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Can we go 4-5 years with no retirement saving to accelerate student loan payoff?

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  • Can we go 4-5 years with no retirement saving to accelerate student loan payoff?

    Me: 35, outpatient pediatrician, full time. 2017 W2 salaried income 219,000. Expect small raise in July, some form of bonus (5-15k) each December and March. Not a ton of ways to boost income (occasionally some extra weekend urgent care)

    DW: 35, ancillary health care, 0.8FTE, 2017 W2 salaried income 51k

    Finished residency 2014: 344k med school debt

    DW finished MA program 2013: 55k grad school debt

    Guess when we found WCI... 

    Family: 2 and 3.5 year old. No more coming

    Taxes: Federal 33%, State 9.3%

    Current fixed expenses

    - my loans: 298k @4.5% 10y fixed (2nd refi 3/2017) = $3,181/month: This was 5.99% 15yr fixed = $2,950/month (11/2014)

    - DW loans: 10k @3.375 5y fixed (2nd refi 3/2017) =  $186/month. This was 5.35% 10yr fixed but used any bonus payments to lump sum this own down first

    - Daycare: $2,400/month total (we have a dependent care FSA for 5k). Anticipate 2.3 more years for oldest, 3.3 more years for younger. They will go to public school once they reach kinder

    - Rent: $1,870

    - utilities: $427

    - Car: $13,760 @ 1.67% 5yr fixed = $403/month, 35 months left (wanted to keep the old one but AC blew at 200k and it's hot here in summer)

    - Insurance: Disability and term for me, term for DW, auto, renters, liability: $575

    - groceries, gas, kids activities, clothing, occasional date night, etc $1500-2k

     

    Savings

    EF: 15k

    Currently, we max out my 401(k), her 403(b). I get another 401(k), not a match, just for being alive, that comes to around $15k/year. DW contribues 8% pretax to her pension plan. Our current tax deferred balance is $196k

    I also have a pension. If it is unchanged 25 years from now (not betting on it, but hoping for it) I could retire with up to 50% of my salary

     

    THE QUESTION

    As you can see, going to an expensive school and being a primary care pediatrician are not an awesome combo. I blame my college self 100% for my 3.3 undergrad GPA and getting into 1/30 med schools I applied to. I was a much better med student and resident, but always wanted to do peds and really like my job most of the time. I have taken on administrative responsibilities which keep my week pretty varied and break up clinic.

    We live in a fairly HCOL area. It is my wife's home town, and was just a little cow town with a college when her parents moved here 32 years ago. We moved back after training in an extremely HCOL area. We really like being close to family. Gparents are a little old to do full time babysitting (and didn't work long, successful careers to be unpaid babysitters in retirement), but we feel it's a huge value for the kids to see them multiple times per week (and they bring us dinner a lot).

    I would like to pay off the remaining student loans in <5 years, and I think we can do 4. After many, many, long conversations with DW, even if we made some cuts in our monthly budget they would not have a huge impact. We go out to 1-2 nice dinners per year and don't take big vacations (kids probably won't go on a plane until loans are paid off and we celebrate). We could cut back on take out and some kids activities, but we don't have the stomach for some of the more extreme loan payoff tracks. I wish we did, but we're just not there right now.

    Until now, I've never really considered not maxing our tax deferred retirement accounts. But if we stopped contributing to our 401(k)/403(b), we would have about $1,700/month more (after taxes) to put toward student loans. I wouldn't quite be able to make the 5 year repayment plan SoFi offered me on a monthly basis, but would have 10-20k more in 2 lump some payments to make in December and March. Using the 7 year option they recently offered me, with these extra payments I think we could pay off the loans in 4-4.5 years.

    The big negative:

    - over 4-5 years, lose out on 144-180k of contributions (+/- growth) which is somewhere around 60-75k in increased taxes (at 33% and 9.3% marginal rates)

    the positive

    - save about 40-45k in interest compared to current loan

    - the huge morale boost of an end date for the loans that seems much closer than the current one (so my blood pressure goes down)

    - DW also has a 457 (U of California) and I can do mega back door roth IRA so we can do a little catch up savings once we have more cash flow

    - it's not really no retirement contribution, as I still have my $15k that my group contributes annually

     

    If you made it this far, I can't thank you enough

    Dru and Mrs Dru

  • #2
    Wow. What a post. I think you understand the pros and cons of both scenarios better than anyone. You've really thought things out. Generally speaking I think it's usually best to do a little of both. Maybe just pull back on your retirement savings, but dont totally stop and increase your loan payments at the same time? It doesnt have to be one extreme or another.
    You do have a lot of debt. But the good news is that the interest rates arent bad AND (more importantly) you like your job Those are two big positives IMHO.
    I think you guys will be in good shape no matter what you decide to do. Just keep being an awesome doc to all those little kids you get to see!!

