Retirement savings or debt

[laterbloomer]

So I have $11,000 I have to decide what to do with. My original plan was that is my TFSA money (Retirement savings) But I have $12 500 on my LOC that is driving me crazy. It was the loan I took for my RV.
I am behind on retirement savings, so they are not maxed no matter how you look at it. LOC is 4.99%
I think I know what the advice here is but walk me through it again. The LOC is driving me crazy.

[haapai]

I have a similar problem, minus the non-mortgage debt that could be retired with money that I am skittish about throwing into what appears to be an overheated stock market.  I'm also way behind on retirement savings. 

I know in my heart that I should be pushing this money into the market but I just can't seem to get myself to do it. 

In your case, the details beyond the principal and interest rate on your LOC matter quite a bit.  Care to tell us what the payments are?  Is the rate variable?  How long do you expect to be carrying it?  Are you currently anywhere close to maxing any of your retirement options? 

ETA:  Have you already made a 2020 IRA contribution?  What's your contribution limit?  (This is a polite way of asking your age, but it's the number that really matters.)  Do you have an existing Roth IRA account?  Do you have a workplace 401(k)?  If you have a 401(k) associated with your current employment, what kind of fees are you paying? 

[azucena]

With the debt at 5% and really not that high, I think you're better off putting retirement first.

[buystoys]

I'd put it into retirement savings.  You'll likely make more than 5% per year on average over a ten (or more) year period.  So you're getting more bang for your buck.  Of course, there's risk involved, but the opportunity for return is much better than paying off your LOC.

[laterbloomer]

Jan 17, 2021 13:49:12 GMT -5 haapai said:

I have a similar problem, minus the non-mortgage debt that could be retired with money that I am skittish about throwing into what appears to be an overheated stock market.  I'm also way behind on retirement savings. 

I know in my heart that I should be pushing this money into the market but I just can't seem to get myself to do it. 

In your case, the details beyond the principal and interest rate on your LOC matter quite a bit.  Care to tell us what the payments are?  Is the rate variable?  How long do you expect to be carrying it?  Are you currently anywhere close to maxing any of your retirement options? 

ETA:  Have you already made a 2020 IRA contribution?  What's your contribution limit?  (This is a polite way of asking your age, but it's the number that really matters.)  Do you have an existing Roth IRA account?  Do you have a workplace 401(k)?  If you have a 401(k) associated with your current employment, what kind of fees are you paying? 

I'm Canadian, we deal in RRSP's and TFSA's. I'm 55. I have a small contribution at work, only 2%. I switched to an Index fund under the Tax Free Savings Account system. I don't get a tax break right now but it won't count as income when I retire. Therefore I will qualify for the GIS which is worth about $7000/year right now, not including what it would be taxed. That $10,000 is only worth $2500 to me as a tax break now.

[laterbloomer]

Okay, using Phil Script may have convinced me. $10,000.00 lump sum @ 11%/ann. for 10 years: $28,394.21

Someone please promise me again that these things make a consistent 11% over time

[CCL]

Dollar-cost averaging, just keep putting it in and don't worry about whether it goes up or down.

[laterbloomer]

Jan 17, 2021 13:49:12 GMT -5 haapai said:

In your case, the details beyond the principal and interest rate on your LOC matter quite a bit.  Care to tell us what the payments are?  Is the rate variable? 

It's a fixed rate, the payment is $367/month

[buster]

First things first, ensure you have an emergency fund. 3-6 months of liquid cash or assets would do the trick. After that is done, I would ask yourself whether you would take out a 5% loan to invest in the market. My guess is the answer is no. I don't know your situation or how many years left you have left until retirement, but if you're already maxing your 401k and ROTH IRA (I realize this may not be the case), I would pay off a 5% debt before investing more in the market with after tax funds.

[WannabeWealthy]

Gotta go with Phil here.  Keep the debt and throw the 11k into the markets (401k).  I know it sucks to see that RV monthly bill but think about the gains you are getting every month on that 11k invested.

[jeffreymo]

I think our car loan balance is similar and around the same rate. Our choice is to max retirement accounts rather than pay it off.

[mary2029]

I agree with others on trying to max retirement. However, that doesn't mean you can't throw another $3 per month (to round it up to $370) at the LOC or randomly throw some money at it.
I try to max my retirement accounts by Oct (harder with the catch up contributions), so I have extra money for house and holidays. I also randomly throw $200 to $400 at the mortgage a few times per year. I kniw that isn't the best use of my money, but it is enough to make me think I am aggressively paying off the house.

