Using retirement money to pay off student loan - Mothering Forums

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#1 of 14 Old 05-12-2011, 01:23 PM - Thread Starter
 
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We have about 18K in retirement savings that we can withdraw without any penalty. (This is not all of our retirement savings, only a small portion.)

 

I've been keeping this money in the back of my mind as part of a downpayment toward a larger house we'd like to buy in the future. (Depending on how expensive the house is, we may or may not need this money.)

 

But we also have a 19K student loan (posted about in another thread) that is our only debt aside from our current mortgage.

 

It may take us a year or two to find the right house, so the money is just sitting there (and basically earning nothing right now).

 

Should I use this money to pay off the student loan? It would reduce the chunk of change we'd have on hand to buy another house, but it would also free up $200/month.

 

Thoughts?

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#2 of 14 Old 05-12-2011, 02:18 PM
 
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Whats the interest rate on your loan? Whats the interest rate on the acct the money is sitting in? Can you get an acct w a better rate (most of them suck right now, but figured id ask)?

We looked at student loans last night and determined it was better to leave it in deferment accruing 1.87% and pay a little every month to bring the balance down than it was to pay it off with our cash on hand. So I'd recommend comparing those numbers.

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#3 of 14 Old 05-12-2011, 02:30 PM - Thread Starter
 
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Student loan is 3.875%.

 

Money in investment account is earning basically nothing. It's actually lost $2K in the past three months. 

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#4 of 14 Old 05-12-2011, 02:47 PM
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I would do it. I like the feeling of a clean slate.

 

The only debt we have right now is a student loan. If i had the cash in hand, I would pay it off first thing. Seriously. Then we would be debt free, and we'd start saving up for a house (though we can't decide if we want to buy one again, or what). 

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#5 of 14 Old 05-12-2011, 04:09 PM
 
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I wouldn't do it, but we've already discussed this a couple times in your other threads.


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#6 of 14 Old 05-12-2011, 04:23 PM - Thread Starter
 
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Quote:
Originally Posted by sunnysandiegan View Post

I wouldn't do it, but we've already discussed this a couple times in your other threads.


I guess they're technically not retirement funds. I should probably just call them investments. They are separate from our 401ks. It's actually money we inherited about four years ago and chose to invest at that time. 

 

My other thread was whether we should use the money sitting in our bank accounts to pay down the loans. 

 

I guess I'm just frustrated because I feel as though we can't move forward with our financial plans until we buy our "forever house." 

 

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#7 of 14 Old 05-12-2011, 05:33 PM
 
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I would focus on that last statement and figure out why you feel that way. hug2.gif


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#8 of 14 Old 05-12-2011, 06:34 PM
 
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Quote:
Originally Posted by taubel View Post

 

I guess I'm just frustrated because I feel as though we can't move forward with our financial plans until we buy our "forever house." 

 


Housing is a dynamic part of your life and thinking like that can really cause financial headaches.  There IS no such thing as a "forever house" until the end of your life.  Life changes.  You have to adapt.  You have to make your financial goals with these changes and adaptations in mind.  If you "wait"... you'll always find something to wait for.  It doesn't mean that you might not find a house that eventually becomes your forever house, but going into it with that expectation is not sound financial thinking.

 

I agree with Sunny.  It seems that you are potentially making some bad financial moves based on your emotions.  You need to take step back and evaluate everything because your financial goals should not be dependent on your emotions, your housing or your emotions about housing.

 

If what you have is a taxable investment that you are considering cashing in to pay OFF a student loan (not pay DOWN, but OFF), then I can see some logic to that if you have maxed out your other retirement options.  However, unless you are already maxing a Roth IRA for both of you, then I would consider instead of paying off student loans, to roll that taxable investment into a tax-exempt Roth IRA and hold on to the money for your retirement.  You can each roll $5000 per year into the Roth.  It is *still* accessible, or at least the principle is... any gains are not accessible until you are 59.5 years old... but it will not be a taxable gain every year.  I guess what I'm saying is that you are trading long-term security for today's goals.  That is no different than just using a credit card for instant gratification.

