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

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

Postby Anonymous User » Sun Feb 17, 2013 12:50 pm

Drugs, Bithces, Booze, More Bitches, and possibly an enema if somehow things somehow try horribly wrong at a point I black out......................... :|

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

Postby Tiago Splitter » Sun Feb 17, 2013 12:53 pm

MapsMapsMaps wrote:I dont/wont have any income for CY 2013. Is there anyway to backdoor money into my Roth IRA, which requires earned income to contribute? Ive maxed out every year since I was 19 (Im 27 now), and I'd be a bit sad if I didnt... compounding interest and all (and minimal debt).

No. Although if you're married your spouse can contribute on your behalf.

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

Postby dingbat » Sun Feb 17, 2013 1:05 pm

fatduck wrote:
albusdumbledore wrote:
XxSpyKEx wrote:Max out contributions to Roth IRA each year. How is that even a question? Roth IRA is like a tax scam the IRS lets you run on it.

TITCR. Anyone who says otherwise doesn't understand math or how compound interest (i.e. investment interest) versus simple interest (i.e. student loan interest) works.

explain to me, using hypothetical numbers, how the difference between investment interest and loan interest makes a difference in this situation.

Objectively, it can't be done.

I can, if I actually cared enough, provide numbers showing that investing in a roth IRA is better than paying off loans and I can just as easily manipulate numbers to show that paying off loans is better than a roth IRA (by assuming different returns on investment)

Quick answer is that it depends on your return on investment, and that in the current environment you should not assume being able to have a high enough return.

reference

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

Postby fatduck » Sun Feb 17, 2013 1:45 pm

dingbat wrote:
fatduck wrote:
albusdumbledore wrote:
XxSpyKEx wrote:Max out contributions to Roth IRA each year. How is that even a question? Roth IRA is like a tax scam the IRS lets you run on it.

TITCR. Anyone who says otherwise doesn't understand math or how compound interest (i.e. investment interest) versus simple interest (i.e. student loan interest) works.

explain to me, using hypothetical numbers, how the difference between investment interest and loan interest makes a difference in this situation.

Objectively, it can't be done.

I can, if I actually cared enough, provide numbers showing that investing in a roth IRA is better than paying off loans and I can just as easily manipulate numbers to show that paying off loans is better than a roth IRA (by assuming different returns on investment)

Quick answer is that it depends on your return on investment, and that in the current environment you should not assume being able to have a high enough return.

reference

that's not what i said, though. i want to know why it matters that investment interest compounds and student loans accrue simple interest, irrespective of returns.

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

Postby thesealocust » Sun Feb 17, 2013 1:58 pm

fatduck: I think dingbat is agreeing with you, just in a roundabout way. If student loan interest were 1% and checking accounts were paying 2%, then it'd be a different story - the answer depends on rates, and rates are unknowable for risking investments, so theoretically you could argue Roth > loans by assuming gangbuster stock performance and/or inflation.

As for the compounding argument itself, it's missing the point. To simplify things, if you pay down X amount loan and thus do not have to pay 6.8% interest, you have 6.8% of X dollars more than you would have, which you can then either (a) invest on your own or (b) also apply to the loans. The fact that the loans are working on simple interest doesn't alter the magnitude of the 6.8% to you.

EvilClinton wrote:
thesealocust wrote:Floating rate based on inflation (CPI-U). Changes every 6 months; a year or two ago it was 4.6% per year (!) but it's lower now. And it floats, so as rates/inflation increase so will the rate they pay.

Traditional fixed interest bonds drop in value as interest rates rise (and interest rates are so fucking close to zero that's all but inevitable, just hard to predict). Corporate floating rate bonds have lots of fees and you take on credit risk. But sweet, sweet series-I bonds are fully liquid and backed by the full faith and credit of the US.


Okay this is shitty advice. The composite rate on an I-bond right now is 1.76%. You can not cash them in for at least 1 year and after that you lose 3 months of interest if the bond is less than 5 years old. A safety net or rainy day fund is meant to be at least semi liquid. These bonds are not.

