Cutting off that Anchor that is Debt

[deleted684261]

Finally made my last payment to my student loans ($ 170, 000) ... just wanna share this good news and want to thank this forum for educating me on the anchor that is debt, especially student loans. Wife and I made many sacrifices past two years and through medical school and these sacrifices finally paid off: i have never felt this free, free from worries, free from walking around with a cloud above my head. I can't agree more with the saying that debt is An Anchor .... sooner you cut loose, the better. Thank guys!

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[chocomorsel]

Nice. Excellent if it only took two years post residency.

 

[mostwanted]

Nice. Excellent if it only took two years post residency.

It is possible, my starting amount $150k. Should be done 6 months out of fellowship (proper planning, living within my means)

 

[Wiscoblue]

Good job! Now keep that discipline and pay off your house and build a nest egg. Don't celebrate with a Porsche.

 

[deleted50478]

Congrats. I'm sure it feels good and I'm jealous but...

In 20 years calculate what $170k would have made you in an S&P tracking fund, compare that to how much your loans would have cost to pay over 20 years, and report back to us. I'll be waiting but guess what, you'll lose TONS of potential money. I hope the feeling a weight off your shoulders is worth hundreds of thousands in lost investment growth.

 

[urge]

Congrats. I'm sure it feels good and I'm jealous but...

In 20 years calculate what $170k would have made you in an S&P tracking fund, compare that to how much your loans would have cost to pay over 20 years, and report back to us. I'll be waiting but guess what, you'll lose TONS of potential money. I hope the feeling a weight off your shoulders is worth hundreds of thousands in lost investment growth.

8.7% yearly return for the last 20 yrs. Then you get to pay ~30% in taxes (depending on State) over any gains. You are probably better off paying any debt over 4.5% interest.

 

[urge]

Don't celebrate with a Porsche.

I wouldn't go that far. A nice car (or boat, or whatever...) will potentially give you many years of happiness (if that is what makes you happy). The key is to make it last so that you don't have to keep spending money on cars too often.

 

[aneftp]

8.7% yearly return for the last 20 yrs. Then you get to pay 40% to 50% in taxes (depending on State) over any gains. You are probably better off paying any debt over 4.5% interest.

Yup. Agreed. I think people look at the returns since the bottom of the market in 2009. And market has more than doubled in 5 years.

It's not sustainable. Always a pull back.

Look at nasdaq. It crashed in 2000-2001. It took almost 15 years to return to its peak level in late 2014.

There is always opportunity costs lost. Can't predict the market. Depends on ones risks level.

 

[deleted50478]

The capital gains tax rate is 20% or less.

There's definately an interest rate at which paying debt beats investing. It's probably higher than 4.5%.

 

[urge]

The capital gains tax rate is 20% or less.

Not really, it's about 30% average for the US.

Currently, the United States places a high tax burden on capital gains income. The current federal top marginal tax rate on long-term capital gains in the United States is 23.8 percent (20 percent top rate plus 3.8 percent tax on unearned income to fund the Affordable Care Act). In addition, taxpayers have to pay state and local income taxes on their capital gains income from zero percent in states that do no levy an individual income tax to as high as 13.3 percent in California.

http://taxfoundation.org/blog/how-high-are-capital-gains-tax-rates-your-state

 

[urge]

There's definately an interest rate at which paying debt beats investing. It's probably higher than 4.5%.

You might be able to stretch it to 6% but any more than that is pushing it.

 

[BLADEMDA]

I posted back in 2007 that the stock market was risky compared to paying off your student loans. Most posters mocked me by showing the market returns were consistently better than the interest rate on their loans.

Guess what happened in '08? The market tanked and all these geniuses lost money instead of paying down their debt. If instead they had paid off their debt or at least half that amount then invested again in '09 they would have done better.

I'm posting the same thing now as I did in '07: The market is near a top so if you invest now instead of paying off your huge student loans it is a big gamble.
Both the fixed income and equity markets could easily lose money over the next 2 years. Do the safe thing and pay off some debt.

 

[deleted50478]

I posted back in 2007 that the stock market was risky compared to paying off your student loans. Most posters mocked me by showing the market returns were consistently better than the interest rate on their loans.

Guess what happened in '08? The market tanked and all these geniuses lost money instead of paying down their debt. If instead they had paid off their debt or at least half that amount then invested again in '09 they would have done better.

I'm posting the same thing now as I did in '07: The market is near a top so if you invest now instead of paying off your huge student loans it is a big gamble.
Both the fixed income and equity markets could easily lose money over the next 2 years. Do the safe thing and pay off some debt.

You posted the same thing in 2011 and anyone taking your advice lost boatloads of money so far.

