Retirement Investing vs Loans

[xraygoggles]

Build up assets early on! You will be very happy you did in 5,10,15,20 years ahead.

Roth, (Roth) 401k/403b at least to match, small chunks in taxable monthly (even if only one hundred dollars in residency) to get in habit.

The debt is fixed, low rate (free right now), and will be paid off eventually. Re-fi debt at historically low interest rates, and let it ride. Keep it on the back burner.

[EM-CCM MD]

I fully realize that 8% compounded will outpace 3.5% fixed over the years. I also understand that the only billionaire I know didn’t take a mortgage out on his house or car even if at 0% (no, I am not exaggerating, I have a family friend that is a billionaire). I know that everyone in my life worth 7-8 figures doesn’t have any debt.

Yes, I could make more investing in the stock market than I could in paying off my house and than had I already paid off my student loans. I also realize that I didn’t have the same level of stress as my colleagues did when my employer announced temporary pay cuts - my only fixed expense is my mortgage.

Yes, it is important to invest early. I know this, and I practice this. I don’t believe in the Dave Ramsey approach of ignoring tax-advantaged space to pay off low interest debt, but I did feel a weight off my shoulders when I paid off my debt (that I didn’t even necessarily appreciate until it was gone). I expect a similar relief when my house is paid off.

What we have decided to do is max our all tax preferred space (403b, 457b, bd-Roth’s, 401a) first, then put half of all left over money into a taxable account and half into our mortgage. I think this is a reasonable way to still be debt averse while still investing. We save about 25% of our income plus about 10% from my employer and will have our house paid off in about 15 years.

[Nysoz]

Your way is a perfectly good way to approach loans/investing. That’s why personal finance is personal.

instead of paying off my loans, I refinanced into things as low as possible and taking my time off to pay them off. Im then taking the extra to invest by yolo’ing it into TSLA (not really but investing aggressively which included TSLA options lately).

i get to save 40% of my gross income, max out retirement accounts and fill up my taxable. For my risk tolerance, I pay minimums any loans less than 4% and invest the rest. I know I might have some pull backs but can stay the course and think that I can beat 4% in the long run.

Ill always encourage people to invest in indexes and pay off high interest loans as that’s the best advice for the far majority of people. But they have to figure out their budget and risk tolerance to get a full picture of what would be good for them.

[Tim]

You can’t afford not to save for retirement, 20%+ as tax efficiently as possible.
After that, the choice of paying off debt vs investing is purely personal. Debt is leverage just risk/return .

[hightower]

Hello,
I recently graduated med school and am an intern in a 3 year program. I do not plan on pursuing PSLF. I have about 300k in unsubsidized federal student loans at around 7%. Right now they are 0% until the fall (due to CARES act). I am wondering how to spend the next few intern paychecks. I'm living at home and do not have many expenses.

1) Put a large sum of my paychecks towards my loans since they are 0% interest right now. This will help lower the interest burden when they get consolidated. I assume theres no penalty in paying off the loans right now since REPAY hasnt kicked in yet.
2) Put 6k a ROTH IRA (my employer has no match) and the rest on student loans.

Please let me know what you think, thanks.

I vote for paying down the student loans. 300k is no small sum. You've got to get used to large sums of cash going towards those loans for the foreseeable future. The sooner you get used to that, the sooner you'll be able to get those loans off your back. I would hold on to about 3-6 months worth of expenses in a savings account to use as your emergency fund. Otherwise, everything else goes to the loans. Now is the time to do it. The earlier in your career you can get those loans paid off, the better off you'll be. It will also get you in the right frame of mind for building wealth down the road. Your older, attending self will thank you for this 10 years from now, trust me

[Future Fire]

Agree with paying down loans. And perhaps making sure you have other aspects of your financial life in order.... emergency fund, disability insurance....before saving for retirement during your residency years.

I agree with saving >20% of income for retirement. However, during a 3 year residency, I see this as more of a mental exercise to adopt good long term financial habits than making a large financial impact since your 'shovel' will be much bigger during your Attending years. For example, if you save $6000 in your roth annually during a 3 year residency and then $50,000 annually towards retirement as an Attending, you break 1 million dollars at year 16 (arbitrarily chose 6% growth). You also break the 1 million mark at year 16 if you save no money during residency.

Curious what folks think.

Save during residency:

Don't save during residency:

[rocky4x4]

Thanks for all the insight!

I think the dilemma now is how much do I put towards retirement. The roth IRA + my employer 403b (no match but it is after-tax) amount I can put in is a combined $25,500 per year (6k roth ira & the rest into 403b). Clearly I cant invest that much on my resident salary. So the balance is, how much should I put into roth IRA versus tackling my 300k student loans.

On one hand, according to "future fire" post above me, it looks like investing into roth IRA isn't going to make a huge difference. So I'm hesitant to put 100% of my money into retirement and 0% into loans. On the other hand, I think investing into the roth IRA is a good idea because I am at such a low tax bracket now.