You can find money market account and CDs that are FDIC insured (and therefore 0 risk just like the bond) that pay the sam or better rates.


Wat?

Rate: You absolutely cannot find a CD with the same or better rate. Look it up, the highest rate you can get on a 2 year CD is like 1.20% with a minimum deposit of $25,000. Most are much lower.

On top of that, the rate on the bonds float, which if inflation picks up so will your rate. When they were earning 4.6%/year, interest rates were still very low - the CPI dropped, but it isn't perfectly coupled with interest rates, which is what makes them awesome.

Lastly, rates on CDs are bargained for. That means higher rates are being paid by less stable institutions or with more restrictive liquidity terms (see below). FDIC insurance is great, but not immediate, so if the bank holding your CD goes belly up you are going to get your money back but also have a headache.

Liquidity: The bonds are fully liquid after a year. Obviously you can't put your only emergency fund money into them, but you'll need an emergency fund a year from now, 2 years from now, 3 years from now, etc. Getting some money into them doesn't mean relying on them exclusively for an emergency.

And CDs generally have liquidity restrictions, from interest rate penalties to lock up periods, as well. It can vary, including the ominous "bank reserves the right to restrict redemption" type clauses where you might not be able to break the CD at the banks discretion (which is most likely to happen in a bleak economic environment i.e. when you might need it most).

Taxes: I bonds allow you to defer tax until you cash them in AND are exempt from state and local taxes. Eat your heart out, CDs.

They're not sexy from a pure "how much will I earn" standpoint, but they behave completely differently from other financial products and are as risk free as a financial product can get. The U.S. government is taking a bath on them, which is why they only offer $10K/person/year.

A bank would never offer a similar product, because it would be too expensive for them to do so. Structured notes tied to the CPI are less liquid, have huge fees, subject you to the issuer's credit risk, and often give you a less favorable credit spread. And that's before FINRA suitability / actually being able to find somebody to sell you the damn thing issues.

XxSpyKEx wrote:Max out contributions to Roth IRA each year. How is that even a question? Roth IRA is like a tax scam the IRS lets you run on it.


You can't contribute to a Roth IRA if you earn over 96K or something per year. You can contribute after tax dollars to a traditional IRA, and they actually removed the income limits from rolling over a traditional IRA to a Roth IRA to try and grab some revenue, but it's an open question whether it's allowable or not. Or rather, you can do it, but the IRS might get grumpy. It's aggressive, but plenty of info about how to get it done if you want to. Google "backdoor roth IRA" and related terms.

Otherwise, the income tax shield you get from having money in a Roth IRA is valuable, but query whether it's actually more valuable than a ~6.8% guaranteed rate of return for paying down loans is harder to say.

dingbat wrote:
Anonymous User wrote:Honest question: If one is being payed NYC market and has no loans, how should one invest? And how much should one save per year?

How one should invest is too broad a category, but unless you know what you're doing, I'd suggest a combination of index funds. Vanguard has an excellent website for giving general allocation breakdowns and has a good variety of funds to stick your money in.

As a general rule, do not invest in stocks directly.
Many mutual funds have (relatively) high fees and underperform their index
Because of incredibly low yield rates, bond funds are likely to decrease in value whenever interest rates rise again

disclaimer: none of this should be construed as investment, tax, or legal advice. Please see your accountant, lawyer, or investment professional for personalized advice


Excellent advice.
Last edited by thesealocust on Sun Feb 17, 2013 2:01 pm, edited 1 time in total.

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

Postby albusdumbledore » Sun Feb 17, 2013 2:00 pm

fatduck wrote:
albusdumbledore wrote:
XxSpyKEx wrote:Max out contributions to Roth IRA each year. How is that even a question? Roth IRA is like a tax scam the IRS lets you run on it.