 

ETA:  I know my post sounds harsh, but I hate to see people give up retirement for dealing with today's problems.  This is probably because I've seen many people in my family do this and now my mother, who is penniless, has to live with us.  My sister is in her 50's with no retirement and has lost her "forever house" along with her marriage.  Dh and I have diligently been saving and he will retire in less than 10 years at 65 and the sense of security we have is just irreplaceable.  Don't give up your long-term future for a quick fix today.  You will regret it later.

 

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#9 of 14 Old 05-13-2011, 08:06 PM - Thread Starter
 
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OK - I should not call it a "forever house." But for many different reasons, DH and I have decided (after 8 years of living in our current home) that we need to either buy a slightly larger home or add on to ours.

 

Both will cost money.

 

What bothers me most is that I don't know and can't plan for how much money.

 

We are leaning towards buying a different house. We may find one for $200K. We may find one for $270K. And then we'd need to sell our house. We don't know how long that will take or what we will get for our house (although we have a fairly good idea). 

 

Once the new house is purchased or ours is remodeled, we will have a much better idea of our mortgage payment and how much of our chunk of savings is left over. Then it will be MUCH easier to decide to pay down the debt, put more into retirement, etc. So that is what I mean when I say I'm frustrated.

 

I also view my home as retirement savings. The housing market has remained fairly stable in our area. Even if we don't make money on a house, we will be able to at least sell it for what we paid for it. To me, investing the money for retirement is just as risky as investing it in a house.

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#10 of 14 Old 05-13-2011, 10:48 PM
 
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I hear what you are saying and I empathize. hug2.gif However, I think you need to go deeper into your emotions surrounding money. Not on this board, but privately and with DH. Really examine how you feel and why. Discuss your thoughts and feelings with DH and solicit his.

 

Food for thought: What is really holding you back from making a decision? You've asked the same questions a handful of times, just dressed them up a bit differently, and have gotten pretty much the same answers each time (a mix, which is par for the course). Ultimately, all financial decisions are best made between the people involved and only those people. Listening to other viewpoints and professional advice can be good, too, but it still comes down to you and DH. Your values are what matter. And that is where I think you would benefit the most ... focus on discovering your financial values and DH's and how they mesh together. These types of decisions become a lot easier at that point.

 

May you find strength and peace. smile.gif


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#11 of 14 Old 05-14-2011, 11:36 AM - Thread Starter
 
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Quote:
Originally Posted by sunnysandiegan View Post

I hear what you are saying and I empathize. hug2.gif However, I think you need to go deeper into your emotions surrounding money. Not on this board, but privately and with DH. Really examine how you feel and why. Discuss your thoughts and feelings with DH and solicit his.

 

Food for thought: What is really holding you back from making a decision? You've asked the same questions a handful of times, just dressed them up a bit differently, and have gotten pretty much the same answers each time (a mix, which is par for the course). Ultimately, all financial decisions are best made between the people involved and only those people. Listening to other viewpoints and professional advice can be good, too, but it still comes down to you and DH. Your values are what matter. And that is where I think you would benefit the most ... focus on discovering your financial values and DH's and how they mesh together. These types of decisions become a lot easier at that point.

 

May you find strength and peace. smile.gif


Thanks! DH and I have discussed finances to death! He doesn't care where we live or how much money we have. Both of us live very simply and are very conservative when it comes to money. I am very indecisive and afraid to take risks when it comes to spending money. But I definitely do want a different house. I'm just afraid to take the plunge! I base everything on the worst case scenario - like what if one of us were to lose our job? But of course that could happen no matter where we live, and a house that costs us $300 more a month isn't really going to make a difference if we face a large loss of income.

 

I have asked slightly different questions each time I've posted and most of the answers have been very helpful to me. I was terrified to pay off our car loan, and then I finally did it, based on advice I received on this board, and am very happy I did it. We did not need that money. We still have a large chunk in the bank. And now we have an extra $300/month, which is going right back into that savings.

