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Max out 401k or pay off debt first?

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  • Avatar PedDoctor1986 
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    Status: Physician
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    Joined: 05/01/2019

    Hi everyone! First post here! I am learning a lot from you all! I am a pediatrician 4 years out of residency slowly working on paying off my student loans and building up my 401k. I am mapping out my plan to become debt free as soon as possible and looking for some advice. I am currently saving about 19k a year in my 401k including my employer match and making extra payments towards both student loans at 5% interest rate and our mortgage (we are 4 years in to a 30 Yr fixed 3.75%). Would you put all extra money towards the debts or increase to max 401k contribution of 19k without employer contributions? I would like to be debt free ASAP but I am unsure if it is a mistake to not max out my 401k while getting out of debt. I am maximizing my 401k employer match. Thanks for your help!

    #211362 Reply
    Avatar hightower 
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    Status: Physician
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    Generally speaking it is best to max all tax advantaged savings first, before paying extra to student loans.  The only time I would make an exception there is if you have an unusually large amount of debt or very high interest rates.

    What is your total debt? What are the rates on your loans?

    #211469 Reply
    Liked by Jack_Sparrow
    Avatar MaxPower 
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    Status: Physician
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    Joined: 02/22/2016

    Max out 401(k) first. Never have a chance to get those tax breaks back (deferral of taxes), and never have a chance to put that money in later (once the year is over), but you can always pay off debt at any time.

    Also, with those rates I wouldn’t pay off any extra towards your mortgage and would put all extra towards your student loans. Have you tried to refinance to a lower rate on your student loans? Something to look into.

    #211472 Reply
    Liked by Hank
    Avatar Peds 
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    currently saving about 19k a year in my 401k including my employer match

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    no, set this to max 19K, the match should be extra on top of that.

    making extra payments towards both student loans at 5%

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    are you saving 20% for retirement first? backdoor rIRA?

    our mortgage (we are 4 years in to a 30 Yr fixed 3.75%).

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    no stop that

    but I am unsure if it is a mistake to not max out my 401k

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    it is.

     

    hooray another peds. well get you on the right track.

    #211473 Reply
    Avatar PedDoctor1986 
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    Status: Physician
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    Joined: 05/01/2019

    Thanks for the great advice so far. I have 170k in student loans at 5% (already refinanced, they were 6.8%) and our mortgage is 400k at 3.75%. So pretty large debt that feels overwhelming, which is why I’d like to pay it off ASAP. It should be gone in about 7 more years for the student loans and 13-19 for the mortgage depending how aggressive we are but it makes sense that I need to think about retirement as an equal priority. I do not have any other types of retirement accounts besides the 401k, and would be at a 15% retirement savings rate if I maximize it. My husband is a nurse and has a 403b (also not max contributed to) and a small pension.

    #211501 Reply
    CordMcNally CordMcNally 
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    I would make sure you are maxing out both you and your husband’s pre-tax retirement accounts and then focus all your attention on your student loans. I would also consider a Roth IRA and HSA depending on the rest of your financial situation.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #211502 Reply
    Liked by ENT Doc, Hank, Tim, LizOB
    Avatar Peds 
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    Status: Physician
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    Joined: 01/08/2016
    I do not have any other types of retirement accounts besides the 401k, and would be at a 15% retirement savings rate if I maximize it. My husband is a nurse and has a 403b (also not max contributed to) and a small pension.

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    so take gross income, multiply by 20% and that goes to retirement first.

    so 19K + 19K + 12K (backdoor rIRA) = 50K to start.

    the rest goes to loans.

    #211508 Reply
    Liked by Craigy
    Lordosis Lordosis 
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    I agree.  20% to retirement accounts first. In your case it would be the 401k 403b and you should get a RIRA going for both of you.  If you have an HSA you should max that as well.  That gets you north of 50K in savings not counting any match.  So if the household income in 250K or less then you are saving plenty for retirement.  Put the rest to student loans and when they are gone you can evaluate if you want to pay down the mortgage.

    You might not need more retirement account space but you might have access to a 457.

    Welcome to the forum.

    “Never let your sense of morals prevent you from doing what is right.”

    #211557 Reply
    Avatar jz 
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    Status: Physician
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    Retirement uber alles.  1) you are already delayed in retirement savings because of sacrificed years in school.  Moving forward, every year counts and can not be recovered. 2) It will lower your income tax burden and possibly lower your marginal bracket. 3) Statistically an aggressive tax deferred AA will outperform 5%.

