lets talk Retirement accounts & loans..

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OtisBlkR1

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So i dont get long winded let me put this simply..

I have two loans at the local bank.
loan #1 has 3 years left and its about $4,300 @ 6.5% annual
loan #2 has 4 years left and its about $9,800 @4.5% annual

combined 11% annual.

Im heavily considering taking out a loan against my retirement fund that's in goverment funds and returning around 6-8% on a good year (or we can have another 2008) I dont have a crystal ball..
combined i pay approximately $375 a month for both loans..

I can take out a loan against my retirement @ 1.37% for 3 years
and pay off both loans with a monthly payment around $360-$370ish (less money than im paying now) and shaving a year off the bigger of my two loans..

the perk.. the 1.37% is interest im paying myself back (its my money and goes back into my retirement along with the monthly payment) the processing fee for the loan through my retirement is $50.00 thats it, $50 out of pocket for the loan.

My only fear is the interest i will loose over the three years the money is out.. mind you its being put back in every two weeks with interest..

I will continue to put 9% of my check in this fund.. i will not slow or stop my contributions.. and with the last loan paid off a year early i plan to up the percent to 15% when the loan is completed (for atleast 12 months).

my financial advisor at work said it simple.. your guaranteed to save 9% that your paying the local bank in interest, your not guaranteed 9% in the market..


i havent pulled the trigger but this seems like a no-brainer to me.

p.s. im not close to retirement, my minium out is 13 more years, but i can work another 21.. so if i feel i lost my butt i have plenty of time to make up contributions in the future.

id love to hear from those that are very familiar with this sort of thing, or those that have done this ?
 
What about using all of your tax return and put it towards your debt ?

Put on your fire resistant flame suit as people will say you are wrong to take out loans in the first place....
 
Never take a Loan from a retirement account.

You are already making money on the retirement account vs the Loan. And according to your post it is more than the 1.37% you would be "paying yourself"

Simply focus on paying off the higher interest loan first.
 
Originally Posted By: LT4 Vette
What about using all of your tax return and put it towards your debt ?

Put on your fire resistant flame suit as people will say you are wrong to take out loans in the first place....



Im not against this idea.. my return wont pay off the smaller loan, but it will be close. i would have no trouble throwing some cash ontop of my return and easily paying off loan #1


the appeal to this in the first place is simply not paying the bank interest.. why give away my money ? i already have alot more in that retirement account than im thinking of borrowing from it.. $14,000 is not alot of money.
But im no expert.. thats why im gathering opinions. We have a good financial consultant at work and we talked it out over a 30 minutes.. in her words its "a good plan"...
 
It doesn't really sound like you would be saving much money. Both loans are pretty decent interest rates anyway. The only time I would consider taking money from my 401K is if there was a major emergency. My advice is to look over your monthly budget to find one thing you can do without. Cable TV for example. Cancel that and apply the amount toward the smaller loan. Once that is knocked out take that amount and add it to the payment on the larger loan. If your retirement plan allows you to rebalance your portfolio, I would consider that also. I rebalance mine once or twice a year and seem to get better gains that way.
 
Originally Posted By: OtisBlkR1
So i dont get long winded let me put this simply..

I have two loans at the local bank.
loan #1 has 3 years left and its about $4,300 @ 6.5% annual
loan #2 has 4 years left and its about $9,800 @4.5% annual

combined 11% annual.

Im heavily considering taking out a loan against my retirement fund that's in goverment funds and returning around 6-8% on a good year (or we can have another 2008) I dont have a crystal ball..
combined i pay approximately $375 a month for both loans..

I can take out a loan against my retirement @ 1.37% for 3 years
and pay off both loans with a monthly payment around $360-$370ish (less money than im paying now) and shaving a year off the bigger of my two loans..

the perk.. the 1.37% is interest im paying myself back (its my money and goes back into my retirement along with the monthly payment) the processing fee for the loan through my retirement is $50.00 thats it, $50 out of pocket for the loan.

My only fear is the interest i will loose over the three years the money is out.. mind you its being put back in every two weeks with interest..

I will continue to put 9% of my check in this fund.. i will not slow or stop my contributions.. and with the last loan paid off a year early i plan to up the percent to 15% when the loan is completed (for atleast 12 months).

my financial advisor at work said it simple.. your guaranteed to save 9% that your paying the local bank in interest, your not guaranteed 9% in the market..


i havent pulled the trigger but this seems like a no-brainer to me.

p.s. im not close to retirement, my minium out is 13 more years, but i can work another 21.. so if i feel i lost my butt i have plenty of time to make up contributions in the future.

id love to hear from those that are very familiar with this sort of thing, or those that have done this ?



