Extra retirement contributions or stay liquid?

[saskia]

@inquirer2016 I only keep a 3 month emergency fund. I have two kids and am behind I don’t want 75k sitting there liquid doing nothing. My wife and I are both government workers. I’m not worried about layoffs

 

[michaeldavis]

@inquirer2016 Rent, transportation, groceries, utilities, phone, and my gym are $2-$2.5k per month. Bumping up to $15k to be safe probably wouldn't hurt, but between living cheap and ~$1500/mo of unemployment insurance if I got laid off I feel comfortable at $12k

 

[dee12]

@michaeldavis 401k/Roth. The interest rate on your student loans is low enough that it's not a priority. Getting that much money into retirement accounts at your age will make a huge difference!

 

[michaeldavis]

@dee12 Game plan then: Pay off the 4.8% chunk of loans, leave the other half at 3.1% on regular payments, and then shovel as much as possible into my Roth 401(k)

 

[dee12]

@michaeldavis I agree with what ace425 said. I wouldn't put anything extra toward any debt under 6%. I would direct all that money into the market towards retirement.

 

[rahnjoseph300]

@michaeldavis It’s never too soon to be thinking about big expenses like a home, wedding, etc. But there’s a substantial opportunity cost to deferring retirement savings until after you’ve saved for those short/medium term expenses.

$1,000 into retirement savings now is ~$12,200 (inflation-adjusted) at age 60. If you focus too heavily on saving “liquid” money and wait five years to contribute, that $1,000 is suddenly only ~$8700. You’ve lost almost 30% of that nest egg by waiting a measly 5 years.

You can always reduce your retirement contributions later to more quickly fund a short term goal (where the long term impact will be less significant), but you can’t go back in time and increase your contributions.

As per paying off the loan early, it’s up to your risk tolerance. With a ten year term and 4% APR, the mathematical answer is probably to let it ride in favor of increased retirement savings. But it’s a relatively insignificant sum, so the psychological benefit of zero debt might tip the scales towards paying it off.

 

[rosenberginexile]

@michaeldavis I'm absolutely the minority in this thinking, but 401k savings are still pretty liquid.

You can loan yourself cash, tax and penalty free. Where you pay yourself the interest. Even if worse came to worse. Tax +10% isn't that bad.

You should never loan against it, but it isn't locked away until you're 65.

All that to say, max out that pre-tax account. Lower your tax bill, and save more.

 

[isaiahsean]

@michaeldavis If it were me, I would be dumping as much as I could into your 401K and if you get that maxed out, into a traditional IRA. You marginal tax rate on that money is 22%. What that really means is you can either give the IRS $22 out of every $100 you earn or put that $22 into your 401K. In addition to that, money you put in now will grow over the next 40 some years. Let the government fund your retirement plans.

As you move through your 20's and into your 30's your needs will change and shift your excess income into other opportunities but loading up retirement now will really kick start your retirement fund when you cut back on it a bit.

 

[cristal11]

@michaeldavis It doesn’t sound like you have any high interest debt. If I were you I would minimum payment the student loans at 4%. at this point, I try to throw as much money as I can to my 401(k) you’re in your best decade for compound growth.

What do your state taxes look like? The rule is generally if the sum of your federal and state income tax brackets are greater than 30% then go traditional if lower go Roth

 

[michaeldavis]

@cristal11 Yep, my only debt is the student loans.

Combined, my marginal federal and state income tax rate is 27.75%. So, I that 30% rule would say ROTH for me. Where’s that come from? Thanks for sharing!

 

[cristal11]

@michaeldavis It’s a money guy rule. They are a group of CPAs on YouTube that give great financial advice backed up by research and statistics https://moneyguy.com/faq/should-i-contribute-to-roth-or-traditional-pre-tax-i-e-401k-ira-etc/

 

[convoluted]

@michaeldavis If your company had the ability to use a mega backdoor Roth contributions I would put it all in there. Initial investment can be pulled out if needed and gains aren't taxed when used in retirement. Plus there are many more investment opportunities, such as purchasing a rental unit.

 

[tabithahinson2004]

@michaeldavis I'm going to come out of left field here, and suggest that you add a face-value life insurance policy to your investment portfolio... Likely a whole life policy from a top tier company with large PCT growth.

At 23, your rates should be amazingly low; in a matter of years you will have a nest egg to borrow from for large future expenses, and provide for generational wealth way, way down the road.

I'd recommend as much as $400 a month will get you, aiming for $2M face.

Also, you have a large number of big discretionary expenses, one on top of the other: entertainment, going out, vacations... So $4800 really isn't a large reallocation.

 

[resjudicata]

@michaeldavis I am not a fan of dumping the $15.5k in your Roth IRA, especially with $8k in student loans. I’m assuming you don’t have credit card debt, given how organized you seem to be financially at only 23 years old. Listen, you will want money for short term. Life happens, and you can’t just always save and invest for the extreme far horizon. Open a Fidelity account and start a stock portfolio. Start with a low cost index like VOO. You will likely earn more than 4% return you were guaranteed by paying off your student loans early. Btw, I’m not saying that paying off your student loans or sinking powerful early dollars into your IRA are bad moves, but you are already covering those bases. There is no guarantee you will ever live long enough to spend your IRA, think of that as old-age insurance if you live longer than you are able to work.