Welcome to City-Data.com Forum!
U.S. CitiesCity-Data Forum Index
Go Back   City-Data Forum > General Forums > Economics > Personal Finance
 [Register]
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
View detailed profile (Advanced) or search
site with Google Custom Search

Search Forums  (Advanced)
Reply Start New Thread
 
Old 05-15-2013, 07:53 AM
 
Location: Summerville, SC
3,382 posts, read 8,616,518 times
Reputation: 1456

Advertisements

So yesterday some people were talking about doing a 401k loan with my company, some are knowledgeable and done a few, so I got a lowdown on some of it but I need to look into and deep dive into the details. I used to know people that used them like monthly for crap, I usually just think throw money in and leave it.

1st, you can do up to half your 401k, its like a one time $50 fee. All interest you pay goes back into your 401k. I still need to confirm this.


Either way usually I think, I don't want to touch any of my retirement money etc... Then I got to thinking. My wife and I have some alot of student loan debt.

We can't pay it all off, not enough money in the 401ks. I was mainly going to focus on one private student loan that is 10.5% interest. It is ~$8900. Current plan has it payed off February, 2018. So just under 5 years.

Just skimming a brief Overview, saw I can borrow up to 5 years, for a General loan, and 20 for a residential loan.

They list 3.25% fixed vs a 10.5% variable on my other loan.



Now I know the downfall is reduced growth opportunities, but the upside is cutting my interest rate on the loan? Over 5 years, will I see a 7.25% growth? And even then the number isn't exact because I will be repaying the money over those 5 years, so the money will be seeing growth. Even then the interest I do pay... is going right back to me, so its kind of like I am saving the 10.5% overall.

Since its a student loan, I can't default, so if say I lose my job, everything its not like I can declare bankruptcy, so it makes it a little more appealing to tap retirement, over say a general loan like a house/car/credit card. I also recently was thinking of the 20 year loan towards my house, so I could gain enough equity to lose my Mortgage insurance. But does not apeal to me as much.


I am just starting to dig into this a little bit, and wondering if this may actually be a viable plan. I am normally put money in retirement and don't touch it guy.

This retirement account has $23k in it(accrued over 2.5 years). I have another with about $8500, I still need to rollover into this one. I just turned 31. My wife has about $25k and is 32.
Reply With Quote Quick reply to this message

 
Old 05-15-2013, 08:03 AM
 
Location: The Triad
34,090 posts, read 82,565,007 times
Reputation: 43650
Quote:
Originally Posted by MustangEater82 View Post
saw I can borrow up to 5 years, for a General loan, and 20 for a residential loan.
They list 3.25% fixed vs a 10.5% variable on my other loan.

Now I know the downfall is reduced growth opportunities, but...
but if you can pay YOURSELF then the issue comes down to how long
or how much sooner you can get to zero on the student debt repayment into the 401.
$8900 @ $300 per month = 30 months (December 2015)

Will your employer keep contributing their share during the interim?
Reply With Quote Quick reply to this message
 
Old 05-15-2013, 08:14 AM
 
Location: Summerville, SC
3,382 posts, read 8,616,518 times
Reputation: 1456
Quote:
Originally Posted by MrRational View Post
but if you can pay YOURSELF then the issue comes down to how long
or how much sooner you can get to zero on the student debt repayment into the 401.
$8900 @ $300 per month = 30 months (December 2015)

Will your employer keep contributing their share during the interim?
Not quite sure what you are getting at? Are you asking if my company will pull their contributions during that time? I believe all my company contributions are 100% vested immediately.

Opening the loan guide now to start deep digging. But here is a screenshot of an overview of loans.
Reply With Quote Quick reply to this message
 
Old 05-15-2013, 08:53 AM
 
Location: Censorshipville...
4,386 posts, read 8,065,953 times
Reputation: 4942
Make sure your company will allow you to still contribute while you have a loan out. Some don't so that means you won't be getting a matching since you can't contribute.

Also be aware since you mentioned the hypothetical of losing your job. You are obligated to pay back the balance of the loan or you will be considered taking the loan as income and have to pay taxes/penalty.

I personally wouldn't do it. I've been getting a higher return than the 10.5%. Last year I got 13% and this year so far is almost 18%. Anyway those loans could be consolidated to a lower interest rate? Seems pretty high for a school loan. I've seen personal bank loans for less than that.
Reply With Quote Quick reply to this message
 
Old 05-15-2013, 04:20 PM
 
20,793 posts, read 61,118,536 times
Reputation: 10691
While $8500 may seem like a lot, it's not. Can you pay an extra $50/month or whatever toward the principal and pay it off faster? Do you have a paid off car that you could put up as collateral for a bank loan that will have a much lower interest rate. I know it sounds appealing to pay of that loan but you are really hurting yourself in the long run by touching your 401K now.