    #211572 Reply
    triad triad 
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    Status: Dentist, Small Business Owner
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    Joined: 04/29/2016
    The only time I would make an exception there is if you have an unusually large amount of debt or very high interest rates.

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    what interest rate would that be for you?  5% guaranteed return is nice.  my bond fund is yielding 3%

    #211622 Reply
    Avatar trebizond 
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    Status: Resident
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    Joined: 12/31/2017

    The 19K cap – is that for an entire year 1/1/20XX-12/31/20XX, or runs to tax day of the next year?

    I’m asking because I get annual pay raises in July each year, so I’m trying to figure out for this year if I am currently pulling out 5% (well shy of 19K) if when I get a hefty pay raise in July I should increase the monthly contribution to 19K/12 months or go even higher to make up for the lower contributions in the first half of the year?

    #211641 Reply
    Avatar Peds 
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    The 19K cap – is that for an entire year 1/1/20XX-12/31/20XX, or runs to tax day of the next year?

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    calendar year

     

    #211643 Reply
    Avatar Dru 
    Participant
    Status: Physician
    Posts: 51
    Joined: 01/09/2016

    Welcome! Fellow ped here nearing 5 years out. I think you can do both, though this idea was something I struggled with for awhile. I max 401k ( + match on top amd pension,) and spouse (40k income per year) maxes 403(b) (+ pension +5k into dependent care FSA). We pay 4K/month on student loans and 2.5k/month for daycare (yay public school in 5.5 months and 17.5 months!!!). We live in hcol but snagged a good deal on a rental. We’ve delayed home buying for now but are getting closer on our downpayment.

    Not nearly as impressive as many of our colleagues on WCI but even us peds make enough money to build wealth early in our careers through maxing at least pretax accounts and more aggressive loan payoff.

    Good luck!

    #211679 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
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    Joined: 06/24/2016

    Refinance your student loans again when you can. You should be able to get far better than 5% on a 5-year fixed

    Tax-advantaged retirement accounts come first.

    There is almost zero utility to paying off your 3.75% mortgage before your 5% student loan. If you’re going to focus on debt, pay the highest rate first.

    After your tax-advantaged retirement accounts, do whatever you want. You *should* be able to do both of put 20% gross (a rule of thumb, obv with limitations) toward investing for retirement and being more aggressive with debt repayment. Obv it’s better to have no debt than some debt, but you had to go to med school to be a doctor and you’ve got to live somewhere.

    Once your debt is structured to the lowest rate and term you can afford, i.e. 5-year term on the student loans, you can start running numbers to see how much you’d save by paying it even earlier – it’s not a *whole* lot lost to interest.

    You’ll be fine as long as money is going toward net worth – investing and paying debts – and not being blown on consumption expenses.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #211687 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4473
    Joined: 05/13/2011

    Hi everyone! First post here! I am learning a lot from you all! I am a pediatrician 4 years out of residency slowly working on paying off my student loans and building up my 401k. I am mapping out my plan to become debt free as soon as possible and looking for some advice. I am currently saving about 19k a year in my 401k including my employer match and making extra payments towards both student loans at 5% interest rate and our mortgage (we are 4 years in to a 30 Yr fixed 3.75%). Would you put all extra money towards the debts or increase to max 401k contribution of 19k without employer contributions? I would like to be debt free ASAP but I am unsure if it is a mistake to not max out my 401k while getting out of debt. I am maximizing my 401k employer match. Thanks for your help!

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    Do both by living like a resident for 2-5 years after residency.

    Seriously, that’s the key. Cut spending. I know it’s hard once you grow into your attending income, but it’s a lot easier than deciding between paying off debt or investing every year for the next 40.

    You’re presumably making $150-250K. $19K should not even be close to a financial sacrifice. If I were you, my wife and I would be living on something like $50-75K and we’d be putting $100K+ toward the debt every year and still maxing out retirement accounts. How long will your student loans last if you throw $100K a year at them?

    You have money sloshing out of your bucket all month long. Get on a written spending plan and figure out where it is going and make it go toward those things you value most. If that is retirement and being debt-free, then stop spending it on whatever it is now being spent on.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #211688 Reply

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