Debt vs. Retirement (and what type?)

[dragonfly7]

(This is a combination of things Jenr and cawiau have already asked, but I didn't want to hijack their threads.)

Now that we are approaching financial stability, I'm trying to figure out debt payoff and retirement savings for DH and I.

DH, a new teacher, currently contributes 6.4% to the state pension plan. The state's contribution in the pending Texas budget is 6%. (Luckily, there are no plans to eliminate his position for the next school year.) We could potentially start a 403(b) (no match) and/or a Roth for him but certainly couldn't max out both. I am unemployed, looking, and do not yet have any retirement savings. He and I are 28 and 26.

Meanwhile, we have just under 14k in CC debt at an average of 24%. At that rate, I'm assuming it should be eliminated first, but after that, which type of retirement savings should take priority? 401k up to the match (if I have one), Roth, then 403(b)? Or something else?

We are firmly in the 15% tax bracket. The jobs I am looking at would barely push us into the 25%, if at all.

[Deleted]

ACK. Get rid of that debt!!!! Can you do a balance transfer to a lower rate card?



After that a 401k up to the match and next the ROTH is my preference.

[Plain Old Petunia]

I agree with Archie. Your dh's pension will be taxable income. So if that pension is substantial, when it comes time to draw down retirement assets, they are all going to be taxed. Your 0% and 10% brackets will already be filled by the pension, maybe your 15% too. Having some income from Roths will be very beneficial.

I'm not saying avoid tax-deferred accounts completely, but fund your Roths before making non-matched tax-deferred contributions.

[tskeeter]

While paying down the credit card debt is important, I wouldn't delay Roth contributions to apply everything to the credit cards. The most effective way to prepare for retirement is to save early to take the maximum advantage of compounding your investment. My suggestion is rather than approaching this as a one or the other decision, approach it as a blended decision. How much money do I apply to reducing the credit card debt and how much do I apply to retirement savings? As the credit card balance comes down, you may apply more money to retirement savings.

By the way, if you don't have an emergency fund, that is the first thing you take care of. Before retirement savings. Before paying off credit cards. Having an emergency fund keeps relatively minor hiccups from turning into a charge on the credit card that costs you 24% a year. I'd initially target the emergency fund at $500, then within six months increase it to $1,000, then keep adding to it for several years until it reached about $10K. While $10K is a lot of money, it would allow you to ride out events like unexpectedly needing to replace the roof on a house, or buy another car, or be unemployed for a few months, etc.

[The J]

I would eliminate the credit card debt first, as much as I hate the idea of delaying retirement savings. But you should eliminate that debt as quickly as possible -- which means a complete austerity budget. Then 401(k) to matching point, then Roths.

[Gardening Grandma]

We're talking CC debt at 24% interest here! Twenty four percent!

That should be your number 1 priority. Yes, DH should contribute his 6.4 to the pension plan, but until that debt is eliminated, I think it would be foolish to put money anywhere else, including ROTH IRA's.

This is from a Yahoo finance column.....
Certain types of debt are toxic to building wealth. High-interest credit card debt can fester in your finances and cost more than can possibly be regained through saving and investing. Still, if you have access to a retirement account at work, take advantage of it. (See Rule 5.)

"If it's costing you a rate of interest and you're not getting a deduction for it, that would be the first order of business before you do any significant saving," says Brian Kuhn, Certified Financial Planner at Retirement Planning Services in Millersville, Md.

Mortgages and student loans score a pass due to the deductibility of the interest, but car loans and credit cards can sport interest rates well above yields on aggressive investments.

Pay off expensive debts and then accelerate retirement savings in earnest.