TITCR. Anyone who says otherwise doesn't understand math or how compound interest (i.e. investment interest) versus simple interest (i.e. student loan interest) works.

explain to me, using hypothetical numbers, how the difference between investment interest and loan interest makes a difference in this situation.

I don't know how many times I've had this argument on TLS and had to prove dingbat wrong, but sure I'll do it again.

Let's assume I'm a 25 year old grad with 200k in debt with a 160k job. I plan on retiring at 65, so I've got 40 years until retirement. I'm going to assume a 6.8% interest across all loans for simplicity's sake. I'll also assume that after taxes, I can reasonably manage to pay 40k a year to my loans and use the rest for living expenses.

Option 1: In lieu of contributing the max of $5500 to a Roth, I instead take that money and apply it to my loans which means I stay on target for my 40k/yr loan payments. I'm paying $3333.33 a month and will have paid my loans off after 74 months with total payments coming to $245k. So roughly 6 years.

At that point, at the age of 31, I max out my roth until retirement at 65, giving me 34 years to contribute before I start to pull. I'm a pussy investor because I'm a lawyer and my whole being is tied up in being a risk adverse bewb, so I choose a bond index fund and pull 5% a year which gives me a roth retirement balance of ~467k.

Option 2: This time, I decide to contribute to the Roth and only pay 34.5k/yr on my loans. It takes me longer to pay off the loans and I pay slightly more in the end. Monthly payments come to $2875 and I will have paid my loans off after 89 monthly payments with total payments of ~$255k. So I end up paying 10k more in the long run w/r/t loans.

However, I maxed out my Roth during those early years from 25-31. I'm still retiring at 65, so I now contribute for the full 40 years. I'm still that wiener who went to law school and has never taken a bong hit, so I stuck with the 5% bond index fund the whole time. At the end of the 40 years, my Roth balance comes 664k. Subtracting out 10k more for the loans leaves a balance of 654k and that leaves me a lot better off at age 65 than the kid who slammed those loans a little bit harder.

The key is ultimately that the investment interest rate is with you for longer than the student loan interest rate is, and it has a profound effect that is magnified the older you get. Simple versus compound matters with regards to student loans because it doesn't allow for negative amortization. If student loans were compound interest and they let you pay less than the interest, you'd never get out of debt and this whole thing would be a wash. The compounding effect for the Roth is why there is such a massive difference at the end.
Last edited by albusdumbledore on Sun Feb 17, 2013 2:05 pm, edited 1 time in total.

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

Postby dingbat » Sun Feb 17, 2013 2:03 pm

thesealocust wrote:fatduck: I think dingbat is agreeing with you, just in a roundabout way.

I thought he was calling dumb-bore out (seeing as he referenced in the link from the last time this was discussed) and I didn't feel like giving a legit answer.

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

Postby thesealocust » Sun Feb 17, 2013 2:16 pm

albusdumbledore: your math/model is absurd and wrong.

Every dollar paid towards loans has a ~6.8% return. Every dollar you place into a bond fund has a ~5% return. Unwinding your post to figure out exactly where the train went of the rails would be a pain in the ass at this point, but you can't magically gain 200K by forgoing a high rate of return and instead seeking a low one. The below is at least one example though:

Here's probably the most obvious mistake you made: Option 1 is done repaying loans in ~6 years and Option 2 is done repaying loans in ~7.4 years. You neglected to account for the extra cash flow Option 1 has during that time. Because you had Option 1 paying over 3 grand/month in loans, that comes to almost $57,000 in extra income which Option 1 could have. Tossing it in a non-IRA bond fund for the remaining 34 years would pout Option 1's ending balance 299,440.83 higher than you calculated. Even after accounting for the fact that it would be taxable income, it still proves the point.

Almost all of the massive difference in your ending balance comes from the fact that Option 2 put more total cash into funds than Option 1 by ignoring the fact that for several months, Option 2 is still paying almost 3 grand/year in loans while Option 1 is not.