[laterbloomer]

Jan 18, 2021 8:40:16 GMT -5 mary2029 said:

I agree with others on trying to max retirement. However, that doesn't mean you can't throw another $3 per month (to round it up to $370) at the LOC or randomly throw some money at it.
I try to max my retirement accounts by Oct (harder with the catch up contributions), so I have extra money for house and holidays. I also randomly throw $200 to $400 at the mortgage a few times per year. I kniw that isn't the best use of my money, but it is enough to make me think I am aggressively paying off the house.

That was my original plan. I will stick with it. 

[laterbloomer]

Jan 18, 2021 5:04:45 GMT -5 buster said:

First things first, ensure you have an emergency fund. 3-6 months of liquid cash or assets would do the trick. After that is done, I would ask yourself whether you would take out a 5% loan to invest in the market. My guess is the answer is no. I don't know your situation or how many years left you have left until retirement, but if you're already maxing your 401k and ROTH IRA (I realize this may not be the case), I would pay off a 5% debt before investing more in the market with after tax funds.

10 years max, and no I'm not maxed on retirement savings. 

I have prioritized staying out of debt before and that has left me way behind on my retirement savings. The fact is I will pay off the debt if I don't pay it off right now, I do not have a history of replacing my retirement savings.

[jd2005]

I'm a Dave Ramsey fan (ducks for cover)...I'd put all of the $$ but $1k against the debt.

[laterbloomer]

Jan 18, 2021 12:09:24 GMT -5 jd2005 said:

I'm a Dave Ramsey fan (ducks for cover)...I'd put all of the $$ but $1k against the debt.

But what about retirement?

[jd2005]

Jan 18, 2021 12:23:12 GMT -5 laterbloomer said:

Jan 18, 2021 12:09:24 GMT -5 jd2005 said:

I'm a Dave Ramsey fan (ducks for cover)...I'd put all of the $$ but $1k against the debt.

But what about retirement?

Retirement after you pay off your debt.  Focusing on one thing helps you achieve the goal.  

[Tiny]

I'm guesstimating you have about 36 more payments on LOC (the loan)?    

I'd invest the $11K - is there some sort of retirement tax advantaged account that you can get it into? 
OR could you bump up your payroll retirement deduction and use the 11K for the next year or two to cover the short fall in net income? 

OR if you are looking at retiring in 5 years (at 60? or 62?) could you invest this money after tax and label it part of your "retirement cash" to be used if you need to a "bridge" during the first few months of "retirement" until you get your retirement income flow settled?      5 years isn't that long a time (and your LOC should be paid off well before that?) 

If you pay off the LOC - what would you do with the payment amount?  Would you just be moving that amount to savings?    If you are going to do that, I'd just invest the 11K and keep making payments on the loan.     (What if you figure out when the loan will be at some smaller amount say 1K and when the loan gets to that amount - just pay it in full.  That doesn't save you interest. but it does give you a "feel good" in that you paid it off sooner than required AND you have a "done date" that maybe fits into your plans a bit better.  ) 

[countrygirl2]

As you all know we don't do debt, just us. But hubs was fortunate to move into high paying jobs for 15 years which set us up for retirement. But I would rather do that then pay interest right now.

[Rukh O'Rorke]

Jan 18, 2021 13:20:48 GMT -5 jd2005 said:

Jan 18, 2021 12:23:12 GMT -5 laterbloomer said:

But what about retirement?

Retirement after you pay off your debt.  Focusing on one thing helps you achieve the goal.  

Frankly, at 55 the time is short to get money working in the market for growth before retirement.

to an earlier question from Later - past results are not a guarantee of future performance, and your money put in the market today could be 50k or 5k ten years from now.

[Rukh O'Rorke]

In your situation Later, I would invest it.

While 10 years isn't a long period to reap the benefits of the market - if you don't have to access this money immediately, it, or some part of it, could keep growing for the next 30 years.

At the point the returns may be almost assured.

[ajmom]

How about doing some of each — some for investing and some for pay off. This is what I would do if the debt was really getting to me. Yes, supposedly you will get 11 percent a year (we never paid attention to the rate , and we accumulated 2 million in 28 years, but we were obsessive about not taking it out and we lived very frugally. In fact, I know the neighbors laughed at our very modest house and that we each owned cars over 15 years old... But they couldn’t figure out how we were able to send our kids to private school. Haha. That one always made me laugh.. ). I’m not bragging. I’m just saying It can be done, but you just have to be in it for the long haul, and you have to stick to the plan.).

But having said that, there is nothing, nothing, nothing like the feeling of having no debt! So if you are already investing wisely, I vote for a little bit of both. Good Luck!!!