[Epaphras]

I think I already know the answer to this question (to do it), but I wanted to solicit others' input as well.

I currently have 6% of my gross pay directed to my 401(k) to maximize my employer's match of 3%, for a total of 9% of my compensation going to retirement savings. My portion works out to about $170 a month that is deferred.

We have a little less than $6,000 left on the last student loan (fixed 5.7% rate), and want to get it paid off before our baby arrives in late December. We were applying my wife's 2 part-time job paychecks directly to the loan each month to knock down the principal, but since getting pregnant we have just been saving it until the baby is home safe and sound, then we'll put a lump sum down.

By extracting that extra $170 a month and adding it to that lump sum amount, we'll definitely be able to pay it off by Christmas (it's an extra $850 between now and then). Without it, it will be tighter to meet that deadline. But the trade-off is not saving the approx. $1,000 during that time in my 401(k), which (if it averages 10% a year) would be over $50,000 in 40 years.

I'd resume the 6% to get the extra 3% from my employer as soon as we paid off the loan, and without minimum payments and these extra debt payments (and with me no longer having to cash-roll my grad school tuition after I graduate in December), I'll be able to catch up. I wouldn't really be losing the $50,000 in 40 years (mentioned above) because I would have more money to save after becoming debt-free.

Does it make sense?

[jthomas1600]

I don't know. You're making a 50% profit right off the bat on that $170 because your boss is matching 50 cents on the dollar. I don't know if it makes sense to give that up to pay off a loan that is less than 6% interest. I'm not a financial guy and didn't think about this much before posting so I could be wrong, but that's my first reaction. Now if you were putting in more than you 6% I would say stop contributing the extra, but I think the money you are contributing your making a pretty good profit on.

*edit* So re-reading your post I see you commented that you'd have an extra $850 to pay towards the loan, if you withdraw from the 401K program. That means you'd lose $425 in contributions from your employer.

[Epaphras]

Originally Posted by jthomas1600

I don't know. You're making a 50% profit right off the bat on that $170 because your boss is matching 50 cents on the dollar. I don't know if it makes sense to give that up to pay off a loan that is less than 6% interest. I'm not a financial guy and didn't think about this much before posting so I could be wrong, but that's my first reaction. Now if you were putting in more than you 6% I would say stop contributing the extra, but I think the money you are contributing your making a pretty good profit on.

*edit* So re-reading your post I see you commented that you'd have an extra $850 to pay towards the loan, if you withdraw from the 401K program. That means you'd lose $425 in contributions from your employer.

To play devil's advocate, how does it make sense to "give" $170 to "get" $85 in terms of cash in my pocket at the end of the day, versus "giving up" $85 to "keep" $170?

In other words if I had $170 and you agreed to match me 50% but I couldn't have the $170 for a while, but could do good things with the $170 in the short-term, wouldn't it make sense to not take that deal temporarily?

I know it doesn't make sense to not take the match if you are just eating the $170 on stupid stuff, but if you are using it as leverage in a strategic, short-term manner to get rid of debt, that seems (to me) to be worth it. I want to be rid of the student loan and throwing every extra dollar on it would help pay it off faster. I don't care about the interest rate at this point because we are making over 10x the minimum payments on it each month. All that money will go in our pocket when the debt is paid off, and could go into an IRA and more than make up (in the long term) the amount forfeited for the next 4-5 months, even with the match. In other words we could (later) easily invest way more than the ~$500 employer match that we'd be giving up now, so it makes the match irrelevant, does it not?

[jthomas1600]

Just casually looking at the numbers it appears to me that no mater how you slice it, you're losing money in the long run by opting out of the 401k. Really I was only pointing that out and not offering advice. If you want my advice I would say that the money you will lose by opting out is really pretty insignificant, and as such, if you want to get out from under the loan, go for it. I just have a thing about getting as much from my boss as I can so it'd kill me to let him keep that $85 every month. But long term I don't think it will effect you much as long as you get right back in the program once the loan is paid off, so go ahead and do it.

[BillSPrestonEsq]

The amount of money you save here is insignificant compared to the amount you lose in long term gains on retirement accounts over say 40 years. Ultimately though, there is always a "good" reason to opt out of retirement until you are old. Then it is too late.

[Art]

Originally Posted by BillSPrestonEsq

The amount of money you save here is insignificant compared to the amount you lose in long term gains on retirement accounts over say 40 years. Ultimately though, there is always a "good" reason to opt out of retirement until you are old. Then it is too late.

I agree, except that long term gains are not at all guaranteed. I've had my 401K for 6 years, which is not all that long, but my account currently holds less money than has been contributed.

[jthomas1600]

Originally Posted by Art

I agree, except that long term gains are not at all guaranteed. I've had my 401K for 6 years, which is not all that long, but my account currently holds less money than has been contributed.

Two things. First, do you have all your money in a high risk ultra aggressive fund or something? Second thing, it might be worth less dollars than have been contributed, but theoretically isn't it really about how many shares of the market you have? So the market can rebound and 5 years from now it's a totally different picture.

My money is invested conservatively. That means when the markets going great guns I'm not making as much as some people, but when things went south a few years ago, I didn't lose everything either. And for the last 6-12 months I've actually seen decent returns.