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

Postby albusdumbledore » Sun Feb 17, 2013 2:20 pm

thesealocust wrote:albusdumbledore: your math/model is absurd and wrong.

Every dollar paid towards loans has a ~6.8% return. Every dollar you place into a bond fund has a ~5% return. Unwinding your post to figure out exactly where the train went of the rails would be a pain in the ass at this point, but you can't magically gain 200K by forgoing a high rate of return and instead seeking a low one. The below is at least one example though:

Here's probably the most obvious mistake you made: Option 1 is done repaying loans in ~6 years and Option 2 is done repaying loans in ~7.4 years. You neglected to account for the extra cash flow Option 1 has during that time. Because you had Option 1 paying over 3 grand/month in loans, that comes to almost $57,000 in extra income which Option 1 could have. Tossing it in a non-IRA bond fund for the remaining 34 years would pout Option 1's ending balance 299,440.83 higher than you calculated. Even after accounting for the fact that it would be taxable income, it still proves the point.

Almost all of the massive difference in your ending balance comes from the fact that Option 2 put more total cash into funds than Option 1 by ignoring the fact that for several months, Option 2 is still paying almost 3 grand/year in loans while Option 1 is not.

Wrong bro. Even if the Option 1 threw that extra cash into a taxable account, he's still only got a 15-month advantage on Option 2 of doing the same because Option 2 stops paying loans too. That will not make up for the 6 year advantage that Option 2 has with regards to the Roth.

The key is that in those early years, you aren't just giving up $5500 at 5% interest. You're giving up $5500 at 5% interest compounded for 40 years, and $5500 at 5% interest compounded for 39 years, 38 years, etc.

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

Postby dingbat » Sun Feb 17, 2013 2:24 pm

albusdumbledore wrote:
thesealocust wrote:albusdumbledore: your math/model is absurd and wrong.

Every dollar paid towards loans has a ~6.8% return. Every dollar you place into a bond fund has a ~5% return. Unwinding your post to figure out exactly where the train went of the rails would be a pain in the ass at this point, but you can't magically gain 200K by forgoing a high rate of return and instead seeking a low one. The below is at least one example though:

Here's probably the most obvious mistake you made: Option 1 is done repaying loans in ~6 years and Option 2 is done repaying loans in ~7.4 years. You neglected to account for the extra cash flow Option 1 has during that time. Because you had Option 1 paying over 3 grand/month in loans, that comes to almost $57,000 in extra income which Option 1 could have. Tossing it in a non-IRA bond fund for the remaining 34 years would pout Option 1's ending balance 299,440.83 higher than you calculated. Even after accounting for the fact that it would be taxable income, it still proves the point.

Almost all of the massive difference in your ending balance comes from the fact that Option 2 put more total cash into funds than Option 1 by ignoring the fact that for several months, Option 2 is still paying almost 3 grand/year in loans while Option 1 is not.

Wrong bro. Even if the Option 1 threw that extra cash into a taxable account, he's still only got a 15-month advantage on Option 2 of doing the same because Option 2 stops paying loans too. That will not make up for the 6 year advantage that Option 2 has with regards to the Roth.

The key is that in those early years, you aren't just giving up $5500 at 5% interest. You're giving up $5500 at 5% interest compounded for 40 years, and $5500 at 5% interest compounded for 39 years, 38 years, etc.

Care to give a breakdown of the person's annual payments to A) loan and B) investments (both in a roth and outside of it)?

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

Postby dingbat » Sun Feb 17, 2013 2:25 pm

on a different note, whenever I see someone touting a roth IRA without any comparison to a traditional IRA, I generally think of the maxim "a little bit of knowledge can do a lot of harm"

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

Postby thesealocust » Sun Feb 17, 2013 3:19 pm

albusdumbledore wrote:
thesealocust wrote:albusdumbledore: your math/model is absurd and wrong.

