SVT
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Post by SVT on Jan 30, 2011 21:23:47 GMT -5
Age: 25 Income: $55k+ (figures below based on $55k only) Match: 4% Other: Single and I'll be renting after house gets sold in 2 weeks so I won't have any mortgage interest or property tax deduction anymore Current Retirement Balance: $35k
My choices:
6% - $1750/month left over after all bills including $416/month for Roth 11% - $1450/month left over 16% - $1150/month left over 21% - $1000/month left over 26% - $775/month left over 30% (max) - $550/month leftover
I'm thinking the right answer is somewhere in the middle. Basically, I'm trying to make the decision based on the amount I think I should allow myself to have after all bills to use for paying down high interest student loans and savings. I was thinking of doing something like 11%. That plus the 4% match and the Roth is nearly 25% to retirement and it will leave me with $1450/month after all bills for savings, spending, and paying off high interest student loans. Although I've also been thinking about my tax liability at the end of the year.
What do you think?
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formerexpat
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Post by formerexpat on Jan 30, 2011 22:18:39 GMT -5
21% along with the standard deduction and exemption appears to bring you into the 15% bracket for federal taxes. I'd play with that, trying to keep your taxable income under $34.5k to determine how much to contribute to your 401k.
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phil5185
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Post by phil5185 on Jan 30, 2011 23:02:10 GMT -5
How come a 5% step sometimes lowers the remainder by $300/m and sometimes only $150/m? Or $225/m?
How high is the high interest SL?
I would want at least 16%, that, plus the match, invested at 11%/yr, would be $2.4M at age 55. And the Roth would be $1.1M. You probably don't want to aim lower than that? Remember, $3.5M in 2040 won't do what $3.5M does today.
And then put some into a taxable account - they are accessible (not locked until age 59 1/2) so you can push your envelope, build up a pre 59 1/2 fund - use it as a backup EF, etc.
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SVT
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Post by SVT on Jan 30, 2011 23:16:32 GMT -5
How come a 5% step sometimes lowers the remainder by $300/m and sometimes only $150/m? Or $225/m? How high is the high interest SL? I would want at least 16%, that, plus the match, invested at 11%/yr, would be $2.4M at age 55. And the Roth would be $1.1M. You probably don't want to aim lower than that? Remember, $3.5M in 2040 won't do what $3.5M does today. And then put some into a taxable account - they are accessible (not locked until age 59 1/2) so you can push your envelope, build up a pre 59 1/2 fund - use it as a backup EF, etc. The figures are done ultra conservatively by rounding down a bit. I have like $10k @ 9.25%, $3k @ 6.25%, and $12k @ 5.25. They're private loans with Sallie Mae and I think they all have to be paid together. I don't think I can just pay down the 9.25% loan. Sallie Mae combined the loans together. I also have like $35k at 6.8% fixed for 25 years.
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Post by ummboutthat on Jan 30, 2011 23:18:27 GMT -5
when I first started it was 15% and my x-BFF - said that was too much then I dropped down to 10% then I started to want more in my pay checks so lastly I dropped down to 2% it barely grows company is changing the rules again this summer when it takes effect I'm thinking of going up....to ...maybe...5%
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bean29
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Post by bean29 on Feb 1, 2011 11:40:31 GMT -5
Personally I agree with the somewhere in the middle comment. If you can afford to invest so much some of your investing should be outside your 401K. You may want to tap some of your nest egg 10 0r 20 years down the road and not yet be eligible to tap into the 401K.
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busymom
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Post by busymom on Feb 2, 2011 8:54:25 GMT -5
If you make extra payments to your student loans, how long would it take you to get rid of them? It would be good to take a close look at your overall debt, and make a plan on paper for paying it off, before you decide how much to put in the 401K.
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phil5185
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Post by phil5185 on Feb 2, 2011 10:37:12 GMT -5
I have like $10k @ 9.25%, $3k @ 6.25%, and $12k @ 5.25. They're private loans with Sallie Mae and I think they all have to be paid together. I don't think I can just pay down the 9.25% loan. Sallie Mae combined the loans together. I also have like $35k at 6.8% fixed for 25 years. I would recheck that $10k loan - if allowed, prepay it and pay the minimums on the other $50,000. But if you really are not allowed to prepay the $10k, I would pay the minimums on the whole $60k. (Your composite rate for the entire $60k is 6.87%). The way to get the $3.5M is to make that your priority - ie, have that money automatically withheld & invested incrementally (per pay period) w/o fail for 30 yrs. If you apply that discipline, you can enjoy spending the remainder of your income, content in the knowledge that the "$3.5M Plan @ 55" is on track. Stated another way - don't derail the $3.5M Plan by using (misusing?) your income to prepay inexpensive long term debt.
