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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Wed Dec 26, 2012 3:50 pm 

Joined: Tue Jun 30, 2009 9:44 pm
Posts: 308
Location: Atlanta, Georgia
N2Deep wrote:
Sorry... I can't be more specific on the type of account it's in. I don't fill comfortable sharing that info. There is no additional taxes or penalties associated with these funds. I can say that within a couple days I could have my hands on it to send it in as payment if that's what I decided to do.

Okay, to each his own. I think bpgui was just trying to figure out if it was a 401(k), IRA, or similar that would trigger penalties. Even selling standard taxable accounts may result in capital gains and, thereby, capital gains taxes. But assuming that there is no penalty or tax associated with taking the money out of wherever you have it, you have to consider the lost compound savings you would have by pulling it out now. It's difficult for any of us to assess, because without more information, we have no idea what sort of potential the retirement monies have now. Also, I'm not sure we know yet how many more years you want to work before retirement and then how long you assume you will live after retirement. Those need to be taken into account because different answers will have big impacts on what advice we would give here. Personally, I would seriously hesitate to part with funds that are already parked in retirement accounts.

Edit: For example, if your retirement money is in stocks or mutual funds, I probably would leave it alone. If it is cash hidden in your mattress, I would put it use at least part of it to pay down debt and save or invest whatever is left. If it is ownership of an object that it presently valued ~$7k (or whatever number you said before), then I would likely sell it and, again, use at least part to pay down debt and part to save or invest. If you are planning to retire 40 years from now, using the money for debt might be okay, but if you are trying to retire in 5 years, getting rid of it now is probably far too constraining on your future. So you see, to get any sort of helpful advice, you probably do need to provide some more information, but at least you can get a feel for what sorts of things we would take into account.


Last edited by LeRainDrop on Wed Dec 26, 2012 4:04 pm, edited 2 times in total.

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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Wed Dec 26, 2012 4:01 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1148
Location: Illinois
If there are no additional taxes or penalties, (including cap gain taxes) I'd be very tempted to use it to pay down the debt. It seems like it would be a huge weight off your shoulders and gets you to debt free much quicker.

By doing so, you are essentially locking in your investment gain at whatever interest rate you are currently paying on the debt. If the debt has a very low interest rate, paying it off may not be the mathematically superior action, but it may still be the best choice for your peace of mind.

edit: LRD 's points are spot on as well.


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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Wed Dec 26, 2012 4:06 pm 

Joined: Tue Apr 15, 2008 6:48 am
Posts: 526
Location: Arkansas
LeRainDrop wrote:
Okay, to each his own. I think bpgui was just trying to figure out if it was a 401(k), IRA, or similar that would trigger penalties. Even selling standard taxable accounts may result in capital gains and, thereby, capital gains taxes.


It's not any of the above. For the purpose of this discussion lets just say its cash free and clear.

Quote:
But assuming that there is no penalty or tax associated with taking the money out of wherever you have it, you have to consider the lost compound savings you would have by pulling it out now. It's difficult for any of us to assess, because without more information, we have no idea what sort of potential the retirement monies have now. Also, I'm not sure we know yet how many more years you want to work before retirement and then how long you assume you will live after retirement. Those need to be taken into account because different answers will have big impacts on what advice we would give here. Personally, I would seriously hesitate to part with funds that are already parked in retirement accounts.


The re-invested money would be subject to market changes, so who knows where that would lead. Could be good, could be bad.

I have 13 more years before I can walk away from this job free and clear with my retirement. At that time I'll be 53 yrs old. How long I'll live after (or if I even make it to that point) is anyones guess.

Sorry I have to be cagy, but some things I just don't feel comfortable putting on the internet. It took me a while to even be able to start my journal.

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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Thu Dec 27, 2012 10:20 am 

Joined: Tue Jun 30, 2009 9:44 pm
Posts: 308
Location: Atlanta, Georgia
N2Deep wrote:
For the purpose of this discussion lets just say its cash free and clear.

Okay, I'm gathering my thoughts from both of your threads on this topic, so forgive me if I'm forgetting something. With the assumption that the retirement money that you are thinking about using to pay down debt is "cash free and clear" (and therefore currently producing no return and instead getting devalued by inflation), then this is what I would do:

(1) Use the first part of it to get your e-fund up to $1,000. $200-$500ish is miniscule, and you run the risk of simply adding to high interest credit card debt if an emergency comes along. Then you'd be in an even worse place than where you started because your credit card interest rate (I'm assuming) is higher than the interest rate for the debt that you want to pay down first.

(2) Use the balance to pay down the debt that you have first in your plan. I think this puts you pretty close to getting rid of that debt, and then that monthly payment can be snowballed over to your next debt in your plan. (Personally, I would still prefer to pay down the highest interest debt first, but I'll assume the order that you prefer since there are many things that go into deciding, and you know yourself best!)

