Investing vs paying down SLs

[Deleted]

I am coming to a problem I need help with. I can save for retirement up to $4000/year for year (at least). However, I do have a student loan of $30/month ($5363. 14 at 5.75%)that will increase to $80 in 2.5 years. My husband has $17,000 worth of SL at 6.55% (deferred while in school about another 3 years) and $5500 at 5.75% (also deferred). He makes $26000 pre-tax and we own a duplex where we live and rent out the upper unit for $525/month. $8500 of the $17,000 we have as a last resort EF, as well as a much small real EF both earning interest at this time.
I am trying to get into grad school, which may or may not take loans (depends on a ton of factors) and then my SL will go into deferment. I have one more class in Fall to take before applying. My husband and I are also planning on having kids, as soon as possible hopefully that I will have one before grad school begins. If I do not get into grad school I want to try to pay off the SLs before he gets out, if I get in, I was thinking of just deferring the loans.
But for now, I won't know which is happening and do not know what to do with the $4000. I am planning to put away $2000 at least into a Roth, but not sure what to do with the other $2000.
Oh and we live in a very LCOL area and will have to move after graduation to a high COLA area so the raise from $26,000 to $35,000 won't help as much as I wish. Also, with the travel back to this area, we most likely will not be earning much from the duplex (breaking even probably).

[midjd]

Is your husband's SL interest-deferred (like a Stafford subsidized) or is the payment just deferred? If it's accruing interest, I'd throw the extra $ at the larger SL.

[Deleted]

All of the loans are stafford subsidized student loans. The lower interest ones are from undergrad, the higher from graduate school.

[Deleted]

"Also, with the travel back to this area, we most likely will not be earning much from the duplex (breaking even probably)."

Could you clarify this statement? Won't you be earning money from renting out your half of the duplex? Or do you mean that your housing costs in the new area will be significantly higher than what your half will earn?

[Deleted]

The cost of the travel from where we will be living to buffalo, NY will use up most of the extra income from the side we are living in, plus we will be getting a property management firm, which will cost money. Also, we will be paying the cost of the duplex out of that income. So in #s, each side will rent out for $525 so $1050/month times 10 months (2 months for vacancies/property management fee)= 10500- cost of duplex $700/month so $8400/year= $2100 Of which we will have travel expenses to come back and check on the property/fix stuff =$1520/year leaving on $580 net, before taxes.

[Sum Dum Gai]

How much do you currently have saved for retirement?

[Deleted]

A little under $10,000 my DH is 29 and I am 26. Also, I would love to buy another duplex but I am not sure how I would make that work (we would need another $14955 to do that).

[Sum Dum Gai]

A little under $10,000 my DH is 29 and I am 26. Also, I would love to buy another duplex but I am not sure how I would make that work (we would need another $14955 to do that).

Either of you guys expecting to get into a career where pensions are common when you're done with school?

[Deleted]

Yes, both of us want to become professors. Also, after post-doc ($35,000/year) a full professor can pull in much more. The professor I want to work under (been a full professor for about 5 years is making $75000 in a very LCOL area), my husband's PI is making $150,000/year. The other reason for the low amount in our accounts is my DH had no savings when he met me 4 years ago and the buying of the duplex. I am mostly worried about the 2-5 years of post-doc, in regards to cash-flow. I also wonder if paying $4000 this year (and hopeful the next 2 years) and then not paying more than 10% for those 2-5 years would work. However, I want to get to the point that I am saving/investing enough for retirement without those pensions or social security.

[Deleted]

Oh I forgot to add that we plan to pay back the $8500 (1/2 of the $17,000 6.55% loan) before there is interest. And the remaining $8500 loan will cost 97.82/month and the $5500 loan is $61.06. We can, if we chose, pay $30/month for 4 years then 80/month for 6 years for the $5500 loan. We are thinking we will do that and put the extra $31.06 on the $8500 loan.

[Sum Dum Gai]

However, I want to get to the point that I am saving/investing enough for retirement without those pensions or social security.

The longer you wait to start investing, and the less you put in, the less likely it is that you'd have enough for retirement without pensions or SS making up the difference.

[Deleted]

May 25, 2011 15:56:49 GMT -5 Sum Dum Gai said:

However, I want to get to the point that I am saving/investing enough for retirement without those pensions or social security.