I ran a calculator to see how much 6k/yr during residency would grow to. For simplicity sake I did it as a 18k investment (6k each year for 3 years) with an 8% growth, with compounding interest for 30 years. The amount is about 200k.

[Nysoz]

I ran a calculator to see how much 6k/yr during residency would grow to. For simplicity sake I did it as a 18k investment (6k each year for 3 years) with an 8% growth, with compounding interest for 30 years. The amount is about 200k.

Did you run the calculation about how much interest you would save by paying down your subsidized 3.5% loan?

it also depends on what you can invest in your 403b/401k. This is if you have good options to invest in there. Some people have not great options to choose from so might be less beneficial.

but in the end, it’s not that huge of a difference in net worth one way or another. Probably slightly more money saved for retirement vs slightly less in loans you have to pay off when you’re an attending which means slightly faster being done with loans.

[billy]

Based on a earlier post youre talking about 14k used to save or pay down correct? If so the roth is your most precious asset imho, and should be fully funded. Then you can decide on the other 8k to split between the 401k/loans or just go to one or the other. If its less money, then I still think the roth should at least be partially funded this year. Roths can be the last asset you touch in retirement, or leave to your heirs (no RMDs). So the growth may be 45+ years, not 16 or 30. (im assuming youre mid-late 20s since you're an intern).

[EM-CCM MD]

You never get that space in your Roth back. Like I said, I’m debt averse, but you’re in a low incomes bracket, 6k isn’t much and, again, you’ll never have it back. I paid off my debt and didn’t save a dime in residency. I’m happy with my decision. I don’t regret it, but I don't think I’d be upset if it took an extra couple months to pay off loans but had a Roth. Both are good.

Regardless what you do, the most important thing you can do is automate, start now and remain disciplined.

At the end of the day, it doesn’t matter. What matters is that you do something. 5 years from now, it won’t matter. 20 years from now, it won’t matter. What will matter is that you save and pay off your debt aggressively, invest wisely, automate, get good insurance, avoid lifestyle inflation, get a good job, don’t get divorced, etc.

[rocky4x4]

I ran the numbers. This assumes I put down $14,000 by September 30th (when my loans get consolidated) and continue on REPAYE for the rest of the 3 years.

Option 1) Put 14,000 towards loans.
The amount of money saved from the growth of the loan over 3 years is $1,623.
Option 2) Put the 14,000 into a roth IRA + 403b (after-tax contribution) assuming 6% growth
The amount of money grown would be $2,760 by the end of the 3 years.

The benefits of option 1 would be to finish paying the loan down, get out of debt quicker. The benefit of option 2 would be to have a lot more money in retirement (but carry a larger debt burden initially after residency).

[MD_Spouse]

Whichever option you choose, you are setting great financial habits for the future when your income is much greater. That being said, the behavioral side of personal finance is significant. My spouse and I were in a similar situation and we decided to go with just paying off debt. Having a singular goal rather than splitting our money between investing and debt payoff allowed us to focus 100%. It was easier for us to continuously say no to lifestyle inflation when we knew how much it would set us back in terms of our one goal.

Edit: If you're thinking about other items on the residency financial to-do list, it may be a good idea to get own-occupation disability insurance set up so you want have to go through any more health screenings to increase your coverage when you complete training.

[Hank]

Go with option 2. You still have until 15 July to make a Roth contribution for 2019. After that, you’ve lost that opportunity forever.

Live like a resident while you’re a resident. Once you’re an attending, save 20% of gross income towards retirement, maximize all qualified funds, and aggressively pay off your student loans.

Continue to live like a resident as an attending until you kill your student loan debt. Maybe stick with it until you save a down payment for a house. Maybe give yourself a 25-50% raise from your resident salary. You can be a little more or less aggressive, but the first few years after graduation are critical.

[East coast]

Go with option 2. You still have until 15 July to make a Roth contribution for 2019. After that, you’ve lost that opportunity forever.

Live like a resident while you’re a resident. Once you’re an attending, save 20% of gross income towards retirement, maximize all qualified funds, and aggressively pay off your student loans.

Continue to live like a resident as an attending until you kill your student loan debt. Maybe stick with it until you save a down payment for a house. Maybe give yourself a 25-50% raise from your resident salary. You can be a little more or less aggressive, but the first few years after graduation are critical.

Clarifying the bolded comment: Correct me if I'm wrong OP, but you just graduated and thus don't have 2019 income - you are not eligible for a 2019 roth contribution.

[Hank]

Clarifying the bolded comment: Correct me if I'm wrong OP, but you just graduated and thus don't have 2019 income - you are not eligible for a 2019 roth contribution.

Good point. IRA contribution is limited to the lesser of earned income or $6,000 ($7,000 If you’re 50 or older).