N2Deep wrote:
I have 13 more years before I can walk away from this job free and clear with my retirement. At that time I'll be 53 yrs old. How long I'll live after (or if I even make it to that point) is anyones guess.

That's very true that we don't know when we'll die, but for purposes of retirement planning, people have to make assumptions about when it will be. This is because you wouldn't know if you have "enough" to retire unless you can approximate how much money you will need to have to live on for the rest of your life. I think most people who have a plan choose until around 85 to 95 years old, though others adjust this based on family medical history, etc.

N2Deep wrote:
Sorry I have to be cagy, but some things I just don't feel comfortable putting on the internet. It took me a while to even be able to start my journal.

No worries -- thanks for being brave and sharing so much already!


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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Thu Dec 27, 2012 10:51 am 

Joined: Tue Apr 15, 2008 6:48 am
Posts: 526
Location: Arkansas
Ok... some more numbers

My current balance is 7963. While the amount I can throw at it wont wipe it out, within a month or so I could have it gone.

Per my plans that were posted several posts up, each time I pay off a debt I planned on increasing the paycheck percentage that goes towards my retirement. Currently it is at 5%, and I had planned on bumping that up to 10% when I got this debt paid off. That would mean I would be throwing roughly $300 each month into my retirement.

Knowing this lets look at the numbers.

Using the 7k towards debt:
first couple of months only $150 per month gets tossed towards retirement
next 22 months roughly $300 per month gets tossed back at my retirement

This gives me a total of $6900 going toward my retirement in the two years it would take to pay off my debt. At this point I've almost payed myself back and Im out of debt a year early. Then for that year I should have been paying on debt I could add roughly 12000 into my retirement (december min payments was 1135/mo which comes out to 13620 a year)... for a total amount of 18900 in my retirement funds over the course of the next three years.

Now lets look at NOT using the 7k and using the same debt to calculate the numbers
for the first 12 months I add in $150 a month
for the next 24 months I add in $300 a month
In three years my debt will be paid for and I would have added in an extra 9000 on top of the 7000 I had for a total of 16000 in my retirement funds

This leads me to believe that I'd be better off going ahead and using the money to pay down that debt. From the looks of it I'd have 2900 more in my retirement funds within the same time frame.

Do you see anything wrong with my figures? I'll have to admit I'm kinda leaning towards using it for debt. I'll have extra in my retirement funds, plus I'd have a year of no paying interest to the credit card companies.

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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Thu Dec 27, 2012 11:00 am 

Joined: Tue Apr 15, 2008 6:48 am
Posts: 526
Location: Arkansas
LeRainDrop wrote:
(1) Use the first part of it to get your e-fund up to $1,000. $200-$500ish is miniscule, and you run the risk of simply adding to high interest credit card debt if an emergency comes along. Then you'd be in an even worse place than where you started because your credit card interest rate (I'm assuming) is higher than the interest rate for the debt that you want to pay down first.


That would be a correct assumption. The debt I am wanting to pay off is at 12%, the next one on the list is at 13.99% then it goes to 15.24%. The reason for this is due to how much it would free up in monthly payments. After living so long with debt I'm not worried about the little amount of interest difference. The monthly amounts freed up mean more to me and would help keep me motivated more.

Quote:
That's very true that we don't know when we'll die, but for purposes of retirement planning, people have to make assumptions about when it will be. This is because you wouldn't know if you have "enough" to retire unless you can approximate how much money you will need to have to live on for the rest of your life. I think most people who have a plan choose until around 85 to 95 years old, though others adjust this based on family medical history, etc.


Man if I make it to 95 Im gonna be a cranky ol geezer :rofl: Assuming 85 then I'll have 32 years in retirement

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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Thu Dec 27, 2012 5:33 pm 

Joined: Tue Apr 15, 2008 6:48 am
Posts: 526
Location: Arkansas
N2Deep wrote:
Man if I make it to 95 Im gonna be a cranky ol geezer :rofl: Assuming 85 then I'll have 32 years in retirement


ohhhhh scary thought considering the numbers I just ran.

25000 left in retirement if I use 7k for debts
250000 what I want to retire with
225000 What I'll need to sock away
18900 should be able to put into retirement while paying off CC debt
206100 Amount left to strive for
20610 needed per year if I want to retire by age 53
1717.5 What that goal breaks down to a month for 10 years

Considering 1000 per month in expenses, 250000 come out to only 20.8 years

25000 left in retirement if I use 7k for debts
300000 what I want to retire with
275000 What I'll need to sock away
18900 should be able to put into retirement while paying off CC debt
256100 Amount left to strive for
25610 needed per year if I want to retire by age 53
2134.166667 What that goal breaks down to a month for 10 years

Considering 1000 per month in expenses, 300000 come out to only 25 years


I guess it's good that I spent the time working out these numbers... now I kinda have an idea how much I really need.