Every dollar paid towards loans has a ~6.8% return. Every dollar you place into a bond fund has a ~5% return. Unwinding your post to figure out exactly where the train went of the rails would be a pain in the ass at this point, but you can't magically gain 200K by forgoing a high rate of return and instead seeking a low one. The below is at least one example though:

Here's probably the most obvious mistake you made: Option 1 is done repaying loans in ~6 years and Option 2 is done repaying loans in ~7.4 years. You neglected to account for the extra cash flow Option 1 has during that time. Because you had Option 1 paying over 3 grand/month in loans, that comes to almost $57,000 in extra income which Option 1 could have. Tossing it in a non-IRA bond fund for the remaining 34 years would pout Option 1's ending balance 299,440.83 higher than you calculated. Even after accounting for the fact that it would be taxable income, it still proves the point.

Almost all of the massive difference in your ending balance comes from the fact that Option 2 put more total cash into funds than Option 1 by ignoring the fact that for several months, Option 2 is still paying almost 3 grand/year in loans while Option 1 is not.

Wrong bro. Even if the Option 1 threw that extra cash into a taxable account, he's still only got a 15-month advantage on Option 2 of doing the same because Option 2 stops paying loans too. That will not make up for the 6 year advantage that Option 2 has with regards to the Roth.

The key is that in those early years, you aren't just giving up $5500 at 5% interest. You're giving up $5500 at 5% interest compounded for 40 years, and $5500 at 5% interest compounded for 39 years, 38 years, etc.


This is why your example makes no sense:

Over the first 89 months, Option 1 pays $245K in loans and contributes to a roth only once they are paid down, for another $7.7K. So your numbers for Option 1 accounted for roughly $252.7K in loan payments + investments over 89 months.

Over the first 89 months, Option 2 pays $255.875K in loans and contributes $40.8K to his 401(K). Your numbers in Option 2 accounted for $296.67K in loan payments + investments over 89 months.

The overwhelming difference in your example comes from the fact that you're giving Option 2 almost $44,000 extra dollars in loan payments + investments over the same period of time. Even if Option 1 isn't putting money into his Roth early on, he still has that same $44 grand which, at whatever time, could be invested in taxable or tax favored investment accounts. You need to account for that missing money. Option 1 either isn't blowing it on blackjack and hookers, or is and you need to account for much more fun he has than option 2.

They both have the same income, so there is absolutely no reason why you should be running numbers letting Option 2 use more money. I suggest you re-think your examples with the following assumptions: Person 1 and Person 2 will each spend $300,000 on loans + investments over 90 months, but person 1 will aggressively pay down loans while person 2 while always max out his Roth first.
Last edited by thesealocust on Sun Feb 17, 2013 3:23 pm, edited 2 times in total.

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

Postby dingbat » Sun Feb 17, 2013 3:22 pm

thesealocust wrote:This is why your example makes no sense:

Over the first 89 months, Option 1 pays $245K in loans and contributes to a roth only once they are paid down, for another $7.7K. So your numbers for Option 1 accounted for roughly $252.7K in loan payments + investments over 89 months.

Over the first 89 months, Option 2 pays $255.875K in loans and contributes $40.8K to his 401(K). Your numbers in Option 2 accounted for $296.67K in loan payments + investments over 89 months.

The overwhelming difference in your example comes from the fact that you're giving Option 2 almost $44,000 extra dollars in loan payments + investments over the same period of time. Even if Option 1 isn't putting money into his Roth early on, he still has that same $44 grand which, at whatever time, could be invested in taxable or tax favored investment accounts. You need to account for that missing money. Option 1 either isn't blowing it on blackjack and hookers, or is and you need to account for much more fun he has than option 2.