The longer you wait to start investing, and the less you put in, the less likely it is that you'd have enough for retirement without pensions or SS making up the difference.

The bolded is partly why I want to invest the full $4000, but I worry about cash flow once my DH graduates grad school, so I want to pay down my SL.

[Deleted]

Gin,

Do you really need a property manager? I don't use one and I am (normally) out of the country. Before we moved out of the country I was out of state. I have a good handy man in each area who can handle small repairs. Right now I am writing 2 year leases to reduce turnover. I advertise on Craig's list about 2 months before the lease is up. I do make an annual trip home which is tax deductible for the handover between the tenants and to inspect the property.

[Sum Dum Gai]

The bolded is partly why I want to invest the full $4000, but I worry about cash flow once my DH graduates grad school, so I want to pay down my SL.

Split the difference for now. Re-evaluate after he graduates and starts working.

[phil5185]

I can save for retirement up to $4000/year for year

I would broaden 'retirement' to 'build family wealth' - it opens the goal/focus. 'Retirement' infers pretax (401k/IRA) and posttax (roth), accounts that get gov't restricted tax treatment in exchange for locking to age 59 1/2. You also need a taxable account, one that grows tax deferred and gets capital gains preferential taxation when/if sold. And it is available w/o restriction - it can be a fall back EF, house DP, rental houses, cars, etc. The key metric (for all 3 account types) is the return, use 10%/yr to 12%/yr products regardless of the future tax treatment.

And I would not prepay any of your loans, I would keep them and pay the minimums for the full term - direct your own incomes to investing (mostly in the taxable account at this time of your life). The rates are low on most of the loans - and the 6.55% loan is more attractive when you factor in that you get to use that capital for a few extra yrs before you must start paying it.

I would use a PM for the duplex, no need to travel back annually. And PMs usu sally keep a waiting list of pre-screened renters - so you won't have the 2-months of vacancy nor will you get dead-beat renters. That raises the rental income to $12,600/yr plus the depreciation tax break, about $500/yr. So, $13,100/yr minus PM $1300 minus your $8400 payments.

[Deleted]

Sorry Uncle Phil but while I agree with you on a lot of stuff I think it's a bad idea to not check on your property at least once a year. While I'm not a big fan of property managers (I don't think they spend the time or attention on your property they way you would) at least a property owner needs to check on the property manager!

I do agree that the OP needs to look at wealth building vs just the tax strategy especially since she and DH are probably not paying that much tax right now.

OP what is the amount of your "real" EF?

My concern is that you have a lot of change going on over the next 3 years e.g. moving, changing jobs and possibly a baby, not to mention the oh sh*t! things that can happen with a rental property. I'm thinking you probably should be staying pretty liquid. If you're a risk taker you could do what Phil does and keep $5k in the bank and invest the rest in a taxable S&P 500 index fund.

[Deleted]

Bonnap, it depends on what you count as an EF. I have saving for car repair/replacement, housing repair etc and I pay my insurance (home and car) as well as property taxes twice a year. If I exclude all of that I have $1000 as an EF, and an additional $95 as a mutual fund. Including all my savings I have about at best $6000 more.

[Deleted]

Gin,

I wouldn't count the insurance or tax money as part of an EF; that's a known and regular expense. I also wouldn't count the car repair and replacement an EF; it's actually a "sinking fund". I could see short term borrowing from time to time if you did have an emergency if it's your most liquid savings. But you will need to pay it back.

DH and I actually have separate checking accounts for each property as well as a separate account for our "personal" operating account and a savings account. I found it much easier to build up the EFs for each property, ourselves, and we used the "savings" account as our "car" account. It is so much easier when it comes to tax time if the property stuff is separated from personal!

As mentioned in the earlier post, Phil just keeps 5k in the checking account and keeps the rest of the EF money invested in a taxable SP 500 mutual index fund. His philosophy is that the long term investment return outweighs the risk of liquidating a portion of the fund for an emergency during a down market. I think he's right and his philosophy may work well for your situation. Disclaimer- I've been unable to convince my DH of trying it since I first mentioned it about 2 months ago. Therefore we're still sitting on about $100k of EF in a money market account. This in addition to another short term savings account for a remodel. We're also in flux; DH may lose his job at the end of the year. And regardless, he will be retiring the end of July 2012. We're being conservative because we need to test our retirement lifestyle for a year before we know if our proposed budget is realistic.

