July 12, 2013
When considering paying off debt early vs. investing for retirement in your 401k/Roth IRA, what questions should you contemplate?
When considering paying off debt early vs. investing for retirement in your 401k/Roth IRA, what questions should you contemplate?
You should max out your retirement plans before paying off business loans/your mortgage. Once you have maxed out your retirement plans, you should contemplate whether you can earn a higher return in a good investment outside of your retirement plans or by paying off your business/real estate loans. Another question you should contemplate is what kind of fees and commissions are you paying to invest your money? Also, what interest rate/fees are you paying? Is there a better way? Finally, who do you owe and how much?
You make many good points, Katherine, but their are a few points I would challenge. The key point when looking at investing vs. paying off debt is this: what is the interest rates on your debt and what is the projected returns on your investments AFTER costs.
Here are a few simple rules to live by: If you get matching money on your retirement fund at work GO GET IT! That is a 100% return and you should not let that go. For most people, it is wise to invest any amount that is matched or partially matched by your employer. After that, it starts to get tricky.
A good and cheap no-load total stock market fund should produce a return of 7 to 10% over time after costs. If you have a debt where you are paying more than 7%, I would definitely take any extra money and pay down the debt instead of putting it in the retirement accounts. I would probably go as low as 5% before deciding to invest. The key here is using efficient and low-cost stock investments. The average investor tends to end up with 2 to 3% returns on their investments because of their over reliance on “experts” who end up sticking their money in high cost investments like annuities, life insurance, and load managed mutual funds. If you are in this category, WISE UP and get away from those people. THEY ARE NOT YOUR FRIENDS!
BOTTOM LINE: Consider what you can earn on your money in a retirement account vs. the guaranteed return you would get by paying down debt. The smarter you become on this issue, the higher your net worth will be as time rolls on.