    Comment


    • #3
      Great post and glad you followed your chosen career path despite the student loans.

      Is there a loan forgiveness program that you're eligible at work (Kaiser?--pension and plan1-2 sounds ballparkish) or arrangements with the PIC for some type of retention.

      There's no right answer for either debt repay (interest reduction) vs retirement savings (salary reduction on taxes).  The rates are quite low for the loans so at 5 and 10 yrs, you'll be fine.

      One caveat with the great pension -- don't oversave on the retirement side at this moment since you have a few other active factors.  You're at the beginning with a large loan debt but have a certain plan for that for 5+10 years with a good flow to tackle that.

      The other key missing factor not mentioned: house.  Since HCOL area, housing becomes the X factor in many cases for long term viability in desirable neighborhoods and living--especially when looking at public schooling.

      Comment


      • #4
        I am all for rapidly paying off student loans.  I wouldn't go 5 years without contributing to retirement, however.  Stop it for 2 years, hit the loans super hard.  Seeing your retirement fund not growing is a pretty good motivator to cut your lifestyle, get serious about paying off the loans and then being able to concentrate on your other goals.

        Comment


        • #5
          Ditto the pension comment.  I'd consider picking up more overtime or doing locums to help pay off the loans.  You're in a tough spot with the family trap and paying $2400/mo in daycare.  That's a shame they can't help out 1-2x/wk to help defer some costs, but I totally get not wanting to burden them in retirement.  This is where assessing the marginal benefit of added income comes into play.  You're taxed at >40% of every dollar your wife earns, so she's really earning ~$13k a year compared to the stat-at-home decision (that's not including any other pros/cons).  Since your pension seems solid any thoughts to a 529?  I'd probably stay the course and try to bolster my income as much as humanly possible while reducing expenses to help pay off the principal faster.

          Comment


          • #6
            I commend you on your clear eyed assessment of your situation.  I think you are doing a lot of stuff right.  You are controlling what you can control (living liken a resident).  You have not not bought  a house.  Your kids will age out of day care and it will seem like an income boost.  If you quit contributing to your retirement then you may more tax.  Stay the course.

            Comment


            • #7
              Hi Dru-  Pediatrician here also.  Congrats on finally making it out into practice and having a cogent financial game plan.  Here are my thoughts having lived a similar path.  Use some/all/none of them.  Hopefully they'll give you some thoughts of your own...

              1.  Retirement:  It looks like you guys are making about 300K annually with your bases and bonuses.  Great shovel.  I would put up to 20% into tax deferred retirement accounts.  It is not clear to me that you have achieved that amount, so no way would I decrease retirement for any time at all.  Here's an interesting read on using the student loans to help decrease your sequence of returns risk of the accumulation phase:

              https://earlyretirementnow.com/2017/05/24/the-ultimate-guide-to-safe-withdrawal-rates-part-15-sequence-of-return-risk-part2/

              I am not saying drag the loans out indefinitely.  I am just pointing out that paying them off too quickly at the expense of retirement savings is not clearly the best for you.  I would ignore pensions for now but use them to make you feel better if, as I suspect, you are not least 20% in tax deferred retirement plans right now.

              2.  Daycare:  Obviously this cost is what is hurting you the most.  Can you be creative in choosing any other options here?  If not hunker down and hang on till they are in school.  We used in home caregivers which cost less and offered great flexibility.  We could spend mornings more relaxed by not having to get kids fed, dressed, and to daycare.  We used au pairs in the early years.  The program is even better now as the au pair can stay longer than one year.

              3.  Loans-As above with retirement, balance paying them off.  Continue to lump sum wife's loan away to improve cash flow.  Set your plan for payoff without stopping retirement.  Once loans gone, use some of the increased cash flow to get 529's started for kids.  Don't save for their education until you are done paying for yours.

              You can read more of my story by searching WCI for "Not All Who Wander are Lost." Best advice I can leave you with is to plot your net worth annually which will help you see the results best of any plan you use.  Good luck.  Best wishes.

               

               

              Comment


              • #8
                Forgot to mention...

                4.  Increase income-Consider telemedicine.  Look into Teladoc.  Super flexible.  It may not increase your income as much as other options but can very easily work into your lifestyle around kid time.

                Comment


                • #9
                  Lots of good suggestions here. I think my favorite is a 2 year period of savage loan attacking. If I were in your shoes and my partner was on board I would try to get the family on a Ramsey/Moustache ride (sorry) for that period of time -- "beans and rice, rice and beans."

                  Esp w/ the low income partner could they drop job for 2 years and have their "job" be saving money? Lots of other costs might go down w/ stay at home spouse. Obviously the daycare payment falls away but then more meals at home, less driving etc. Also could free you up to do locum, urgent care, etc.