You cannot combine the interest to show 11%. Thats not correct math.

Keep in mind should you loose your job for unknown reason, its not good to have outstanding loans.

However many people will say not to take a loan out of your 401K. But my feeling is if you were going to take out a loan anyway, its better to take it from your 401K than a bank for reasons you state. You save the interest paid on the loan, and the interest on the 401K is paid to yourself. Its really not interest, not even sure why the IRS forces them to do that.

But if you say, hey I could take a loan from my 401K and take the family to Hawaii for a month when we normally go the the local beach, that would not be a good idea.

I have done it several times. There are some rules about having only 2 loans at once and max 4 year payback and the % of your vested amount you can take out, or $50K max. Those I believe are all IRS rules.

The risk is the 401K shoots up by 50% and a portion of your money is not in it. But thats unlikely.

Now another option is a home equity loan where you could deduct the interest on your income tax.
 
Originally Posted By: Kuato
Never take a Loan from a retirement account.

You are already making money on the retirement account vs the Loan. And according to your post it is more than the 1.37% you would be "paying yourself"

Simply focus on paying off the higher interest loan first.


thats what i need to figure out! would i be earning more than im paying in interest now ?
 
I should add: Im not hurting for $ (im not rich) but not hurting either.. Im simply looking at the numbers and looking for the best ways to maximize what ive already got without paying more interest to the bank.. over coffee a coworker started talking about this plan and got me interested..

$50 bucks to borrow against yourself and pay yourself back with interest ? yes, i risk future earnings over the next three years untill 100% is fully paid back.. but with the bigger loan out of the way i can invest a full 15% on that imaginary 4th year.. (paying myself back even more on the back side)..
as i mentioned before im no expert on this stuff.. thats why i bring it to some of you.
 
Originally Posted By: OtisBlkR1
Originally Posted By: Kuato
Never take a Loan from a retirement account.

You are already making money on the retirement account vs the Loan. And according to your post it is more than the 1.37% you would be "paying yourself"

Simply focus on paying off the higher interest loan first.



thats what i need to figure out! would i be earning more than im paying in interest now ?



Well, you said you earn 6% - 8% on your retirement loan.

Let's start with: You pay 6.5% on $4300

If you look at this example, the basic math shows you are losing interest of 6-8% on $4300 in order to pay off a loan that is 6.5%. So the variable change would be either a .5% gain (if you would have made 6%) up to a loss of 1.5% (if you would have made 8%). That's bad odds in my book.

With the other loan, it's worse: You are losing 6-8% interest on $9800, to pay off a loan where you are paying 4.5%. That means that at the least you are losing 1.5% on this deal.

In a bad year, I could see maybe paying off the 6.5% loan. Maybe. It's really tempting to "get rid" of those loans. However when you figure what you are probably losing in the deal (plus the $50 they're stealing from you to do it), overall, IMO it's not a good idea.

Again, just pay as much as you can on the 6.5% loan, then when it's gone do the same on the 4.5%.
 
Originally Posted By: Kuato
Originally Posted By: OtisBlkR1
Originally Posted By: Kuato
Never take a Loan from a retirement account.

You are already making money on the retirement account vs the Loan. And according to your post it is more than the 1.37% you would be "paying yourself"

Simply focus on paying off the higher interest loan first.



thats what i need to figure out! would i be earning more than im paying in interest now ?



Well, you said you earn 6% - 8% on your retirement loan.



a good year is 6-8% a bad year (like 2008) and we all loose thousands.... ive seen 5% years 3% years, and 9% years.. im not sure what the actual average is.. id have to do some investigating Im not opposed to just paying off the 6.5% loan.. (i can write a check and pay it off) But that robbs another account..

I think the old addage that the market earns 10% a year is pretty much out the window for some time time.. relearning how to invest is tricky.. and im not all that great at it anyways..
 
Look at your statements, are you really getting 8%-9% over the past year on your 401K? Sounds high.

Maybe take a 2 yr loan from 401K. Chances are when the economy really takes off will be sometime in 2014 when the bulk of your 401K loan will be paid back.
 
Motorcycles are dangerous, maybe sell both of them and use that towards your debt (I'm kidding sort of). Cut out unnecessary spending and tighten your belt. Have a talk with your wife and say this debt is a priority .
 
Don't borrow from retirement. Bad, bad, bad. If you lose your job for any reason, and can't pay it, it becomes penalized, taxed income. If you have other assets that could cover it in an emergency, but that you don't want to cash out now, perhaps it would be ok. But these are generally specialized circumstances. As a rule though... Bad.