 

Thanks for your continued support! 

 

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#12 of 14 Old 05-17-2011, 09:47 AM
 
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3.87% is not a super high interest rate (is it locked in?), but I'd be worried about having savings in something that is not secure and loses money (but that's just my low risk nature speaking).  Have you considered paying down part of the loan just to reduce the total interest that will be paid....while still keeping some savings accessible for some downpayment?   When I was going through this decision of whether to pay down student loans, I found that looking at my student loan statements and the "amount paid to interest" vs "amount paid to principle" was very powerful for me. I realized how much money I was "throwing away to the banks". Anything I've read on financial planning has said to pay down debts first (unless the investment is earning more).  Your liabilities (debts) (combined with downpayment amount) could also affect the mortgage rate on a new home purchase.

 

I also wonder what it going to happen to housing prices down the road when more baby boomers move out of their homes into care facilities, apartments, etc.

 

There's a book that I really liked called "Your Money or Your Life" - all about financial stuff and how to tie it into your values and life goals with the ultimate goal of achieveing financial independence (not needing to work and living off your interest).  It's a bit dated now but the info is probably timeless.

 

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#13 of 14 Old 05-18-2011, 06:53 PM
 
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I have really enjoyed reading these posts and the frank discussion about priorities when it comes to money.  I can identify with the "forever house" idea - I moved 7 times in my 20s and dreamt of having a final home for my family - one where we could mark height on the wall and know we'd be there 10, 20, 30 years in the future.

 

Last year, we did buy that forever house and it brings me joy and peace of mind EVERY DAY.  Even still - I'm marking the height on a door - something I can take with me if I need to...

 

However, the thing that alarmed me most in your post was that you needed to make a MAJOR financial move (buy a bigger, more expensive house or remodel) before knowing what the mortgage would be.  Please don't do that.  You need to figure out in advance what you can afford, and base your decision on that.  

 

Here are rules to live by:

 

Do NOT buy a home UNTIL you have a downpayment saved AND a minimum of 6-months emergency fund saved.  This is essential to weathering any financial storm down the way.  Also, if you really want to weather a storm - don't settle for a mortgage that is more than 28% of your take home pay.  If you can do this, you'll be fine.

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#14 of 14 Old 05-20-2011, 07:20 AM - Thread Starter
 
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Originally Posted by moneymama View Post

I have really enjoyed reading these posts and the frank discussion about priorities when it comes to money.  I can identify with the "forever house" idea - I moved 7 times in my 20s and dreamt of having a final home for my family - one where we could mark height on the wall and know we'd be there 10, 20, 30 years in the future.

 

Last year, we did buy that forever house and it brings me joy and peace of mind EVERY DAY.  Even still - I'm marking the height on a door - something I can take with me if I need to...

 

However, the thing that alarmed me most in your post was that you needed to make a MAJOR financial move (buy a bigger, more expensive house or remodel) before knowing what the mortgage would be.  Please don't do that.  You need to figure out in advance what you can afford, and base your decision on that.  

 

Here are rules to live by:

 

Do NOT buy a home UNTIL you have a downpayment saved AND a minimum of 6-months emergency fund saved.  This is essential to weathering any financial storm down the way.  Also, if you really want to weather a storm - don't settle for a mortgage that is more than 28% of your take home pay.  If you can do this, you'll be fine.


Well, we would know what the mortgage would be once we found the house we wanted! At that point, we'd have to work out the finances and see if we could afford it! Right now we are looking at a specific house that is on the high end of what we're comfortable paying, so we will probably end up not making an offer.

 

I do like your rules to live by, though! We are adhering to these in our current home. However, if we did buy a larger home, we'd still have a downpayment (at least 20 - 30%), we'd still have 6 months emergency fund, BUT our mortgage, taxes and homeowner's insurance would be about 32% of our take home pay. So I guess we should look for a less expensive house, or I should go back to work for more hours!

 

Thanks again for everyone's advice. It has been very helpful.

 

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