                  The other thing is that a self-limited period of attack would be done when your kids are relatively young so you aren't having to explain that they can't play travel soccer b/c you are still paying back med school loans.

                  Do that for 2 years and add $300 a month or something like that into a vacation fund for the end of it then treat yourself when it's over.

                  This is one of those scenarios like when one of my residents asks me if they should pay off loans or increase 401k contribution -- "you are about to make a really good decision so don't agonize!"

                  Comment


                  • #10
                    If you want to defer contributing to retirement in lieu of contributing fully to loan payments, I would do so at most for 1 to 2 years, then do a little bit of both therafter. My thinking is that even one or two years of fewer retirement payments can make a huge difference come retirement, because of compound interest. Good luck, it sounds like you have a good plan.

                    Comment


                    • #11
                      If you already haven't done so, develop your PoF's IPS -  Individual Policy Statement  as your guidepost for retirement/savings.

                      Translating pension is always a hard thing to do as you have to make the 20-30yr MRA to get the grand prize with COLA, otherwise it's a static # after getting to vesting.   We use $30,000 = $1M retirement savings as our model for income savings goals in the calculations.

                      As others mentioned, unless DWs work essential to her wellbeing or you're using her benefits, the income is a wash for nanny and a potential drag on your ceiling if you wanted to expand (IF you wanted....work/life balance remember...burnout gets you nowhere fast).

                      I differ from the most here cause we live the HCOL issue.  Housing is a larger long term factor than anything and must be considered in the equation.

                      Comment


                      • #12
                        Long post, but good assessment of your situation. Access to pension plans is a huge plus in your favor. Some information on your goals w/b helpful. When do you plan to retire? To buy a house? How much do you plan to save for your kids' education? Do you plan to start your own practice in the future? Absolutely agree that you should not begin saving for college until you have your own financial plan worked out and on track. You do not want to prioritize college over retirement planning and risk running out of money just when you want to be enjoying tIke off and spoiling grandkids.

                        Probably a crazy idea, but is there any way you can move in with your wife's parents for a couple of years?

                        With all due respect, any advice you get at this point (including mine!) is strictly taking a shot in the dark as to what choices are the right ones. You really need to have a clear idea of how much you should have saved for retirement at the time you plan to retire. You need to know the impact your chosen loan payment schedule and funding/timing of other goals on the probablility of reaching that goal. And there is no reliable way to get that information without having a financial checkup (at a minimum). I realize it will cost you a precious few thousand dollars, but you can (and should) come out tens of thousands of dollars ahead of where you will be otherwise. And that doesn't include the value of peace of mind that you'll have knowing that you have eyes-wide-open chosen the correct course of treatment for your family. Consider interviewing some fee-only planners for what they can offer. Those listed on this site have been vetted by WCI.

                         
                        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                        Comment


                        • #13


                          Hi Dru-  Pediatrician here also.  Congrats on finally making it out into practice and having a cogent financial game plan.  Here are my thoughts having lived a similar path.  Use some/all/none of them.  Hopefully they’ll give you some thoughts of your own…
                          Click to expand...


                          Some great advice from everyone here.  While I think everyone here has excellent insight, it's hard for me to know what helps you the most because it depends on some lifestyle things you didn't mention.  Is early retirement a goal?  Is your spouse happy with her job and wants to stay despite the marginal utility of the income being low?  Any plans for college savings?  Plan to buy a home and need cash for downpayment?

                          Like you and Dr. Mom I am in peds (W2 -- university employed), and some of my finances are very similar to yours (income, spouse in lower paying healthcare position, daycare bills).  I don't have a pension but we have higher retirement savings (pre-tax + years of Roth IRA savings), more cash, small taxable accounts, cash/investments in an HSA, 3x529 accounts, and our only loan is a low interest rate mortgage.  Our daycare bill is similar to yours and it inhibits the ability to attack the mortgage or go crazy on the 529's, but combined we're putting ~ 25% into retirement accounts, not including the HSA or dependent care FSA.

                          I would be hesitant to slash the retirement savings -- while the pension is great, it's hard to count on at this point. Your retirement account levels are good for the average American, but they don't seem high enough to completely stop for awhile, particularly when you're going to lose out on 20 -30 years of compounding before retirement and a huge up front tax break.

                          I like the idea of attacking the loans, but not at the expense of no retirement savings for several years.  Increasing income or just riding out the term seems more appropriate.  I also am concerned your emergency fund may be a bit low -- you have a lot of fixed expenses and not a lot of places you can cut back if needed.