While not the best way to run the numbers, look at something like this to see the end result of not putting funds in for 5 years 401(k) Savings & Planning Calculator - Bloomberg

Maybe someone has a link to a better calculator. Taking 5 years off those dollars can mean a difference of maybe 2,000,000+ in retirement--assuming you are 30 and are saving for another 40 years or 35 years....so how bad does that $8500 look now?
Reply With Quote Quick reply to this message
 
Old 05-15-2013, 11:10 PM
 
1,784 posts, read 3,449,353 times
Reputation: 1295
Quote:
Originally Posted by golfgal View Post

Maybe someone has a link to a better calculator. Taking 5 years off those dollars can mean a difference of maybe 2,000,000+ in retirement--assuming you are 30 and are saving for another 40 years or 35 years....so how bad does that $8500 look now?
How are you get 2 million ??

Assume net 10% every year (I'll be generous):

8500 * (1.1^40 - 1.1^35) = 145K


You would need to have about 117K not invested for the first 5 years (35 vs 40) to have a 2M difference.
Reply With Quote Quick reply to this message
 
Old 05-16-2013, 05:28 AM
 
20,793 posts, read 61,118,536 times
Reputation: 10691
Quote:
Originally Posted by snowdenscold View Post
How are you get 2 million ??

Assume net 10% every year (I'll be generous):

8500 * (1.1^40 - 1.1^35) = 145K


You would need to have about 117K not invested for the first 5 years (35 vs 40) to have a 2M difference.
I was calculating the lost investment dollars in a 401K assuming he loses the match and his ability to contribute while he has a loan out, not the value of the student loans now. The numbers aren't exact and I said it wasn't the best calculator but even with your example, that's a lot of money to pass up...
Reply With Quote Quick reply to this message
 
Old 05-16-2013, 09:21 AM
 
Location: Summerville, SC
3,382 posts, read 8,616,518 times
Reputation: 1456
Quote:
Originally Posted by golfgal View Post
I was calculating the lost investment dollars in a 401K assuming he loses the match and his ability to contribute while he has a loan out, not the value of the student loans now. The numbers aren't exact and I said it wasn't the best calculator but even with your example, that's a lot of money to pass up...
I do not believe I will be losing my match or ability to contribute. Still looking intoo it.


My understanding, is I am just exchanging a student loan for a 401k loan. Making my payments lower and interest being paid to me instead of a bank. Only trade off being, I lose the $9k ability to make money in the market for 5 years. But every month that amount gets lower, as I will be paying it back in. Paying back about $2k a year.
Reply With Quote Quick reply to this message
 
Old 05-16-2013, 09:36 AM
 
20,793 posts, read 61,118,536 times
Reputation: 10691
Quote:
Originally Posted by MustangEater82 View Post
I do not believe I will be losing my match or ability to contribute. Still looking intoo it.


My understanding, is I am just exchanging a student loan for a 401k loan. Making my payments lower and interest being paid to me instead of a bank. Only trade off being, I lose the $9k ability to make money in the market for 5 years. But every month that amount gets lower, as I will be paying it back in. Paying back about $2k a year.
Even if you don't lose your match or funding ability you are taking $9000 out of your 401K and like snowdenscold showed, that's going to cost you $145,000 to do that. It's just not worth it. You will be FAR better off in the long run just putting an extra $20/month against the principal of your loan or even just continuing to pay at your current rate over 5 years then you would be to pay it off next month and lose that money in your 401K and for you retirement. It's just too short thinking to do that. You have to look 40 years down the road.
Reply With Quote Quick reply to this message
 
Old 05-16-2013, 10:08 AM
 
1,784 posts, read 3,449,353 times
Reputation: 1295
Quote:
Originally Posted by golfgal View Post
Even if you don't lose your match or funding ability you are taking $9000 out of your 401K and like snowdenscold showed, that's going to cost you $145,000 to do that. It's just not worth it. You will be FAR better off in the long run just putting an extra $20/month against the principal of your loan or even just continuing to pay at your current rate over 5 years then you would be to pay it off next month and lose that money in your 401K and for you retirement. It's just too short thinking to do that. You have to look 40 years down the road.
Well, it wouldn't be like he was really losing $145K over his life.

He'd now be saving ~$190/mo on his car loan. So if he now puts that saved amount back into the market through repayment each month, it comes out close to a wash.

I believe his 401k balance 5 years from now would look somewhat similar? In fact maybe a little bit higher? This is because his student loan rate is higher than what the market would return (we're assuming). Of course if he takes his monthly savings from lower interest and just spends it on stuff rather than reinvesting his balance will be lower.




If he was putting 8500 on the sidelines for 5 years and doing nothing with it, then yes, he'd miss out on 145K over 40 years. But that's not this situation.

Now with that said, since it's not a huge advantage, I'm not sure whether it's worth the risk of a job loss where he might owe it immediately. And obviously not if he lost his funding or matching ability.
Reply With Quote Quick reply to this message
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.

Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.


Reply
Please update this thread with any new information or opinions. This open thread is still read by thousands of people, so we encourage all additional points of view.

Quick Reply
Message:


Over $104,000 in prizes was already given out to active posters on our forum and additional giveaways are planned!

Go Back   City-Data Forum > General Forums > Economics > Personal Finance
Similar Threads

All times are GMT -6.

© 2005-2024, Advameg, Inc. · Please obey Forum Rules · Terms of Use and Privacy Policy · Bug Bounty

City-Data.com - Contact Us - Archive 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37 - Top