junk bonds, a very high risk investment, are yielding about 9.00%. All of these rates are before taxes. Take your pick.

As to the stock market, the stock market is very risky by any measure, and no one in their right mind expects a risk adjudged 8.00% return on the stock market. The average annual return on the S&P 500 since 1950 is 8.34%. http://finance.yahoo.com/q/hp?s=^GSPC&a=00&b=3&c=1950&d=09&e=23&f=2011&g=m. That's before tax and before risk adjustment. Assuming a tax rate of 30% and ignoring the risk issue, that's 5.8% after taxes. Which investment is better, 5.8% after taxes in a wildly volatile investment or 7.9% risk free?

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 4:52 pm

Bronte wrote:
quakeroats wrote:I'm suggesting the stock market. You're time horizon isn't ten years, so I'd say that unimportant. The market isn't risky at all if you aren't using the money for 40 years.


You have to pick a maturity if you want to quote an interest rate, so I picked ten years. That's the standard rate. The 30-year Treasury rate is 3.26%. The six-month rate is 0.04%. Junk bonds, a very high risk investment, are yielding about 9.00%. All of these rates are before taxes. Take your pick.

As to the stock market, the stock market is very risky by any measure, and no one in their right mind expects a risk adjudged 8.00% return on the stock market. The average annual return on the S&P 500 since 1950 is 8.34%. http://finance.yahoo.com/q/hp?s=^GSPC&a=00&b=3&c=1950&d=09&e=23&f=2011&g=m. That's before tax and before risk adjustment. Assuming a tax rate of 30% and ignoring the risk issue, that's 5.8% after taxes. Which investment is better, 5.8% after taxes in a wildly volatile investment or 7.9% risk free?

I like moar risk and less money.

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sun Oct 23, 2011 4:52 pm

Just do LBOs bro

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quakeroats
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Re: paying back loans

Postby quakeroats » Sun Oct 23, 2011 4:57 pm

Bronte wrote:
quakeroats wrote:I'm suggesting the stock market. You're time horizon isn't ten years, so I'd say that unimportant. The market isn't risky at all if you aren't using the money for 40 years.


You have to pick a maturity if you want to quote an interest rate, so I picked ten years. That's the standard rate. The 30-year Treasury rate is 3.26%. The six-month rate is 0.04%. Junk bonds, a very high risk investment, are yielding about 9.00%. All of these rates are before taxes. Take your pick.

As to the stock market, the stock market is very risky by any measure, and no one in their right mind expects a risk adjudged 8.00% return on the stock market. The average annual return on the S&P 500 since 1950 is 8.34%. http://finance.yahoo.com/q/hp?s=^GSPC&a=00&b=3&c=1950&d=09&e=23&f=2011&g=m. That's before tax and before risk adjustment. Assuming a tax rate of 30% and ignoring the risk issue, that's 5.8% after taxes. Which investment is better, 5.8% after taxes in a wildly volatile investment or 7.9% risk free?


If you manage your money well, 10-12% is the realistic figure. The stats your quoting are after a once-in-a-hundred-year event too. I can still show you funds that have returned well over 12% over the last 30 years. Again, even if you don't buy this, you'll still have more liquidity if you pay your loans slowly. Even at a loss of 2%, I'd say that's enough to swing the decision.

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sun Oct 23, 2011 4:59 pm

LOL.

Alright, Quaker, you go ahead and make your 10-12%. If you're capable of those kind of results on anywhere near a consistent basis, you're seriously in the wrong line of work: you should go into banking.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 5:02 pm

quakeroats wrote:
Bronte wrote:
quakeroats wrote:I'm suggesting the stock market. You're time horizon isn't ten years, so I'd say that unimportant. The market isn't risky at all if you aren't using the money for 40 years.


You have to pick a maturity if you want to quote an interest rate, so I picked ten years. That's the standard rate. The 30-year Treasury rate is 3.26%. The six-month rate is 0.04%. Junk bonds, a very high risk investment, are yielding about 9.00%. All of these rates are before taxes. Take your pick.

As to the stock market, the stock market is very risky by any measure, and no one in their right mind expects a risk adjudged 8.00% return on the stock market. The average annual return on the S&P 500 since 1950 is 8.34%. http://finance.yahoo.com/q/hp?s=^GSPC&a=00&b=3&c=1950&d=09&e=23&f=2011&g=m. That's before tax and before risk adjustment. Assuming a tax rate of 30% and ignoring the risk issue, that's 5.8% after taxes. Which investment is better, 5.8% after taxes in a wildly volatile investment or 7.9% risk free?


If you manage your money well, 10-12% is the realistic figure. The stats your quoting are after a once-in-a-hundred-year event too. I can still show you funds that have returned well over 12% over the last 30 years. Again, even if you don't buy this, you'll still have more liquidity if you pay your loans slowly. Even at a loss of 2%, I'd say that's enough to swing the decision.

Unfortunately, we are currently in that once-in-a-hundred-year situation. The issue with "showing you funds that have returned well over 12%" is that there are way more that have made way less than that. I could show you that investing in Wal-Mart back when it opened is a lucrative investment, but I don't think that's really very appropriate information to base financial decisions on.