                          The snowball method seems appropriate here as well, since part of this decision seems to be psychologic (don't mean that in a neg way -- you're doing a great job of being aware of your $).  You have 2 small loans (car loan and one student loan) and one big student loan.  Get one of the small loans paid off, roll that into the other small loan, then put all of that to the big loan, and suddenly you're putting $600 extra a month to the big loan without changing anything.  In the next 6 months work as many random urgent care shifts as you can or whatever you can find to knock out those two small loans and then attack the big loan.  Anytime you get a bonus or work extra or get a tax refund, throw it at the big loan and you can probably STILL knock it out in 5-6 years without sacrificing retirement.

                          Regarding the kids travel -- we've got 3 young kids (8 months, 3y, 8y).  I wouldn't avoid traveling with kids on a plane because of money.  Avoid it because traveling with little kids on a plane is a giant in in the rear.    Having said that, all of our kids have been on planes (the oldest many times, the younger two just once each), and all the trips were worth it despite the awfulness of a few of the flights when the two older ones were in the 1-2 year old range (though the infant did great on a trip this month to SF -- way better than his older brothers were at that age).  There is a balance between working excessive hours right now to attack debt and having time to enjoy the family and fruits of the hard effort.

                          I use a mild form of credit card churning to pay for some of these trips with spouse/kids (+CME money to finance expensive hotels in a nice city when bringing spouse/kids).  Our daycare lets us charge to a credit card with a $10 fee (get 2% cashback on our Citi Doublecash so make ~ $40-50 each time).  I use that to quickly hit min spending requirements for credit card bonuses (prior to that just took longer to get there -- we put everything on credit and pay off each month).

                          Go work towards the Southwest Companion pass or get some sign on credit card bonuses and use the points to finance trips. I've used those to great help -- saved me thousands of dollars in travel costs with only a few hours of effort -- a lot easier than working an extra shift in the ER or telemedicine (though all good options).  We're going to have 3 free nights at a Hilton in London this July using 100k AmEx Platinum signon bonus points transferred to Hilton Honors.  That's the equivalent of extra $ subsidized without sacrificing anything.  It's also had negligible impact on our credit score (though I did cool it for a bit before buying a house last year).  The Chase Sapphire had a 100k signon bonus last year AND gives a $300 travel credit each calendar year.  I signed up for it near the end of 2016, used the $300 travel credit in Nov then again in February (it renewed in Jan) and used the 100k points to subsidize travel.  I'll cancel before the fee renews (comes out ahead if you use it right).
                          An alt-brown look at medicine, money, faith, & family
                          www.RogueDadMD.com

                          Comment


                          • #14
                            My first thought was, can the lower-income spouse either cut down from work or leave completely for a couple years to take care of the kids? That would save you a lot in terms of daycare, ?lower tax bracket?, and other home- and kid-related logistics.

                            Comment


                            • #15
                              OP here. Wow, a huge thank you to all who replied. The support is humbling.


                              Is there a loan forgiveness program that you’re eligible at work (Kaiser?–pension and plan1-2 sounds ballparkish) or arrangements with the PIC for some type of retention.
                              Click to expand...


                              I've inquired, but it's not hard enough to recruit pediatricians so nothing other than our regular salary.


                              Retirement:  It looks like you guys are making about 300K annually with your bases and bonuses
                              Click to expand...


                              2016 we were 280k (if we include my employer's retirement contributions as income) and saved 18.9% for retirement. We should be closer to 300k this year, and if we change nothing in our plan retirement savings would be around 18.4% this year.

                              Re: lower income spouse: She is an amazing parent, but really likes her job and working, and is really good at it. Even though her field is lower paying (compared to us, not most people) it is severely impacted and they get 20 candidates for every job they post, so taking a few years off will likely mean a huge hit to her career. We have tried to minimize her taxes by maxing out her 403(b) and using dependent care FSA for 5k for daycare. She also has 8% taken out pretax for her pension, so over half of her gross income comes out pretax. So her net pay is less than daycare costs, but we have more tax-deferred space available through her.


                              Ramsey/Moustache ride (sorry)
                              Click to expand...


                              I watched a lot of super troopers in college. Hence by poor college GPA...


                              Probably a crazy idea, but is there any way you can move in with your wife’s parents for a couple of years?
                              Click to expand...


                              We've actually had this conversation and thought about it. We lived with them right after college for a few months, I think that was about as much as they could handle (of course then we were not gainfully employed real adults then). Also didn't have any kids then...


                              And there is no reliable way to get that information without having a financial checkup (at a minimum)
                              Click to expand...


                              We've had this discussion too and are seriously considering it.

                              Other comments

                              Daycare: our 2yo would do fine anywhere. Our 3.5yo has really benefited from the structure and consistency at the current program, and I think may not do as well in a home setting with a nanny/au pair.

                              Housing: I'm fine with where we live now, renting is so easy, but we would like something bigger as the kids get older. If we stay on the 10 year plan (and paying down as lump some when able) it's going to really take a long time to get to that point. The city we live in has uniformly excellent public schools.

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