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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Thu Dec 27, 2012 5:39 pm 

Joined: Tue Jun 30, 2009 9:44 pm
Posts: 308
Location: Atlanta, Georgia
N2Deep wrote:
N2Deep wrote:
I guess it's good that I spent the time working out these numbers... no I kinda have an idea how much I really need.

Sorry, I didn't mean to scare you! A lot of that income, however, comes from investing the retirement money over time. So, it's not that you actually need to earn that much at work and sock it away -- over the years, the money you have saved will bring returns, and as they continually reinvest, that money compounds, even after you start your retirement. Because you are not going to withdraw all of the money you have saved for retirement on day 1, most of it will stay invested and continuing growing. It sure does provide a little extra motivation, though! ;)


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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Thu Dec 27, 2012 7:15 pm 

Joined: Tue Apr 15, 2008 6:48 am
Posts: 526
Location: Arkansas
Ok... I'm getting a little gun shy. Don't know if I want to pull that trigger now on the 7k.

Quote:
http://www.huffingtonpost.com/2012/12/27/fiscal-cliff-tax-hikes_n_2370579.html?icid=maing-grid7%7Cmain5%7Cdl4%7Csec1_lnk2%26pLid%3D250281

1.Your Income Tax Rates Will Go Up The expiration of the Bush-era tax cuts on Dec. 31 means nearly every American taxpayer will see their rates go up when the rates go back to their 2001 levels. President Obama’s plan to avert the cliff includes keeping the current rates for middle- and low-income earners, while allowing the rates to increase for the highest income levels from 35 to 39.6 percent. Republicans have pushed to keep the tax cuts for everyone.

2.Your 2012 Tax Bill Will Be Huge As many as 28 million Americans are about to be slammed with the alternative minimum tax because a "patch" to adjust the AMT for inflation will not go into effect unless Congress acts. For middle-class households with kids and earning around $75,000, the AMT will add $3,700 on average to the tax bill for 2012 alone.

3.Your Paycheck Will Be Smaller The first paycheck of the year is going to be smaller for up to 125 million Americans after the Social Security payroll tax holiday expires on Dec. 31, raising the rate from 4.2 to 6.2 percent.

and there is more to this article


The money re-invested in my retirement is quaranteed. I'll put XX into my retirement. If I use it for debt reduction then I may or may not be able to get everything paid off on the schedule I want... thus paying me back with interest for using the money. Especially if my taxes go up and my paycheck goes down. Suddenly just riding it out for 3 years or however long it takes with a smaller paycheck looks appealing.

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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Fri Dec 28, 2012 6:01 am 

Joined: Fri Jul 10, 2009 6:57 am
Posts: 378
LeRainDrop wrote:
N2Deep wrote:
N2Deep wrote:
I guess it's good that I spent the time working out these numbers... no I kinda have an idea how much I really need.

Sorry, I didn't mean to scare you! A lot of that income, however, comes from investing the retirement money over time. So, it's not that you actually need to earn that much at work and sock it away -- over the years, the money you have saved will bring returns, and as they continually reinvest, that money compounds, even after you start your retirement. Because you are not going to withdraw all of the money you have saved for retirement on day 1, most of it will stay invested and continuing growing. It sure does provide a little extra motivation, though! ;)


Yeah, I agree, fear is a great motivator! But compound interest charts are also good motivators. Find one, or find an investment calculator, and see how much different retirement dates, different rates of return, and different monthly savings rates will speed up or slow down progress towards your goal. They are fun to play with...

I also have to agree with Leraindrop about the efund. Get to 1K ASAP!


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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Fri Dec 28, 2012 6:57 am 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1356
N2Deep wrote:
Considering 1000 per month in expenses, 300000 come out to only 25 years


I hate to freak you out even more, but I think even that is very optimistic, unless you happen to have a pension plan (maybe you mentioned this earlier; I haven't taken the time to read back all the way). As I think others have pointed out, one thing you may be missing in your calculations is taxes; another is inflation. Even if your investments are growing, inflation will eat away at them; it sounded like you said your retirement savings interest is "guaranteed" which to me means these are really savings, not investments, and they'll probably barely keep pace with inflation, right?

If you have a pension plan, and your retirement savings are just to tide you over until that kicks in and/or to supplement that income plus whatever you get from social security, $300,000 may be all you need. But if you're really planning to retire in your 50s and live entirely off your retirement savings for the rest of your life, you're going to need an awful lot more than $300,000.

When I did these calculations for my own situation, I figured $250,000 might last me 8 to 9 years, considering that income taxes will be taken from those funds when I withdraw them, and that my cost of living will be higher due to inflation. I factored in Social Security and the fact that I will no longer be paying a mortgage. We live frugally so we don't need a big income to maintain our current lifestyle; we're also willing to cut back. And we could give ourselves a few more years if we sell our house when we're retired and move into a smaller place in a cheaper location. We'd rather not do that unless we have to. I figured we'll probably have to keep working until our early 70s, at least part-time, based on what I've set aside for retirement to date and what I plan to contribute over the next 10 years or so.