 

[IlDestriero]

Paying off the debt is a guaranteed win and has zero risk. Most other investments come with some degree of risk. When jumbo CDs were paying 6% that was an easy place to pick up an extra couple percent over a loan and park some money for a while, the FU account, etc., those days are long gone. Of course the plus side is now we had super low home loans. I still consider getting back in the game, but I suspect we won't see great gains as interest rates swing the other way. There was an opportunity to speculate, but I think that window has probably closed as well.
I'd rather be free of significant student loans than hoping to score a higher rate on the market. Those fees and taxes add up and erode a lot of gains.
I doubled down during the market crash and cleaned up. Would I do that now? Hell no!
Congratulations.

 

[urge]

You posted the same thing in 2011 and anyone taking your advice lost boatloads of money so far.

We just did the math for a 20 yr stretch. Most people here have loans higher than 6%, so going into the market is a big risk with minimal upside.

 

[Man o War]

I think this is dependent on many factors. My loans are 2.5%, I can't write off the interest because of the AMT, and my 10 year average for the stock market is just south of 9%. I'd be an idiot to pay those off.

 

[IlDestriero]

There's a big difference between our generation and the current generation with ~7% loans.

 

[fakin' the funk]

Unfortunately, y'all aren't smarter about this stuff than White Coat Investor, who has a nice post on this topic (paying off loans vs investing).
http://whitecoatinvestor.com/student-loans-vs-investing/

The "cut point" is around 4-5% interest rates, where most would agree that for physicians in high tax brackets, long-term it would be better to pay off a loan above these rates than to invest; below these rates, it would be better to invest than pay off the loans.

I personally loathe having debt and also have a relatively low tolerance for risk in investing. Between a small inheritance, current and spouse's salary, refinancing with parents, and refinancing with DRB, I have been aggressive with paying down debt after residency, getting it down from 250K @ average 5.5% interest rate to 100K @ average 2% interest rate in 2 years.

 

[deleted50478]

Unfortunately, y'all aren't smarter about this stuff than White Coat Investor, who has a nice post on this topic (paying off loans vs investing).
http://whitecoatinvestor.com/student-loans-vs-investing/

The "cut point" is around 4-5% interest rates, where most would agree that for physicians in high tax brackets, long-term it would be better to pay off a loan above these rates than to invest; below these rates, it would be better to invest than pay off the loans.

I personally loathe having debt and also have a relatively low tolerance for risk in investing. Between a small inheritance, current and spouse's salary, refinancing with parents, and refinancing with DRB, I have been aggressive with paying down debt after residency, getting it down from 250K @ average 5.5% interest rate to 100K @ average 2% interest rate in 2 years.

That's a good link. I don't see that it disagrees with me at all actually but whatever. They suggest 5%. That's reasonable, maybe a little conservative but above 5-6% interest rate your investments may still return more than you would save by paying the loan off, but the risk-adjusted return is unlikely to be worthwhile. Even white coat investor places 'risky investments' as a higher priority that paying off loans in the 3-5% range.

My point in commenting was to remind people that paying down debt isn't always the best option.

Congrats on paying off the loans. It's great whether you might have made more by investing or not. My loans won't be paid off for 20 years probably and I'm jealous. I just can't justify paying them off at 3%. Anyway congrats.

 

[okayplayer]

Unfortunately, y'all aren't smarter about this stuff than White Coat Investor, who has a nice post on this topic (paying off loans vs investing).
http://whitecoatinvestor.com/student-loans-vs-investing/

The "cut point" is around 4-5% interest rates, where most would agree that for physicians in high tax brackets, long-term it would be better to pay off a loan above these rates than to invest; below these rates, it would be better to invest than pay off the loans.

I personally loathe having debt and also have a relatively low tolerance for risk in investing. Between a small inheritance, current and spouse's salary, refinancing with parents, and refinancing with DRB, I have been aggressive with paying down debt after residency, getting it down from 250K @ average 5.5% interest rate to 100K @ average 2% interest rate in 2 years.

Congrats man, nice work!

 

[BLADEMDA]

I think this is dependent on many factors. My loans are 2.5%, I can't write off the interest because of the AMT, and my 10 year average for the stock market is just south of 9%. I'd be an idiot to pay those off.

My fixed Income investments are BELOW 2.5% right now so I'm assuming you are 100% equities in the market. My point is that for many of us who have a diversified portfolio 2.5% is a solid rate of return for that portion. Hence, if you were 80/20 then 20% of your investable income could be used to pay off student loans instead of buying any fixed income products.

I won't convince you of any of this until things turn ugly in the either the stock or bond market or both. Debt reduction should be part of any long term financial plan IMHO.

 

[BLADEMDA]

Risk-driven versus risk-free returns. Say you carry a number of student loans with an average interest rate of 6% and you still look to begin saving for retirement.

Feel comfortable borrowing money at 6% interest and investing it? Even if you believe you can earn 7% on your investments? What if you can earn 8%? Ask such calculating questions before deciding to save for retirement instead of paying down your loans.

