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Debt Vs. Investments, Early Retirement

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  • Debt Vs. Investments, Early Retirement

    Long time WCI reader, first time poster, so here it goes.


    I am interested in getting the WCI opinion to my dilemma of whether or not to start a taxable investment account vs. working harder to pay down debt.


    A little background on my starting position.  I am a fairly new Anesthesiologist who is just becoming a partner in my private practice group (about one year in).  I have ridiculous amounts of debt which is almost exclusively student loan and mortgage, net worth is -888,000 roughly.  Yes, I bought the big MD house, and both my wife and I are professionals with great salaries however we also have the accompanying student loan debts, but otherwise we are still fairly frugal.  We definitely are living on less than 50% of net.  We both max out retirement accounts, 18k for her and 52k for me and this is our first year of doing the backdoor Roth (thanks WCI).  We have a emergency fund that I am comfortable with (won't give a number as that may spark a whole other debte).

    The other part about me is that I am interested in a (fairly) early retirment, lets say 50-55.  I am not a gunner, FIRE, person, but I don't want to be making life and death decisions at 70yrs old either.  Previously I had been focused on debt however my father who is just turning 65 is in poor health and this make me think.  Given the genes in my family, I will likely not live to see 75 or 80 even without being obese or smoking or any other crazy vices.  Cancer, sucks.  So while I am happy to max out retirement accounts I go back and forth on whether I should kill myself to payoff debt or start a new taxable account so that it could have time to grow (about 20 yrs until I am 50-55)?  I don't want to work until around 65, have a huge retirement account that I can now tap, tax free, only to find myself tapping out soon thereafter.  I would much rather retire young, enjoy life (travel, kids, second career etc) and am interested in the best way to do this while balancing getting debt free vs. having the cash on hand to live life.


    Thoughts and opinions are welcome, facts and or calculators that may help make the decision more objective or even more appreciated.

  • #2
    You will probably have to give at least a few more details if you want more helpful advice:

    • How much combined income?

    • Breakout of debt amounts and interest rates between mortgage and student debt.

    • Equity in house

    • Current amount in retirement accounts and any other savings

    Generally I would pay down student debt more rapidly if it is above 5-6% interest rate.  If the mortgage terms are reasonable I wouldn't pay that down any faster than scheduled.  If you have a 30 year fixed at say 4%, you are going to be hard pressed to lose money by investing cash in a taxable account over that time frame rather than paying down debt if you follow the general low cost, diversified index fund strategy advocated by WCI and others.


    • #3
      I've recently been dealing with a similar decision. I dont have the same level of debt as you, but as an internist I also dont have your income potential.
      I was originally planning on making minimum payments towards my low interest debt in favor of padding my retirement account. But it started to feel uncomfortable to me when I started thinking about the fact that we're currently in one of the longest running bull markets in history. After posting my numbers here, others agreed that my focus should shift towards debt reduction. My new plan is to focus on paying off debt now so that when the next bear market hits i'll have more cash flow available to direct towards investments. Of course i'm still maxing out tax advantaged accounts, but everything else is getting directed towards debt until debt free.


      • #4
        One question that I have is why are you convinced that your lifespan is short?  If you think your father has a genetic cancer you can be tested.  One basic rule in financial planning is it is better to plan on a long life than to assume a short one. I also agree with Donnie above that you need to post more specific numbers to get help.


        • #5
          The question and details are nebulous, so my answer will be somewhat vague, too. I am guessing you are around 35 and would like to see you debt-free by 45 and financially independent by 55 (if not sooner).

          Rather than looking at the large debt as a huge, insurmountable number, break it down into smaller pieces. Aim to get rid of all of it in 10 years, roughly $100k per year, which should be doable based on the information you have provided. Prioritize the student loan debt and make minimum payments on the mortgage until the student loan is erased.

          Leftover income after expenses can be added to your taxable account. If you don't have any kids currently, now Is the time to work those extra shifts to add to the income and savings pile. Don't take on any more debt-- no vacation home, fancy car, boat, etc. Do take time off and take enjoyable, relaxing vacations with your wife and family (and friends).