I hope my suggestions make sense for you.

[gs11rmb]

Gin - what is your academic discipline? If you are going for a PhD then it will take ~5 years. If you and your husband both want to be professors how will you decide where you will live? He'll finish first and then have to move while you are still in grad school. I ask because I used to work at a research university and with such severe budget cuts very few positions are open which leads to only the top notch candidates being hired. Not to dissuade you from pursuing this path but just a heads-up (although you have probably thought all this through). Also, throwing a baby into the mix, just complicates matters.

[Deleted]

Bonnap, I do not really consider that as part of my EF, but I wanted to give you a complete picture. The same EF is a major reason for us taking out the $8500. I have the business separated on paper but some of it is hard because of it being a duplex and us living here. We are attempting to build up our EF, as well as the separate sink funds but is slow growing. Things pop up and we have very low income. One thing in our favor is my DH has a contract with his PI, the department and the college in regards to being paid for the next 3 years and the funding is already there. My major concern is what will happen 3 years from now. We are saving over $100/month in a EF, in addition to the $100 for car repair/replacement fund and the separate fund for house repair. My immediate question still is what to do with the $4000. Split it $2000 for retirement and $2000 for the SL or all retirement?
Phil, I am not ok with not coming back and checking on the property as of now. The reason I am saving in the Roth is I can take out the deposits if necessary and I would like to maximize low tax bracket. Once we are earning enough to max out our Roths and 401ks or are earning too much for the Roth we will start investing in taxable accounts.

[Deleted]

gs11rmb, I am neuroscience which can either be in biology or psychology departments. Both my DH and I majored in psychology and the PhD program is a biology based program. We are aware that he will finish first and he plans to rent a room during post-doc and come back home over the weekends as much as he can without harming his career. My DH has a better chance on getting a position than me, because he is a minority and there are grants he is eligible for that make he a good business decision to take a tenure track professor. The reason we our planning to have kids early is that is what all my female professor's recommended. And I mean, every single one, the ones that had kids in grad school and the ones that waited. Many said their is more flexibility to do it in grad school vs post-doc and by the time I get the a tenure track job I will not have time at first and by the time I do I will have time only for one child. Because I have to write papers as large part of my job, I can do this if I have bed rest, also I can do some without my PI's knowledge and act like some of came during the bed rest and look more productive that I really may be. In regards to the baby, the school has a daycare, good one, for students and we would get a major discount which makes it close to affordable. If necessary I plan to work a research facility not a university even if that is my preferred choice and I can teach part time at night and continue trying to get a tenure track job.

[Deleted]

"Things pop up and we have very low income."

Exactly. Which is why I'm recommending you stay in something liquid.

I also agree with Phil to not pre-pay those low rate student loans. You need to step back and look at your situation holistically. Think about wealth-building vs just debt pay off.

You don't owe that much in student loans and your careers are just taking off. It's nice that you have that $8,500 cushion in the student loan. Did you actually receive that money and it's sitting in a bank account somewhere, or do you just have the ability to draw on it?

As your incomes start to increase use those % increases to add to your retirement contributions. Again with your incomes being so low the tax deferred feature isn't as important as making sure it's in an account that isn't being used as an EF.

BTW Congrats on pulling off the purchase of the duplex. Most folks in your situation wouldn't have had the wherewithal to do it!

[Deleted]

We are planning to stay liquid in our EF. The little over $100/month for the EF is not part of the $4000/year but separate just for the EF. Yes, we have received the $8500 and it sits in our high yield checking earning 2.75%. We have the ability to draw $4207.50 per semester as an addition SL (also subsidized) but I do not plan to unless a majorly good deal of a rental drops in my lap or I get into grad school but do not get funding. It does take two month (about) to get the money, though. I've always wanted buy property, ever since I was young, so I had been saving during college for it. Comparing between a Roth vs taxable, at my low income would not putting it in a Roth be better, for wealth building?

It looks like two for putting the whole $4000 in investments and one for splitting it $2000/$2000.