Saving for retirement involves no bank passbook these days and is in fact putting money in a sometimes volatile stock market. Your money that pays down a student loan returns 6% every year (the interest rate) regardless of any market factors. Yes, in the long run your investments will likely earn 7% to 8% – but certainly not every year.

It makes little sense to start investing for retirement before you pay off your student debt if your interest rate is anywhere close to your expected return – the likely case in today’s economy.

Come up with a plan that suits your attitudes about debt and your financial goals. You may find that a mix of paying down a little extra principal while also investing a smaller amount for retirement works best.

 

[Shimmy8]

There's a big difference between our generation and the current generation with ~7% loans.

This is the key for pretty much anyone now leaving residency, unless there are special circumstances.

Everyone in my generation (CA-1) and younger govt secured/whatever loans are at 6.8%, minimum; 8.5% for the grad plus loans.

Much of these discussions do not apply to us at all.

Even if my interest rate were similar to the cutoff point, I'd want to be well below break even point to even consider electively holding on to debt.

 

[BLADEMDA]

This is the key for pretty much anyone now leaving residency, unless there are special circumstances.

Everyone in my generation (CA-1) and younger govt secured/whatever loans are at 6.8%, minimum; 8.5% for the grad plus loans.

Much of these discussions do not apply to us at all.

Even if my interest rate were similar to the cutoff point, I'd want to be well below break even point to even consider electively holding on to debt.

Even at 2.5% part of the new money going into an investment portfolio should be used for debt reduction. If the "plan" calls for 100% equity exposure then loans which carry an interest rate less than 4% can be paid at the minimum monthly amount. If, however, the plan is 80/20 or 90/10 then even low interest rate loans can be paid down over time until the yield curve normalizes again.

 

[BLADEMDA]

PLEASE don't misunderstand my posts about Investing vs Paying off debt. I wholeheartedly agree that Investing is the key to early retirement with a lot of money. I just feel like Dave Ramsey does that debt is an anchor so it should be cut loose whenever possible. Many Physicians don't save enough for their retirement or plan for the day when they need to slow down:

http://money.cnn.com/tools/retireyoung/

 

[sevoflurane]

It all depends on your particular situation...

 

[sevoflurane]

We just did the math for a 20 yr stretch. Most people here have loans higher than 6%, so going into the market is a big risk with minimal upside.

This is sooooo true. You can really f*** yourself if you are reliant on a 9% return year after year. Major corrections will happen in your lifetime of investing... prolly 3-5 times.

 

[sevoflurane]

When you pay off your debt... that is a guaranteed return.

 

[fakin' the funk]

Even if my interest rate were similar to the cutoff point, I'd want to be well below break even point to even consider electively holding on to debt.

This is how I feel as well.

Even in a 40% marginal tax bracket, you could argue that it is better to pay the minimum on a 4 or 5% loan and divert most of that money into an investment that is "expected" to earn 8-9% over a long timeframe (e.g., S&P500 Index fund).

But I just can't stomach that risk of investing vs the certainty of the loan interest.

I would think that out of all doctors, anesthesiologists would like investments that are a safe, "sure thing," with minimal risk.

 

[deleted50478]

This is how I feel as well.

Even in a 40% marginal tax bracket, you could argue that it is better to pay the minimum on a 4 or 5% loan and divert most of that money into an investment that is "expected" to earn 8-9% over a long timeframe (e.g., S&P500 Index fund).

But I just can't stomach that risk of investing vs the certainty of the loan interest.

I would that out of all doctors, anesthesiologists would like investments that are a safe, "sure thing," with minimal risk.

Capital Gains Tax Rate is nowhere near 40%

 

[pgg]

Capital Gains Tax Rate is nowhere near 40%

20% federal + 13.3% California gets awfully close for some people. (Granted most working anesthesiologists will be merely 11.3 or 12.3 in CA.)


Missing from most of these threads is any discussion of one's need to take risk. If you think you need $10M to retire, yeah, I guess maybe you need to accept a lot of risk chasing high returns. But maybe you don't really need $10M, and can achieve a more reasonable $4M with a more balanced, risk-averse portfolio. I think it's googley-eyed ridiculous to be 90-100% in equities, ever. Everyone's risk tolerance is different but I just wonder how many of those people so heavily weighted to equities would keep that tilt if the market tanked 40% next week. (And where they'd get the money to rebalance into equities.)

I just filed my taxes yesterday. Tax time every year I re-eval my asset allocation. I think I'm going to take (another) small step back from equity. Not because I think the market will tank soon, but because I don't think I need to chase high returns and take as much risk to reach my retirement goals.

I'd loan my kids out for hard labor in a fertilizer factory if someone told me I could make 4 or 5% risk-free, let alone 6.8%. I can't believe there are people who'd put money in the stock market before paying off loans at those rates.