[BillSPrestonEsq]

Originally Posted by Art

I agree, except that long term gains are not at all guaranteed. I've had my 401K for 6 years, which is not all that long, but my account currently holds less money than has been contributed.

I have 2 accounts, (not actually 401k, slightly different numbers) that have guaranteed returns. I have 3 others that are fairly conservative, though not guaranteed.

My accounts have chugged along slowish, but when the market tanked, I still had a positive increase in the accounts. of course YMMV.

[Art]

Originally Posted by jthomas1600

Two things. First, do you have all your money in a high risk ultra aggressive fund or something? Second thing, it might be worth less dollars than have been contributed, but theoretically isn't it really about how many shares of the market you have? So the market can rebound and 5 years from now it's a totally different picture.

My money is invested conservatively. That means when the markets going great guns I'm not making as much as some people, but when things went south a few years ago, I didn't lose everything either. And for the last 6-12 months I've actually seen decent returns.

My fund changes over time. Higher risk at the beginning, lower risk toward the end.

[beanbag]

i have had the 401k v student loans argument with my dad more times than i can count. i understand wanting to be debt free before your little one arrives, but i am afraid you would be losing more than you would save. educational debt is about the least bad debt you could have, and 401k earnings are compounded. you would be missing out on the employer contribution and you would also have less money gathering interest. my dad has run the numbers for me so many times and the difference between starting in your 20s versus your 30s is incredible. i know you are already contributing, but i think the same idea applies for on-going contributions.

ultimately you must make a choice but my advice is to keep contributing at least the bare minimum to get employer matching, and wait just a bit longer to finish out your educational debt.

[Epaphras]

I ran the numbers on both scenarios, and deferring 401(k) contributions to my take-home pay and applying it directly to the debt shaves about 2 months off the payoff schedule (and makes it pay off just in time for the baby).

I suppose another way to look at it would be to compare the potential gain that is given up by not contributing to 401(k) over the long term, versus the extra interest payments that are made if the loan is paid off in the slower scenario (keep 401k). In that scenario, 2 extra months of interest payments is significantly less than the raw contributions of mine, let alone the employer match.

I have my annual review next week and had a great year, so I'm expecting a raise and a bonus. Maybe I'll just apply the bonus and the raise amount to the student loan fund, keep 401(k) going, and still be able to pay it off by January in that scenario. The overall strategy is "More money per month applied to the loan", so if the money comes from not saving 401(k) or from a raise, it doesn't really a matter how it gets to the savings account does it?

[redbaron]

given that you're moving the payoff up only two months, but shaving 50k off your retirement long term, I would strongly advise against it.

I don't think those months are worth $25k each, especially since it sounds like you have a solid handle on things.

Are you doing the Ramsey thing? Depending on how much emergency fund you have (i.e. if it's more than double his recommended) I'd consider partially raiding that for the 850.

[Epaphras]

Originally Posted by redbaron

given that you're moving the payoff up only two months, but shaving 50k off your retirement long term, I would strongly advise against it.

I don't think those months are worth $25k each, especially since it sounds like you have a solid handle on things.

Are you doing the Ramsey thing? Depending on how much emergency fund you have (i.e. if it's more than double his recommended) I'd consider partially raiding that for the 850.

Yeah the Dave Ramsey plan is the structure we're using for this. We have $1,000 for emergencies (which we have to replenish with my wife's income when we have to dip into it for car things that come up), live on a written budget (my income), and save the rest.

Ramsey advises people to stop all 401(k) savings temporarily to get out of debt, because his 4th step is to set aside 15% of your income for retirement (which can include 401k contributions), which is more than most people do. So the idea is that while we give up the $50k return on the money lost now, we will contribute much more than that when we reach the 4th step and at the end (age 65) will have earned far more than the $50k we gave up for a few months 40 years ago. It doesn't make sense to stop contributions if you don't later dedicate 30+ years of 15% socking away for retirment, but it does make sense if you do do that.

But being only 5-6 months away from being debt-free (even accounting for 6% toward 401k), and being 24, and getting a 50% match on that 6% from my employer, it seems reasonable to keep my 401(k) structure in place, get debt-free, then contribute to Roth IRAs + 401(k) up to 15% and sock away even more money over the 40 years I have until I'm 65.

[redbaron]

If you're really going to amp up the retirement savings then it might make sense to put it on hold, especially if it gives you the peace of mind.

I suppose the big question there is whether or not your wife plans on continuing to work (or at least continues with two part time jobs) after the baby comes. I suppose the plan for after the baby comes would really change how I'd proceed here- It sounds like you're already doing well with living on the single income, so I think you're a bit ahead of the game in that regard.

[Epaphras]

Originally Posted by redbaron

If you're really going to amp up the retirement savings then it might make sense to put it on hold, especially if it gives you the peace of mind.

I suppose the big question there is whether or not your wife plans on continuing to work (or at least continues with two part time jobs) after the baby comes. I suppose the plan for after the baby comes would really change how I'd proceed here- It sounds like you're already doing well with living on the single income, so I think you're a bit ahead of the game in that regard.

She works part time (12 hours per week) as a preschool teacher, so right now the plan is for her to take Christmas break and January off work and then return in February. The place she works also has a nursey that she can use for free, so it will really work out nice.

Her other job is as a massage therapist, but she gave her notice there and will quit that gig at the end of August. It's getting too physically exhausting for her at this point.