They both have the same income, so there is absolutely no reason why you should be running numbers letting Option 2 use more money. I suggest you re-think your examples with the following assumptions: Person 1 and Person 2 will each spend $300,000 on loans + investments over 90 months, but person 1 will aggressively pay down loans while person 2 while always max out his Roth first.

but everyone knows that hyperbole beats logic

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

Postby albusdumbledore » Sun Feb 17, 2013 3:32 pm

thesealocust wrote:This is why your example makes no sense:

Over the first 89 months, Option 1 pays $245K in loans and contributes to a roth only once they are paid down, for another $7.7K. So your numbers for Option 1 accounted for roughly $252.7K in loan payments + investments over 89 months.

Over the first 89 months, Option 2 pays $255.875K in loans and contributes $40.8K to his 401(K). Your numbers in Option 2 accounted for $296.67K in loan payments + investments over 89 months.

The overwhelming difference in your example comes from the fact that you're giving Option 2 almost $44,000 extra dollars in loan payments + investments over the same period of time. Even if Option 1 isn't putting money into his Roth early on, he still has that same $44 grand which, at whatever time, could be invested in taxable or tax favored investment accounts. You need to account for that missing money. Option 1 either isn't blowing it on blackjack and hookers, or is and you need to account for much more fun he has than option 2.

They both have the same income, so there is absolutely no reason why you should be running numbers letting Option 2 use more money. I suggest you re-think your examples with the following assumptions: Person 1 and Person 2 will each spend $300,000 on loans + investments over 90 months, but person 1 will aggressively pay down loans while person 2 while always max out his Roth first.

I understand what you're saying and it's a good point, but I'm not letting Option 2 use more money. I neglected what Option 1 might do with that money because there are too many things to assume. He can't put all of it in a 401k, so the good majority of it is generating taxable income (which makes a huge difference), if it's not just sitting in the bank. And it compounds for less time than Option 2's Roth money of the same amount. Not to mention that you'd have to make assumptions about how long that money was held and not spent (which is harder to do when there aren't things like laws forcing your hand).

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

Postby 20130312 » Sun Feb 17, 2013 3:35 pm

TLS once again going full retard on investment advice.

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

Postby dingbat » Sun Feb 17, 2013 3:35 pm

albusdumbledore wrote:I understand what you're saying and it's a good point, but I'm not letting Option 2 use more money. I neglected what Option 1 might do with that money because there are too many things to assume. He can't put all of it in a 401k, so the good majority of it is generating taxable income (which makes a huge difference), if it's not just sitting in the bank. And it compounds for less time than Option 2's Roth money of the same amount. Not to mention that you'd have to make assumptions about how long that money was held and not spent (which is harder to do when there aren't things like laws forcing your hand).

So basically, you assume that in option 1 the person spends significantly more money, but in option 2, the person puts significantly more into savings

On that basis, I can show that sticking money into a mattress is the ideal retirement solution

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

Postby dingbat » Sun Feb 17, 2013 3:36 pm

InGoodFaith wrote:TLS once again going full retard on investment advice.

That's because TLS is full of people who think they know more than they do who insist that their way is the right way.

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

Postby EvilClinton » Sun Feb 17, 2013 3:40 pm

thesealocust wrote:Wat?

Rate: You absolutely cannot find a CD with the same or better rate. Look it up, the highest rate you can get on a 2 year CD is like 1.20% with a minimum deposit of $25,000. Most are much lower.

On top of that, the rate on the bonds float, which if inflation picks up so will your rate. When they were earning 4.6%/year, interest rates were still very low - the CPI dropped, but it isn't perfectly coupled with interest rates, which is what makes them awesome.

Lastly, rates on CDs are bargained for. That means higher rates are being paid by less stable institutions or with more restrictive liquidity terms (see below). FDIC insurance is great, but not immediate, so if the bank holding your CD goes belly up you are going to get your money back but also have a headache.

Liquidity: The bonds are fully liquid after a year. Obviously you can't put your only emergency fund money into them, but you'll need an emergency fund a year from now, 2 years from now, 3 years from now, etc. Getting some money into them doesn't mean relying on them exclusively for an emergency.