Focus on the fact that you have debt because you can't afford your lifestyle. So focus on taking your lifestyle to nothing. Lower than it would be if you were living within your means because you need more cash to pay off debt.

Some common wastes are:
Cable tv
Smart phone data plans
Text messaging
Eating out
Sporting events
Movies
Coffee/soda/alcohol habits
Cigarettes
Driving too fast or more than you need
Cars and other things on payments

So trim your lifestyle to nothing and take any free cash to be applied to the debt.

Then only slowly add some semblance of normal (remember that normal is deep in debt and reliant upon social security to not starve in retirement), based upon a solid budget only once out of debt.

This Christmas should be arts and crafts and home baked goods only...

You can do this. No matter how secure your job, the loan isn't a good idea, because you don't know what could happen two years from now. You have a lifestyle and decision making issue that needs to be fixed. That's the key.

Good luck and go get 'em. With good focus and care, I'll bet you can be debt free this time next year.
 
Originally Posted By: JHZR2
Don't borrow from retirement. Bad, bad, bad. If you lose your job for any reason, and can't pay it, it becomes penalized, taxed income. If you have other assets that could cover it in an emergency, but that you don't want to cash out now, perhaps it would be ok. But these are generally specialized circumstances. As a rule though... Bad.

Focus on the fact that you have debt because you can't afford your lifestyle. So focus on taking your lifestyle to nothing. Lower than it would be if you were living within your means because you need more cash to pay off debt.

Some common wastes are:
Cable tv
Smart phone data plans
Text messaging
Eating out
Sporting events
Movies
Coffee/soda/alcohol habits
Cigarettes
Driving too fast or more than you need
Cars and other things on payments

So trim your lifestyle to nothing and take any free cash to be applied to the debt.

Then only slowly add some semblance of normal (remember that normal is deep in debt and reliant upon social security to not starve in retirement), based upon a solid budget only once out of debt.

This Christmas should be arts and crafts and home baked goods only...

You can do this. No matter how secure your job, the loan isn't a good idea, because you don't know what could happen two years from now. You have a lifestyle and decision making issue that needs to be fixed. That's the key.

Good luck and go get 'em. With good focus and care, I'll bet you can be debt free this time next year.



As i mentioned before: were not (in my opinion) living outside our means.. my wife and i both do Ok (together were in the 100k club) we only have bank notes as we both invest alot into our retirement accounts and we put our house on a 15 year (so our payment is higher than average).. 2 of our three autos are paid in full, bikes paid in full, Zero credit card debt.. zero school loans, zero other debt besides house and these two notes.. i was only asking looking at ways of maximizing..

but i still appreciate all opinions
smile.gif
 
Borrow as much as you can afford on a fixed 30 year loan and invest it in real property then rent the property to pay off the loan. Preferably a retirement home you can easily rent now and use later. I say this for 3 reasons.

1. Interest rates are the lowest they have been since the 1950's and won't get much lower.
2. The Treasury is buying up so much US debt that your money will be worth much less than it is now. So your purchasing power will never be this high again. You borrow now and pay back in inflated dollars in the future.
3. If you buy in a vacation/retirement area as the baby boom retires rental will be in demand and easy to cover your payments. You will have someone else pay off your retirement home for you.
 
Originally Posted By: OtisBlkR1
..I have two loans at the local bank.
loan #1 has 3 years left and its about $4,300 @ 6.5% annual
loan #2 has 4 years left and its about $9,800 @4.5% annual

combined 11% annual.

You're paying 5.5% average on the two loans, not 11%. Not bad compared with historical averages, moreover the bulk of it is at 4.5%.

If you can afford it, why not increase the payments on the 6.5% loan, pay that off first, then do the same with the 4.5% loan.

Another option, if you have good credit, is 0% credit card balance transfer offers. An attractive offer would be 2 years at 0% with a 3% or less transfer fee. Run the numbers to see if that works for you.

Most likely the bank loans are secured with some collateral I assume. A CC balance transfer would be unsecured. In a worse case scenario default you don't have to worry about the bank repossessing the RV in the middle of the night or putting retirement funds at risk
 
Originally Posted By: Donald
Look at your statements, are you really getting 8%-9% over the past year on your 401K? Sounds high.

Right, and people don't calculate the effects of inflation.

The real inflation rate, not the phony numbers the BLS puts out, could make a 8-9% return flat or negative in real terms.
 
I'd not borrow against what is already going in or in already, but can you cut down what comes out of paycheck and knock at least one of the loans out in six months or so that way? I know we are all human, an extra $400 a month never becomes $400 direct back out to creditors, but just a thought.
 
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