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Bronte
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Re: paying back loans

Postby Bronte » Sun Oct 23, 2011 5:04 pm

quakeroats wrote:
Bronte wrote:
quakeroats wrote:I'm suggesting the stock market. You're time horizon isn't ten years, so I'd say that unimportant. The market isn't risky at all if you aren't using the money for 40 years.


You have to pick a maturity if you want to quote an interest rate, so I picked ten years. That's the standard rate. The 30-year Treasury rate is 3.26%. The six-month rate is 0.04%. Junk bonds, a very high risk investment, are yielding about 9.00%. All of these rates are before taxes. Take your pick.

As to the stock market, the stock market is very risky by any measure, and no one in their right mind expects a risk adjudged 8.00% return on the stock market. The average annual return on the S&P 500 since 1950 is 8.34%. http://finance.yahoo.com/q/hp?s=^GSPC&a=00&b=3&c=1950&d=09&e=23&f=2011&g=m. That's before tax and before risk adjustment. Assuming a tax rate of 30% and ignoring the risk issue, that's 5.8% after taxes. Which investment is better, 5.8% after taxes in a wildly volatile investment or 7.9% risk free?


If you manage your money well, 10-12% is the realistic figure. The stats your quoting are after a once-in-a-hundred-year event too. I can still show you funds that have returned well over 12% over the last 30 years. Again, even if you don't buy this, you'll still have more liquidity if you pay your loans slowly. Even at a loss of 2%, I'd say that's enough to swing the decision.


You can't just say "10-12% is the realistic figure." That's called "making shit up." The return on the S&P 500 from 1950 to 2007 (excluding your once in a lifetime event now) was 9.07%, which is 6.34% after taxes. Even your preposterous 12.00% is only 8.40% after taxes! And that's ignoring the fact that it's an infinitely riskier investment than paying down your loans.

As to your liquidity argument, of course you should build a liquidity cushion. I conceded that pages ago. You build up a reasonable liquidity cushion, which is leave in cash equivalent assets, and you put the rest in the best investment available: your loan payments.

Brassica7
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Re: paying back loans

Postby Brassica7 » Sun Oct 23, 2011 5:06 pm

quakeroats wrote:
Bronte wrote:
quakeroats wrote:I'm suggesting the stock market. You're time horizon isn't ten years, so I'd say that unimportant. The market isn't risky at all if you aren't using the money for 40 years.


You have to pick a maturity if you want to quote an interest rate, so I picked ten years. That's the standard rate. The 30-year Treasury rate is 3.26%. The six-month rate is 0.04%. Junk bonds, a very high risk investment, are yielding about 9.00%. All of these rates are before taxes. Take your pick.

As to the stock market, the stock market is very risky by any measure, and no one in their right mind expects a risk adjudged 8.00% return on the stock market. The average annual return on the S&P 500 since 1950 is 8.34%. http://finance.yahoo.com/q/hp?s=^GSPC&a=00&b=3&c=1950&d=09&e=23&f=2011&g=m. That's before tax and before risk adjustment. Assuming a tax rate of 30% and ignoring the risk issue, that's 5.8% after taxes. Which investment is better, 5.8% after taxes in a wildly volatile investment or 7.9% risk free?


If you manage your money well, 10-12% is the realistic figure. The stats your quoting are after a once-in-a-hundred-year event too. I can still show you funds that have returned well over 12% over the last 30 years. Again, even if you don't buy this, you'll still have more liquidity if you pay your loans slowly. Even at a loss of 2%, I'd say that's enough to swing the decision.



Sure, some funds will significantly outperform the market, but some people will underperform. How do you tell which stocks/funds will do well going forward? Expecting 10-12 percent returns is absurd. Sure, you could get lucky, but 90% percent of investors will not get this. And don't tell me just to look at the funds that have been doing well over the last decade and invest there. Statistically, those funds will underperform in the next decade because they have invested in assets that are now inflated--the latecomers buy high and get screwed. Also, look at the costs of the funds that do well, and your returns will not be 10-12 percent.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 5:07 pm

Bronte, wouldn't the tax rate be 15%?

The analysis is still good, but it would make it closer.

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Tiago Splitter
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Re: paying back loans

Postby Tiago Splitter » Sun Oct 23, 2011 5:08 pm

Bronte wrote:You can't just say "10-12% is the realistic figure." That's called "making shit up." The return on the S&P 500 from 1950 to 2007 (excluding your once in a lifetime event now) was 9.07%, which is 6.34% after taxes. Even your preposterous 12.00% is only 8.40% after taxes! And that's ignoring the fact that it's an infinitely riskier investment than paying down your loans.

As to your liquidity argument, of course you should build a liquidity cushion. I conceded that pages ago. You build up a reasonable liquidity cushion, which is leave in cash equivalent assets, and you put the rest in the best investment available: your loan payments.


