Poll: Pay off debt or Invest in retirement account

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Debt or Investment

Pay off debt--it's a guaranteed, risk-free 6.8% investment
21
27%
401k--If your firm matches, don't leave money on the table
29
38%
Some combination of the two
25
32%
Other (Roth IRAs, indexes, etc.)
2
3%
 
Total votes: 77

WhirledWorld
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Poll: Pay off debt or Invest in retirement account

Postby WhirledWorld » Sat Feb 16, 2013 12:43 pm

Just curious what the best practice is for starting associates with a significant amount of debt. Let's say your options are paying down your debt or investing in a 401k that your employer matches up to 5% of your salary. What's the right thing to do with your leftover money (assuming you can save some of it)?

Big Dog
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Re: Poll: Pay off debt or Invest in retirement account

Postby Big Dog » Sat Feb 16, 2013 12:47 pm

Do NOT leave a match on the table. It is a 100% return your money, in addition to the tax deferrals.


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spicyyoda17
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Re: Poll: Pay off debt or Invest in retirement account

Postby spicyyoda17 » Sat Feb 16, 2013 12:53 pm

The amount you defer should be equal to the point at which the company maxes out their matching. Then use the rest to pay off debt.

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thesealocust
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Re: Poll: Pay off debt or Invest in retirement account

Postby thesealocust » Sat Feb 16, 2013 12:59 pm

Very few - probably well under than 10% - traditional big law firms have matching 401(k) plans.

If the purpose the cash you're deciding on is to maximize value, then paying down debt is always the right answer at prevailing interest rates vs. loan rates. But that isn't always the purpose of cash - having a nest egg, emergency fund, etc. can be important, and worth giving up some value compared to paying down debt.

Remember that IRAs and 401(k)s are "for" retirement, but there are ways to access the money before retirement (stuff like down payments for a house, taking a "loan" against your own retirement account, etc.) that can make the investment vehicles sound even if you aren't presently committed to planning retirement 30-40 years down the road.

WhirledWorld
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Re: Poll: Pay off debt or Invest in retirement account

Postby WhirledWorld » Sat Feb 16, 2013 1:06 pm

So purely in terms of maximizing value, the order for anyone is: 1) Contribute into your 401k up to the amount the firm matches, 2) pay down debt, 3) Invest pre-tax income in 401k.

Is that right?

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dingbat
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Re: Poll: Pay off debt or Invest in retirement account

Postby dingbat » Sat Feb 16, 2013 1:35 pm

WhirledWorld wrote:So purely in terms of maximizing value, the order for anyone is: 1) Contribute into your 401k up to the amount the firm matches, 2) pay down debt, 3) Invest pre-tax income in 401k.

Is that right?

It's a good rule of thumb to max out matching contributions and then max out debt repayment based on current rates (high student loan rates, low investment returns)
Based on current rates, don't invest in a 401k (excluding matching contributions) if you have student loans outstanding

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20130312
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Re: Poll: Pay off debt or Invest in retirement account

Postby 20130312 » Sat Feb 16, 2013 1:43 pm

Don't know what you're investing in, but my 401(k) made 12% last year. Cha ching, self managed accounts FTW.

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Tiago Splitter
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Re: Poll: Pay off debt or Invest in retirement account

Postby Tiago Splitter » Sat Feb 16, 2013 1:51 pm

thesealocust wrote:Remember that IRAs and 401(k)s are "for" retirement, but there are ways to access the money before retirement (stuff like down payments for a house, taking a "loan" against your own retirement account, etc.) that can make the investment vehicles sound even if you aren't presently committed to planning retirement 30-40 years down the road.

This is true, but remember that these kinds of distribution options are plan specific. Plan sponsors aren't obligated to let participants take loans or in-service distributions. Don't lock up your nest egg inside of your 401(k) until you've confirmed you have the ability to access some of the money while still working.

InGoodFaith wrote:Don't know what you're investing in, but my 401(k) made 12% last year. Cha ching, self managed accounts FTW.

Everyone made 12% last year. Doesn't mean people should be investing rather than paying down debt.