 

[deleted50478]

20% federal + 13.3% California gets awfully close for some people. (Granted most working anesthesiologists will be merely 11.3 or 12.3 in CA.)


Missing from most of these threads is any discussion of one's need to take risk. If you think you need $10M to retire, yeah, I guess maybe you need to accept a lot of risk chasing high returns. But maybe you don't really need $10M, and can achieve a more reasonable $4M with a more balanced, risk-averse portfolio. I think it's googley-eyed ridiculous to be 90-100% in equities, ever. Everyone's risk tolerance is different but I just wonder how many of those people so heavily weighted to equities would keep that tilt if the market tanked 40% next week. (And where they'd get the money to rebalance into equities.)

I just filed my taxes yesterday. Tax time every year I re-eval my asset allocation. I think I'm going to take (another) small step back from equity. Not because I think the market will tank soon, but because I don't think I need to chase high returns and take as much risk to reach my retirement goals.

I'd loan my kids out for hard labor in a fertilizer factory if someone told me I could make 4 or 5% risk-free, let alone 6.8%. I can't believe there are people who'd put money in the stock market before paying off loans at those rates.

a. There are lots of tax avoidance techniques.
b. Most of us are in the 15% capital gains tax range and live in states with no taxes or much lower rates than california.

You should probably be 100% in equities until your yearly contribution to your 401k+ira is less than 10% (maybe 20%?) of your portfolio and then have an ever increasing percent in bonds until you hit your target percentage, whatever that might be.

 

[Man o War]

Like I said earlier, so many factors, age is a big one. I'm personally at an age where I'm in a high growth trajectory with my investments, as I get on in years this will obviously change to mitigate risk as I approach retirement. Definitely case by case basis, I don't worry too much about my yearly return numbers- I always look at longer term data, since I'm on the younger side, which is why I stated my 10 year number, and not my 1 year number. My only debt is a pretty small mortgage at 3.375% and these 2.5% student loans, and I'm keeping it that way. My wife and I are not lavish spenders, so I don't expect that to change. I'm totally comfortable taking the investment risks.

 

[atomi]

Don't celebrate with a Porsche.

Correct -- buy a Corvette. Faster. Cheaper. Easier to work on. Less douchey.

 

[urge]

20% federal + 13.3% California gets awfully close for some people. (Granted most working anesthesiologists will be merely 11.3 or 12.3 in CA.)

Don't forget to add 3.8% from the affordable care act.

37% for California.

 

[deleted684261]

Congrats. I'm sure it feels good and I'm jealous but...

In 20 years calculate what $170k would have made you in an S&P tracking fund, compare that to how much your loans would have cost to pay over 20 years, and report back to us. I'll be waiting but guess what, you'll lose TONS of potential money. I hope the feeling a weight off your shoulders is worth hundreds of thousands in lost investment growth.

To each his own i guess. I am still in residency and the only reason I was able to pay off this quick was because of some returns from the stock market. I put in 20 g during med school into some stocks and was able to triple the investment. I think looking at the current market, it is wise to cash in the pay off the debt. Besides I met my investment goals which was to make enough return to help me pay off the loans. Any savvy investor know that you need a goal before you invest and once that goal is met, pull the trigger, cash out. You also need to realize that average returns is just that, averaged. Some years u have 50 % , some 2 % and I don't have 10-20 yrs time horizon at the moment. so I can't risk losing my monies that should have been cashed in.

 

[Frank Rizzo]

Finally made my last payment to my student loans ($ 170, 000) ... just wanna share this good news and want to thank this forum for educating me on the anchor that is debt, especially student loans. Wife and I made many sacrifices past two years and through medical school and these sacrifices finally paid off: i have never felt this free, free from worries, free from walking around with a cloud above my head. I can't agree more with the saying that debt is An Anchor .... sooner you cut loose, the better. Thank guys!

I rarely visit this site anymore, but was board in the OR today. I have not logged in for almost a year, but felt the need to today to tell you "Congrats." Don't worry about the naysayers that think you should have invested. You sat back, analyzed what was best for you and your family, and paid it off. Good for you! Now keep living within your means, so you can use that money to increase your retirement investments AND build a FU account, and you will be sitting pretty. It's very easy to scale up your lifestyle... it's very difficult to scale it back.

 

[BLADEMDA]

I rarely visit this site anymore, but was board in the OR today. I have not logged in for almost a year, but felt the need to today to tell you "Congrats." Don't worry about the naysayers that think you should have invested. You sat back, analyzed what was best for you and your family, and paid it off. Good for you! Now keep living within your means, so you can use that money to increase your retirement investments AND build a FU account, and you will be sitting pretty. It's very easy to scale up your lifestyle... it's very difficult to scale it back.

Great post Frank and I suspect you will do well in life.