Quakeroats is inexplicably opposed to taking advantage of Roth money, but you could invest 22K next year into Roth investments and not worry about the tax issue. And the 5K in your Roth IRA could be taken out tax and penalty free at any time, acting as a sort of emergency fund.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 5:11 pm

Tiago Splitter wrote:
Bronte wrote:You can't just say "10-12% is the realistic figure." That's called "making shit up." The return on the S&P 500 from 1950 to 2007 (excluding your once in a lifetime event now) was 9.07%, which is 6.34% after taxes. Even your preposterous 12.00% is only 8.40% after taxes! And that's ignoring the fact that it's an infinitely riskier investment than paying down your loans.

As to your liquidity argument, of course you should build a liquidity cushion. I conceded that pages ago. You build up a reasonable liquidity cushion, which is leave in cash equivalent assets, and you put the rest in the best investment available: your loan payments.


Quakeroats is inexplicably opposed to taking advantage of Roth money, but you could invest 22K next year into Roth investments and not worry about the tax issue. And the 5K in your Roth IRA could be taken out tax and penalty free at any time, acting as a sort of emergency fund.

BUT A ROTH IS A TERRIBLE IDEA FOR ANYONE MAKING 100K!!

Seriously though, this is exactly why a Roth can be so useful.

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sun Oct 23, 2011 5:13 pm

Wait, you can take money out of a Roth investment tax/penalty-free for any reason? How quickly do you need to repay the "Roth loan"?

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 5:14 pm

Bronte wrote:
c3pO4 wrote:
RMstratosphere wrote:
Apologies to the financial wizs in this forum that will rightfully throw up in response to my question.


There are no finance wiz's ITT. Just a bunch of words strung together meaninglessly.


I won't call myself a financial wiz, but I beg to differ. Some people are blabbering meaninglessly. (I won't name names.) Others of us are having a productive discussion, and there's more than just words! There's numbers now too: https://docs.google.com/spreadsheet/ccc ... n_US#gid=0. If you care to refute the fact that your best investment is paying your loans, please do so.

Since this is the most recent link to your spreadsheet, I'll add my question on to this.

Would the compounding interest make a difference for the point when both investors have paid off their loans? Meaning, would the account balances be the same at the time when neither has any debt anymore. That's the point in time I'm most concerned about. Actually, I'm most concerned about retirement, but everything is equal from that point on. I'm not sure if the compounding interest would be the same or if it would be on different amounts over that time. Feel free to update or ignore.

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Bronte
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Re: paying back loans

Postby Bronte » Sun Oct 23, 2011 5:14 pm

birdlaw117 wrote:Bronte, wouldn't the tax rate be 15%?

The analysis is still good, but it would make it closer.


Yeah I guess you're right that the capital gains rate would be 15%. Here's the thing: when the risk free rate is between 0.04% and 3.26% before taxes and you have available to you a 7.9% risk free return after taxes, you are making a massive "free return" that is not available anywhere else in the market.

The risk in the stock market is very real. Quakeroats is talking about "there's no risk in the long term" out one side of his mouth and "you need liquidity" out of the other side. Those two statements are completely contradictory. If you end up having an event that requires liquidity (e.g., you get laid off) and the stock market has tanked, you're going to have to sell your liquidity cushion at a major loss. Even in the long term, the stock market is very risky. If a recession or market collapse occurs during your retirement window, there goes all your earnings and maybe even some of your principal.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 5:16 pm

ToTransferOrNot wrote:Wait, you can take money out of a Roth investment tax/penalty-free for any reason? How quickly do you need to repay the "Roth loan"?

You can always take out the principal amount. There are Roth loans but I don't know how they work and I think it varies.

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sun Oct 23, 2011 5:17 pm

Bronte wrote:
birdlaw117 wrote:Bronte, wouldn't the tax rate be 15%?

The analysis is still good, but it would make it closer.


Yeah I guess you're right that the capital gains rate would be 15%. Here's the thing: when the risk free rate is between 0.04% and 3.26% before taxes and you have available to you a 7.9% risk free return after taxes, you are making a massive "free return" that is not available anywhere else in the market.

The risk in the stock market is very real. Quakeroats is talking about "there's no risk in the long term" out one side of his mouth and "you need liquidity" out of the other side. Those two statements are completely contradictory. If you end up having an event that requires liquidity (e.g., you get laid off) and the stock market has tanked, you're going to have to sell your liquidity cushion at a major loss. Even in the long term, the stock market is very risky. If a recession or market collapse occurs during your retirement window, there goes all your earnings and maybe even some of your principal.


Yep. Notice how the "once-in-a-lifetime" shock to the market came after another shock in 2000, and the two shocks together have demolished the retirement savings of this country's largest generation?

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sun Oct 23, 2011 5:17 pm

birdlaw117 wrote:
ToTransferOrNot wrote:Wait, you can take money out of a Roth investment tax/penalty-free for any reason? How quickly do you need to repay the "Roth loan"?

You can always take out the principal amount. There are Roth loans but I don't know how they work and I think it varies.


So you can take out the principal but not the earnings - if you take it out, then, you can't put it back in?




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