And CDs generally have liquidity restrictions, from interest rate penalties to lock up periods, as well. It can vary, including the ominous "bank reserves the right to restrict redemption" type clauses where you might not be able to break the CD at the banks discretion (which is most likely to happen in a bleak economic environment i.e. when you might need it most).

Taxes: I bonds allow you to defer tax until you cash them in AND are exempt from state and local taxes. Eat your heart out, CDs.

They're not sexy from a pure "how much will I earn" standpoint, but they behave completely differently from other financial products and are as risk free as a financial product can get. The U.S. government is taking a bath on them, which is why they only offer $10K/person/year.

A bank would never offer a similar product, because it would be too expensive for them to do so. Structured notes tied to the CPI are less liquid, have huge fees, subject you to the issuer's credit risk, and often give you a less favorable credit spread. And that's before FINRA suitability / actually being able to find somebody to sell you the damn thing issues.


Your hard-on for I-bonds only makes sense in higher interest rate environments. Right now the I-bond is only getting him less than 1% more than a money market and it is locking up his money for a at least a year. Maybe on a larger scale that would make sense, but 1% of 10k (the I-bond max) is only $100. Is locking up your emergency fund for an entire year worth $100? No. If you want $100 in interest go open up a checking account at Chase with one of the millions of coupons they have floating around the internet (technically the bonus they pay you is counted as interest) and keep your rainy day fund liquid.

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

Postby albusdumbledore » Sun Feb 17, 2013 3:46 pm

dingbat wrote:
albusdumbledore wrote:I understand what you're saying and it's a good point, but I'm not letting Option 2 use more money. I neglected what Option 1 might do with that money because there are too many things to assume. He can't put all of it in a 401k, so the good majority of it is generating taxable income (which makes a huge difference), if it's not just sitting in the bank. And it compounds for less time than Option 2's Roth money of the same amount. Not to mention that you'd have to make assumptions about how long that money was held and not spent (which is harder to do when there aren't things like laws forcing your hand).

So basically, you assume that in option 1 the person spends significantly more money, but in option 2, the person puts significantly more into savings

On that basis, I can show that sticking money into a mattress is the ideal retirement solution

No, not at all. You could make the same assumption about both of the people and come out with the same results. If I assume they both put the excess money in the bank and keep it as cash til 65, then the numbers are the same plus the extra 40k or whatever for Option 1 so Option 2 still wins. If they both blow it all, Option 2 still wins.

Option 1 would have to hold that extra 40k a long time in a taxable account to come out ahead. Which is a weird assumption to make given most people's behavior with excess cash.

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

Postby dingbat » Sun Feb 17, 2013 3:55 pm

albusdumbledore wrote:
dingbat wrote:
albusdumbledore wrote:I understand what you're saying and it's a good point, but I'm not letting Option 2 use more money. I neglected what Option 1 might do with that money because there are too many things to assume. He can't put all of it in a 401k, so the good majority of it is generating taxable income (which makes a huge difference), if it's not just sitting in the bank. And it compounds for less time than Option 2's Roth money of the same amount. Not to mention that you'd have to make assumptions about how long that money was held and not spent (which is harder to do when there aren't things like laws forcing your hand).

So basically, you assume that in option 1 the person spends significantly more money, but in option 2, the person puts significantly more into savings

On that basis, I can show that sticking money into a mattress is the ideal retirement solution

No, not at all. You could make the same assumption about both of the people and come out with the same results. If I assume they both put the excess money in the bank and keep it as cash til 65, then the numbers are the same plus the extra 40k or whatever for Option 1 so Option 2 still wins. If they both blow it all, Option 2 still wins.

Option 1 would have to hold that extra 40k a long time in a taxable account to come out ahead. Which is a weird assumption to make given most people's behavior with excess cash.

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

Postby albusdumbledore » Sun Feb 17, 2013 4:04 pm

^^- this is dingbat

:roll:. Make a substantive point dingbat. I'm inviting you to tell me where I'm wrong. Option 2 still wins at 65 if that money is put into a taxable account at the same 5% rate and a 20% capital gains tax. Certainly not as egregiously, but it's still better.