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homestyle28
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Re: Poll: Pay off debt or Invest in retirement account

Postby homestyle28 » Sat Feb 16, 2013 1:57 pm

My goals/principles
1) 6 month salary nest-egg 2) Debt 3) Retirement 4) Kids college fund

But that's assuming a few things:
1) You think you could lose your job at any point (your firm does stealth layoffs regularly, you're tempted to quit, etc)
2) Your debt is sizable, mine will be $200k+ at graduation, 6.8% is $13,600 just to interest in the first year, if it were sub-100k I might make this a lower priority IF my firm matched - but they don't b/c most firms don't)
3) You have no strong desire to retire in your 50s.
4) You have kids

Anonymous User
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Re: Poll: Pay off debt or Invest in retirement account

Postby Anonymous User » Sat Feb 16, 2013 2:16 pm


That thread is full of misinformation.

Interest does not compound on federal loans. Federal loans are simple interest. If you don't believe me, read this: http://www.nslds.ed.gov/nslds_SA/SaEcTour.do?page=SaEcRyl2 It says that "Interest on all loans borrowed under the Department’s federal student loan programs are calculated on a simple daily basis."

You do not get an "instant 28% return on investment". What you get is a 28% deferral on taxes; it's essentially a very complex financial bet. You don't pay taxes now, but you do pay taxes at ordinary income tax levels when you take the money out. You're betting a bunch of things. Financially you're betting you'll get at least a 6.8% return in your 401k, and that income taxes won't be raised by the time you retire. You're also betting you won't benefit otherwise from paying your loans off faster. If loans follow you and affect decisions like where you live and where you work then they can affect your quality of life.

But investments compound while student loan interest doesn't. Getting at least a 6.8% overall return on investment is doable since you can't take money out of 401ks early. That gives you the discipline to keep reinvesting the money and getting higher overall returns.

Also a full match is a true "instant 100% return on investment". You'll pay taxes on it later, but paying 28% on twice as much money still leaves you with much more money. You're basically turning down free money.

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dingbat
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Re: Poll: Pay off debt or Invest in retirement account

Postby dingbat » Sat Feb 16, 2013 2:33 pm

Anonymous User wrote:

That thread is full of misinformation.

read past the first page

Anonymous User
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Re: Poll: Pay off debt or Invest in retirement account

Postby Anonymous User » Sat Feb 16, 2013 2:33 pm

If you can take money out of your 401k early then can't you use it like an emergency fund. I was thinking of maxing my 401k, having ~5k on hand just in case, and then putting everything else i don't need to live on toward loans.

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dingbat
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Re: Poll: Pay off debt or Invest in retirement account

Postby dingbat » Sat Feb 16, 2013 2:37 pm

Anonymous User wrote:If you can take money out of your 401k early then can't you use it like an emergency fund. I was thinking of maxing my 401k, having ~5k on hand just in case, and then putting everything else i don't need to live on toward loans.

There are IRS requirements for taking money out of a 401k, otherwise you're subject to a penalty.

Good luck with your investments, I hope you know what you're doing.
Oh, and, $5k is definitely too little; $50k is better. Feel free to slowly ramp it up.

Anonymous User
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Re: Poll: Pay off debt or Invest in retirement account

Postby Anonymous User » Sat Feb 16, 2013 2:57 pm

dingbat wrote:
Anonymous User wrote:If you can take money out of your 401k early then can't you use it like an emergency fund. I was thinking of maxing my 401k, having ~5k on hand just in case, and then putting everything else i don't need to live on toward loans.

There are IRS requirements for taking money out of a 401k, otherwise you're subject to a penalty.

Good luck with your investments, I hope you know what you're doing.
Oh, and, $5k is definitely too little; $50k is better. Feel free to slowly ramp it up.


I know there is a penalty but I figure if I get laid off that won't matter much. Also, if I'm maxing my 401k then I will have a nice 50k emergency fund in 2/3 years. 5k is a little low, but I only really want a 3 month cushion of rent, loan minimums and food. I figure if i do get laid off, I won't be making money, moving into a lower marginal rate, and then I can take the 10% penalty to withdraw form the 401k and I will still probably break even since I never paid taxes on the money in the beginning (28% biglaw rate vs. lower marginal rate +10%).