          • #6
            There is so much about the future that you don't know from the perspective of focusing on your current situation. You will have a lot of regret if you get to age 45 and realize that, thanks to the wonders of medicine, you will probably live until 90 or 100 and your savings won't stretch another 40 or 50 years of retirement. Control of cash flow and directing it wisely will have more impact on what you are able to do in the future than any other action you can take. What to do with that cash flow, specifically, can best be determined with a good financial plan in place. It's a very specific, personal process and the answers are different for every couple or individual. You have the tools with dual professional salaries and a lot of potential, but I really believe some planning could make a big difference for you.
            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


            • #7

              I am interested in a (fairly) early retirment, lets say 50-55. I am not a gunner, FIRE, person, but I don’t want to be making life and death decisions at 70yrs old either.
              Click to expand...

              I was in a very similar position ten years ago. Built a large, waterfront home, thought I might want to retire after the kids graduated high school, and thoroughly enjoyed my job as an anesthesiologist.

              My debts were more than $500,000 (mostly mortgage, some student loans), but net worth wasn't too far below zero, since I did have the house to offset most of the construction loan. Are you sure your net worth is in the negative $900,000 range? Are you including the value of the home in the asset side of the equation?

              I would focus on the high interest rate student loans, explore refinancing opportunities if you haven't already, and pay your mortgage as scheduled. At least the mortgage interest will be tax-deductible; you earn too much to get a tax break on the student loan interest.

              Devote a specified amount to the student loans every month, spend what you need to spend to live the life you live, and invest the rest. You should be able to start a taxable account eventually. I finished residency in 2006, started a taxable account in 2009, and found that we could be considered financially independent in 2015. Like you, I didn't consider myself to be a "FIRE person." I hadn't heard of the term until we were pretty much FI on one income.

              Since you have the power of knowledge, make FI a long-term goal, and don't think much about RE until you've reached or exceeded FI. You'll know better what you want out of the rest of your life when you have options.


              • #8
                If you want to retire early you will need income that you can spend now.

                You have to decide what vehicles you want to use to create those investment cash flow streams.

                Almost everyone of us on here who are financially independent at a relatively young age did it through owning a side businesses and/or real estate.

                So if early retirement is your goal, focus on income.


                If security is your goal, max out all of your "retirement" accounts, pay off you debts and you and your wife will get there over the next 20-30 years no problem.



                • #9
                  I would max the retirement accounts, but direct all other cash flow into the debt, including the mortgage.

                  The S&P 500 is likely to return about 3.25% real (2% dividend plus about 1.25% LT real earnings growth) minus some haircut for declining valuation. That haircut may be large and is very likely to occur within the next ten years (based on history).*

                  If the S&P 500 sold for a PE10 of 15 with a 4% dividend (i.e., near the historical median figures), then I would recommend making the minimum monthly mortgage payment while directing extra cash flow into equity index funds. I think you're likely to have this opportunity (and better) within the next decade.



                  *I've explained my reasoning in detail in other threads so won't go into it here.
                  Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.


                  • #10
                    Need more details on the debt to give specific responses. Generally, my answer is to refinance the student loans to the lowest rate and pay it off asap. Then, the decision of taxable vs mortgage is usually a toss up.


                    • #11
                      I'd take another tact on this -- you have a goal of RE at 55 and anticipation of a shortened tail, but as @jfox pointed out, you may very easily outlive your expectations and then stuck with that reality --- so you kind of have to plan for a bump of 50-60 usage, then a potential tail.   Remember if you get sick, you can tap the IRA if expenses >10% of you AGI at that time (hopefully not, but dial that into the calculations).

                      Hence, I can see your thoughts of increasing the taxable side to fund the 50-60 range.

                      PoF has his Investor Policy Statement (IPS) and you should develop one with specific modal expenses in mind during that 50-60 age where IRA can't be tapped and work backwards to a savings goal

                      One different strategy where folk will certainly disagree -  Refi loans as much as possible and max out euqity into a 30yr Mortgage and slowly payoff.   This will smooth the payments into your retirement age (if you're still around hopefully) and allow usage of IRA funds designated to that for access once 60+ years.  This will allow less drag on overall taxable funding up front and allow growth and use during the 50-60 years.


                      • #12

                        We have a emergency fund that I am comfortable with (won’t give a number as that may spark a whole other debte).
                        Click to expand...

                        What is this number? (rhetorical question). Why is that number what it is? If you stick with this line of thinking and level risk tolerance... Does using that level of risk tolerance help you decide the mortgage/taxable question?


                        I read: You have a risk tolerance, you applied to to the emergency fund, but not yet to the mortgage/taxable. Perhaps they should align.