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DVM gone riding
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Post by DVM gone riding on Feb 2, 2011 10:49:44 GMT -5
I would go with 8-11% and then Save a lot of the rest for future other investment-ie buying another house, and aggressively paying down the first three loans. Once the loans are paid off then I would increase the contributions. You are doing amazing for 25!! I am almost 30 make a little more and no where near that good. But I do have my loans fixed at no higher then 5% But you have private loans so that is more of a problem
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hsclassic
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Post by hsclassic on Feb 2, 2011 12:29:49 GMT -5
I would go for the 16% contribution. Not only does it reduce your taxable income now, you benefit from time - the time to let your returns compound and grow further. (See Phil for the details.)
Granted, I'm assuming you can adjust this percentage at least 1x/year (and possibly at any time). If you can change the percentage at any time, you can always adjust it up or down based on whatever financial challenge you are facing at the time.
As for the SL's, if you can't prepay (I'm a fan of getting debt eliminated quickly without sacrificing savings), put some amount of the leftover in a separate account with a goal of a lump-sum payoff. Even if you can prepay (but perhaps not targeted repay), I'd still vote for extra principal payments each month given the combined interest rate you are paying.
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gooddecisions
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Post by gooddecisions on Feb 2, 2011 13:43:30 GMT -5
Percentages are pretty worthless. I personally try to contribute the full amount the government will allow. When my income was especially low, I was contributing 30% (which was only $6,600/year) and it meant cutting back on other things but it will hopefully be worth it some day. When it comes to IRAs everyone recommends contributing the full amount, but for some reason people talk in percentages for the 401(k). Everyone is going to need at least 2MM to (just) survive 40 years of retirement and that will be hard to achieve by only contributing $5000/year.
Not long ago, I took out the percentages and posted my annual contributions over the past 10 years. People immediately replied "why were you only contributing $6,600/year in the beginning!" Well, if they knew my income was only $22000 they would realize that was the max I could contribute. On the other hand, if i had posted the percentages everyone would have said "you're doing great!". lol
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gooddecisions
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Post by gooddecisions on Feb 2, 2011 13:47:47 GMT -5
You're lucky to make a good salary at a young age. Don't blow it by increasing your lifestyle so much that you can't max out your retirement contributions.
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hsclassic
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Post by hsclassic on Feb 2, 2011 16:02:33 GMT -5
Gooddecisions makes a very good point about percentages....they are misleading. Reaching maximum allowable contributions is the objective.
I'll stand by my 16% suggestion so that you have funds leftover for other savings, and having a life. However, raising that percentage every year until you max out the annual contribution is your ultimate (and urgent) goal. If you feel comfortable going with 30% now without impacting your other savings and maintaining a reasonable lifestyle, go for the max today!
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Gardening Grandma
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Post by Gardening Grandma on Feb 4, 2011 15:49:43 GMT -5
You're lucky to make a good salary at a young age. Don't blow it by increasing your lifestyle so much that you can't max out your retirement contributions.
(Looking for the "thumbs up" icon)... I've never met anyone who said, "Dang! I saved too much for retirement!"
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SVT
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Post by SVT on Feb 4, 2011 17:20:57 GMT -5
Wow, I didn't realize I had more replies since Feb 1st...
Phil, I found out that I can in fact split those loans up. I have to request SM to split it up into different billing groups. By default, they put all the loans into one billing group. So I could split it up and pay down the 9.25% loan, which is what I think I'm going to do.
Also, if you remember from the other thread, I found out that my consolidated federal loans, which is a total of $38k, is actually 6%.
I haven't found out yet how often I'll be allowed to adjust the percentage. Most companies let you whenever, right? I know the company that I just left only allowed changes in contribution percentage once every 6 months.
I was thinking of this. Afterall, whatever I don't put towards retirement and towards student loans, will be put in a taxable account in ETFs or index funds. If the account grew to an amount greater than the amount of loans I have and I didn't feel like paying on them anymore years down the road, I could just get rid of them all at once.
I don't know yet. I'm interested to know as well. I should know very soon. As soon as I found out, I'm going to figure out how I want to allocate contributions then roll over my $21k 401(k) to Vanguard into an IRA. I know the new company used to use Fidelity but apparently they changed it a little while ago so I don't know who they use now. I hope they have some good, cheap, index funds though.
Nah, I'm not. It's not that if I don't pay extra on the student loans or contribute more to retirement, I'm going to blow all my extra money on cars and and other "stuff". Just trying to decide how to best allocate my income to build wealth and figure out what percentages (or dollar amounts) would be best.
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