Just having 50k sitting around is absurd. You get taxed the biglaw rate when you earn it and then it earns no ROR sitting around. I figure if I throw the money into 401k AND if i don't get laid off and never have to tap into it, then compounding interest will do it's magic over 30 years. If I do get laid off I can tap into the 401k and even though there is a penalty, my effective tax rate on the money will still come out the same or lower.

Then I really only need ~5k on hand to tie me over for a month or two until I can tap into the 401k should I get laid off.

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20130312
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Re: Poll: Pay off debt or Invest in retirement account

Postby 20130312 » Sat Feb 16, 2013 2:59 pm

I agree that having 50k lying around is absurd, but that doesn't make throwing it into a 401k such a great idea either. Go invest it yourself if you have some idea of what youre doing, and if not then just buy some Vanguard funds.

Anonymous User
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Re: Poll: Pay off debt or Invest in retirement account

Postby Anonymous User » Sat Feb 16, 2013 3:02 pm

InGoodFaith wrote:I agree that having 50k lying around is absurd, but that doesn't make throwing it into a 401k such a great idea either. Go invest it yourself if you have some idea of what youre doing, and if not then just buy some Vanguard funds.


Yea I probably will, the important thing is the tax benefits in the short term.

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dingbat
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Re: Poll: Pay off debt or Invest in retirement account

Postby dingbat » Sat Feb 16, 2013 3:06 pm

Anonymous User wrote:
dingbat wrote:
Anonymous User wrote:If you can take money out of your 401k early then can't you use it like an emergency fund. I was thinking of maxing my 401k, having ~5k on hand just in case, and then putting everything else i don't need to live on toward loans.

There are IRS requirements for taking money out of a 401k, otherwise you're subject to a penalty.

Good luck with your investments, I hope you know what you're doing.
Oh, and, $5k is definitely too little; $50k is better. Feel free to slowly ramp it up.


I know there is a penalty but I figure if I get laid off that won't matter much. Also, if I'm maxing my 401k then I will have a nice 50k emergency fund in 2/3 years. 5k is a little low, but I only really want a 3 month cushion of rent, loan minimums and food. I figure if i do get laid off, I won't be making money, moving into a lower marginal rate, and then I can take the 10% penalty to withdraw form the 401k and I will still probably break even since I never paid taxes on the money in the beginning (28% biglaw rate vs. lower marginal rate +10%).

Just having 50k sitting around is absurd. You get taxed the biglaw rate when you earn it and then it earns no ROR sitting around. I figure if I throw the money into 401k AND if i don't get laid off and never have to tap into it, then compounding interest will do it's magic over 30 years. If I do get laid off I can tap into the 401k and even though there is a penalty, my effective tax rate on the money will still come out the same or lower.

Then I really only need ~5k on hand to tie me over for a month or two until I can tap into the 401k should I get laid off.

That's actually very logical. I mean, you're still getting smacked with a 10% penalty for the withdrawal, but if you have no taxable income that makes sense.
But, what if you don't get laid off on January 1st? If you get laid off toward the end of the year and need to make withdrawals prior to new year, they'll be subject to a higher tax rate.

Once you're working, figure out how much you need for living expenses. Remember that it can take a while to lower your expenses (e.g. cancellation fee for cable or phone, time to find cheaper accommodation, etc.), so those first few months are gonna be at close to full freight

Also consider that if you choose to take a lower salary for an in-house or government position, your loan payments won't decrease (yes, I'm ignoring IBR), which will make it that much harder for you to leave biglaw.

oh, and, just because you have a certain amount of liquid funds set aside for an emergency, doesn't mean it has to sit in cash.

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dingbat
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Re: Poll: Pay off debt or Invest in retirement account

Postby dingbat » Sat Feb 16, 2013 3:06 pm

InGoodFaith wrote:I agree that having 50k lying around is absurd, but that doesn't make throwing it into a 401k such a great idea either. Go invest it yourself if you have some idea of what youre doing, and if not then just buy some Vanguard funds.

Couldn't agree more

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bk1
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Re: Poll: Pay off debt or Invest in retirement account

Postby bk1 » Sat Feb 16, 2013 3:11 pm

homestyle28 wrote:My goals/principles
1) 6 month salary nest-egg 2) Debt 3) Retirement 4) Kids college fund

Boomerish ordering of 3 and 4. :P

But seriously, this is probably my 1/2/3 as well, though I might not make the emergency fund 6 months right away rather make a smaller one initially and then ramp it up over time.