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

Postby wiseowl » Sun Feb 17, 2013 4:13 pm

There's a hysterically ironic post on this page. I'll leave you to pick which one.

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

Postby dingbat » Sun Feb 17, 2013 4:20 pm

albusdumbledore wrote:^^- this is dingbat

:roll:. Make a substantive point dingbat. I'm inviting you to tell me where I'm wrong. Option 2 still wins at 65 if that money is put into a taxable account at the same 5% rate and a 20% capital gains tax. Certainly not as egregiously, but it's still better.
Basically, when thesealocust pointed out a major flaw in your math, you responded by saying "I neglected... because there are too many things to assume"

This was followed by saying that option 1 would have to hold that extra money "in a taxable account to come out ahead. Which is a weird assumption to make given most people's behavior with excess cash".

I mean, you're avoiding the issue, which is that one of your options has tucked significantly more into savings than the other option.

I'd retort, but you can just follow the discussion here, which pretty much covers the same concepts

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

Postby albusdumbledore » Sun Feb 17, 2013 4:30 pm

dingbat wrote:
albusdumbledore wrote:^^- this is dingbat

:roll:. Make a substantive point dingbat. I'm inviting you to tell me where I'm wrong. Option 2 still wins at 65 if that money is put into a taxable account at the same 5% rate and a 20% capital gains tax. Certainly not as egregiously, but it's still better.
Basically, when thesealocust pointed out a major flaw in your math, you responded by saying "I neglected... because there are too many things to assume"

This was followed by saying that option 1 would have to hold that extra money "in a taxable account to come out ahead. Which is a weird assumption to make given most people's behavior with excess cash".

I mean, you're avoiding the issue, which is that one of your options has tucked significantly more into savings than the other option.

I'd retort, but you can just follow the discussion here, which pretty much covers the same concepts

You're a special kind of dense bro. There are three options with Option 1's extra 40k after paying the loans:

1. Blow it.
2. Save it as cash.
3. Save it in a taxable account at an assumed similar investment rate.

I didn't avoid any anything--I just assumed one was most likely. Option 2 wins with any of them at age 65. Which goes to show that it's a lot more complicated than the overly-simplistic "ONLY DO IT IF YOU CAN BEAT YOUR LOAN INTEREST RATE". I chose 5% deliberately because it is less than 6.8%.

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

Postby dingbat » Sun Feb 17, 2013 4:46 pm

albusdumbledore wrote:You're a special kind of dense bro. There are three options with Option 1's extra 40k after paying the loans:

1. Blow it.
2. Save it as cash.
3. Save it in a taxable account at an assumed similar investment rate.

I didn't avoid any anything--I just assumed one was most likely. Option 2 wins with any of them at age 65. Which goes to show that it's a lot more complicated than the overly-simplistic "ONLY DO IT IF YOU CAN BEAT YOUR LOAN INTEREST RATE". I chose 5% deliberately because it is less than 6.8%.

I can make a comment about assumptions, but suffice to say that you were running an apples to oranges comparison. Even if it's more likely that a person blows it, that doesn't make it a reasonable comparison.
I'll not comment on option 2, which I'm sure we can both agree will give a much worse return.

Now, if you care to tell me what your assumptions are for #3, I'll be happy to discuss those, but, barring that, I'll again direct you to this post, which shows that, with respect to prepaying a loan or sticking the money into a 401k both options are similar. We can argue the merits of a 401k vs traditional IRA vs Roth IRA, if you wish.

As an aside, if you're arguing about a tax-advantaged investment vs a non-tax advantaged investment, then 6.8% is roughly equivalent to 4.9% (assuming 28% tax rate), which is a fair point, but doesn't address the issue
Last edited by dingbat on Sun Feb 17, 2013 5:07 pm, edited 1 time in total.




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