It’s another Q&A Edition of Optimal Finance Daily: Episode 1522. Today's questions are on retirement savings and student loan debt.
And I’m your host and personal finance enthusiast, Diania Merriam. As we do about once a month, we’re going to change it up today and address some audience questions on the show. But quick disclaimer, just like all the content shared here, this is for informational and entertainment purposes only… or “infotainment” if you will. I’m not a certified financial planner, and encourage you to take my opinions with a grain of salt.
That being said, if you want to send a question in to be answered here on the show, just send a message to finance AT oldpodcast.com
But for now let’s get to today’s questions and start optimizing your life!
Personal Finance Question 1: “Am I Putting Too Much Into Retirement?”
Our first question comes from Lillian who says:
QUESTION: “I have been interested in financial independence for a while just to create options, but I don't have any clear goals around retiring early. I'm wondering if I'm putting too much money into retirement vehicles and if I'll regret it one day when I figure out what I actually want to do? Maybe I want to start my own business or take time off, or add real estate investing to my portfolio? I'm really not sure yet.
I'm in my mid thirties with a net worth of about $400k. I'm holding a year of expenses in cash as an emergency fund ($36k), I've got the bulk of my investments in retirement vehicles ($253k), a chunk in an after tax brokerage ($40k), and $75k of equity in my house. My only debt is my mortgage and I don't really care about paying my house off early. I've been fully funding my retirement vehicles each year ($29k across 401k, Roth IRA, and HSA) because I don't know what else to do with it and figured the tax benefits are a good enough reason to put my money here.
Is it possible I'm putting too much money into retirement vehicles that I won't be able to access before traditional retirement age? I'm worried I'll get the clarity I'm looking for on other ways I could be using my money now, but then have to spend more time working/saving since I made most of my money inaccessible.”
DIANIA MERRIAM: Thanks so much to Lillian for this great question, and I just want to start off by saying, girl you are killin' it!
I posted your question in our Facebook group called “For the FI Curious” and the members there were celebrating you just in case you missed that. I think your question exemplifies what I’ve learned about money through my own journey – money is only as valuable as your clarity on how you’re going to use it and your comfort level with how much is enough.
You’re not going to get that sense of comfort and peace of mind about your money until you have some more clarity. I get the sense that you’ve bought yourself the opportunity to start asking some bigger questions – how do you want to spend your time, who do you want to spend it with, and what do you want to create?
While you’re spending your mental energy pondering these kinds of questions, I would keep doing what you’re doing in terms of saving and investing. You’re doing a great job taking full advantage of the tax benefits that come with retirement vehicles, so from a numbers perspective, this is the optimal place to put your money. But perhaps some money would be well spent on soul searching right now.
Take a class on something that interests you, take a break from work to knock off something on your bucket list, perhaps find some kind of retreat, coach, or mastermind group of other people finding their own clarity. It might be time to use some of your money to find clarity on what really makes you tick.
You can dial down your retirement contributions at any point and remember that this money is not as inaccessible as you think. Your contributions to your Roth are available now with no tax or penalties, and you can access 401k money through a conversion ladder if you really needed to.
So rest assured that you’re not backing yourself into a corner, you’ve done a great job creating options for yourself and I would encourage you to start exploring them!
Question 2: “Should I Take On More Debt to Finish My Final Year of College?”
Our next question comes from Grace who says:
“I am currently a University student at an international school in London with one year left. I'm overwhelmed by the amount of student debt I have already accumulated and I don't even know if it is worth completing my final year or whether I should start seeking employment to begin paying off my debt. I calculated my current debt and I have $104,843 already. I also looked into a repayment scheme for this amount and the quickest way to pay this off is $561 a month, which will cost $168,247 in the end and I won't pay it all off until March 2046! Should I go back for my final year and bring in $35,000 more of debt? How can I even be sure that my degree will help to pay this all off? Or do I try to find income now and save the $35,000 by not finishing my degree and getting an early start on making loan payments? I don't want to set myself up for a future of struggling to pay my bills.”
DIANIA MERRIAM: Thanks so much for your question, Grace. I know student loan debt creates a ton of anxiety for many people so I wanted to commend you for taking a hard look at it and considering your options.
The first thing I noticed about your question is some all or nothing thinking. The two options you seem to be considering are quit school or take on $35k of more debt. But perhaps there is a middle ground here. Can you transfer to a lower cost school to finish your degree?
I promise if you do some research, you will see that there are plenty of other options for less than $35k. And what about the earning potential for your degree? I would do some networking and research on people who have your same degree to try and estimate the return on investment for taking on this debt.
Sure, quitting now to avoid taking on more debt might seem financially responsible, but if that results in cutting your long term earning potential in half, you’ve just made it even harder for yourself to pay off this debt. You mentioned that you looked into a repayment plan, but remember that just because the required payment is $561 per month, that doesn’t mean that you can’t pay more than that. You could double those payments and pay it off in half the time if your income allows for it.
I know people with much more debt than you that paid it off in a few years, because they were super aggressive about it. Also keep in mind that student loan debt is a whole different animal – you shouldn’t address it the same way as credit card debt for example. The interest doesn’t compound like other types of debt, and there are different repayment plans you can implement like pay as you earn or depending on your career, you could qualify for student loan forgiveness.
I think you’ve got some more research to do before throwing in the towel here. And I’d encourage you to check out a speech from The EconoMe Conference which is an event I produce. You can pull it up on YouTube by searching for the title “Student Loans Never Need to Hold You Back.”
This talk was given by Travis Hornsby of The Student Loan Planner. Travis has consulted on over half a billion in student debt personally.
In this informative and entertaining talk, Travis explains the strategies you can use to simultaneously pay off your debt and pursue your dreams.
Retirement Savings and Student Loan Debt: Sign-Off
Well I hope you enjoyed another Q&A edition of Optimal finance daily.
If you have a question you’d like addressed on the show, go ahead and send it over to finance AT oldpodcast.com
I hope you have a great rest of your day, and I’ll see you tomorrow, where I’ll be back narrating your favorite authors, and where your optimal life awaits!