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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Fri Dec 28, 2012 10:10 am 

Joined: Tue Apr 15, 2008 6:48 am
Posts: 526
Location: Arkansas
brad wrote:
N2Deep wrote:
Considering 1000 per month in expenses, 300000 come out to only 25 years


I hate to freak you out even more, but I think even that is very optimistic, unless you happen to have a pension plan (maybe you mentioned this earlier; I haven't taken the time to read back all the way). As I think others have pointed out, one thing you may be missing in your calculations is taxes; another is inflation. Even if your investments are growing, inflation will eat away at them; it sounded like you said your retirement savings interest is "guaranteed" which to me means these are really savings, not investments, and they'll probably barely keep pace with inflation, right?


What I mean with the "guaranteed" was that I have the 7k for retirement. That's what it's earmarked for... that 7k is guarantted money in my retirement vs. the speculative... I use it to pay down my debt early and pay myself interest for using that money. If my paycheck shrinks becasue of the fiscal cliff then I may not be able to pay down debt early because I'll have less to work with.

I do have a pension plan at work and I spent 3 hours last night pouring over almost 7 years of pay sheets and inputting that info into a spreadsheet. I really hate my job, but now Im gonna tough it out. My retirement is looking a little better with these numbers.

Quote:
If you have a pension plan, and your retirement savings are just to tide you over until that kicks in and/or to supplement that income plus whatever you get from social security, $300,000 may be all you need. But if you're really planning to retire in your 50s and live entirely off your retirement savings for the rest of your life, you're going to need an awful lot more than $300,000.


Agreed..... but here's something else to consider. Not only am I in the process of paying down debt, but I am also in the process of going back to a simplier time. By the time I retire I'll be growing around 85% of what I eat and I'll have a solar array for power. No mortgage, no car payment, and no debt. I really won't need a lot of dough to live on.

Quote:
When I did these calculations for my own situation, I figured $250,000 might last me 8 to 9 years, considering that income taxes will be taken from those funds when I withdraw them, and that my cost of living will be higher due to inflation. I factored in Social Security and the fact that I will no longer be paying a mortgage. We live frugally so we don't need a big income to maintain our current lifestyle; we're also willing to cut back. And we could give ourselves a few more years if we sell our house when we're retired and move into a smaller place in a cheaper location. We'd rather not do that unless we have to. I figured we'll probably have to keep working until our early 70s, at least part-time, based on what I've set aside for retirement to date and what I plan to contribute over the next 10 years or so.


I honestly don't think Social Security will be around when I retire. I'm just giving the govt free money on that one because they wont let me stop.

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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Fri Dec 28, 2012 10:21 am 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1356
Ah, your picture definitely sounds better with those clarifications.

A pension plan at work makes a huge difference. The "inflation proof" lifestyle is good too. Just be sure you budget for replacing your solar array, as PV panels don't last forever.

It's also worth cultivating skills and expertise that you can put to use part-time in retirement if you want to/need to bring in extra money. That's another form of investment that can improve your chances of getting by without having to save a bundle.


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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Fri Dec 28, 2012 10:54 am 

Joined: Tue Apr 15, 2008 6:48 am
Posts: 526
Location: Arkansas
brad wrote:
Ah, your picture definitely sounds better with those clarifications.

A pension plan at work makes a huge difference. The "inflation proof" lifestyle is good too. Just be sure you budget for replacing your solar array, as PV panels don't last forever.

It's also worth cultivating skills and expertise that you can put to use part-time in retirement if you want to/need to bring in extra money. That's another form of investment that can improve your chances of getting by without having to save a bundle.


Working on that too. Not only am I increasing my garden and gardening abilities, it will also allow me to sell plants and produce at the farmers market or roadside stand. In the next few years I want to install a greenhouse here. Course then I may never be on the computer anymore cause I'd always be playin in the dirt :D

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 Post subject: Re: Journey into debt reduction (Round 2)
PostPosted: Fri Dec 28, 2012 12:08 pm 

Joined: Tue Apr 15, 2008 6:48 am
Posts: 526
Location: Arkansas
just a quick update.

No matter how hard I tired, I just couldn't convience myself. I think the last straw was reading how my check was gonna shrink thanks to the idiots in washington. That really lead me to believe that I wouldn't be able to pay off the debts on the time frame I needed in order to pay myself interest for using the 7k.

With that being said.. I'm not going to take the easy way out of the financial mess I find myself in, and instead I'm gonna buckle down and claw my way out like I should have years ago.

The 7k will stay where it's at.... in my retirement.

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