Anonymous User
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Re: Poll: Pay off debt or Invest in retirement account

Postby Anonymous User » Sat Feb 16, 2013 3:21 pm

That's actually very logical. I mean, you're still getting smacked with a 10% penalty for the withdrawal, but if you have no taxable income that makes sense.
But, what if you don't get laid off on January 1st? If you get laid off toward the end of the year and need to make withdrawals prior to new year, they'll be subject to a higher tax rate.

Yea, there is a little risk here. basically, the earlier in the year you get laid off, the lower your tax rate is going to be. But you only need to take out money from the 401k to last until the next year. So if you get laid off in october, after earning biglaw salary for the first 10 months, your rate will be higher. But you only need to withdraw living expenses until the end of the year, after that your withdrawals will be occurring in a year where you haven't worked, meaning much lower tax rate. Basically, you will always come out ahead here unless you are only unemployed for a few months at the end of the year. And if that's the case, then who cares, you aren't unemployed anymore.

Once you're working, figure out how much you need for living expenses. Remember that it can take a while to lower your expenses (e.g. cancellation fee for cable or phone, time to find cheaper accommodation, etc.), so those first few months are gonna be at close to full freight
I just want enough to give me time to tap into my 401k. I'm not sure how long that process could take but i figure 5K is enough for at least a month. I just need enough on hand to cover me until I can withdraw.

Also consider that if you choose to take a lower salary for an in-house or government position, your loan payments won't decrease (yes, I'm ignoring IBR), which will make it that much harder for you to leave biglaw.
Well the nice thing about using the 401k is that since it's pretax your salary isn't affected as much. 160k after tax is 100. Put 20 into 401k and 140 after tax is probably around 90. I can pretty much pay off my loans in ~3 years on that amount. Goal is after 3 years I can have my loans paid off and 50k sitting in a retirement account making me money.

oh, and, just because you have a certain amount of liquid funds set aside for an emergency, doesn't mean it has to sit in cash.

True, but you are still taxed on it at a biglaw rate. Once that takes place then I might as well put it into my loans since its a 7% ROR.

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dingbat
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Re: Poll: Pay off debt or Invest in retirement account

Postby dingbat » Sat Feb 16, 2013 3:31 pm

Anonymous User wrote:I can pretty much pay off my loans in ~3 years on that amount. Goal is after 3 years I can have my loans paid off and 50k sitting in a retirement account making me money

Texas biglaw? otherwise, shutthefuckup

edit: it just occurred to me that you might have had a significant scholarship, so, nevermind

Anonymous User
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Re: Poll: Pay off debt or Invest in retirement account

Postby Anonymous User » Sat Feb 16, 2013 3:49 pm

dingbat wrote:
Anonymous User wrote:I can pretty much pay off my loans in ~3 years on that amount. Goal is after 3 years I can have my loans paid off and 50k sitting in a retirement account making me money

Texas biglaw? otherwise, shutthefuckup

edit: it just occurred to me that you might have had a significant scholarship, so, nevermind


~120k debt starting in NYC. Pay ~40k a year, plus increases and bonuses and I think I can do it.

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dingbat
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Re: Poll: Pay off debt or Invest in retirement account

Postby dingbat » Sat Feb 16, 2013 3:51 pm

Anonymous User wrote:
dingbat wrote:
Anonymous User wrote:I can pretty much pay off my loans in ~3 years on that amount. Goal is after 3 years I can have my loans paid off and 50k sitting in a retirement account making me money

Texas biglaw? otherwise, shutthefuckup

edit: it just occurred to me that you might have had a significant scholarship, so, nevermind


~120k debt starting in NYC. Pay ~40k a year, plus increases and bonuses and I think I can do it.

Wait, your starting pay is $40k per year (would explain why they match), or you plan on putting $40k/year toward your loans?
Last edited by dingbat on Sat Feb 16, 2013 3:51 pm, edited 1 time in total.

09042014
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Re: Poll: Pay off debt or Invest in retirement account

Postby 09042014 » Sat Feb 16, 2013 3:51 pm

There is a zero percent chance boomers won't raid our 401K's when theirs run out.




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