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I've regularly heard the best advice for a young professional is to max out your employer's 401k contributions (maybe 3-5%, or limited in some way), then focus the rest on paying down debts. After the debts are paid, you increase your 401k contributions.

However I'm in an unusual position in that my employer matches 100% of what I contribute during the year as a single lump contribution in December, up to the federal maximum ($19.5k as of right now).

Does this classic advice still hold true in my unusual case? In the future, if I get a raise, how do I figure out where I should put that extra money (paying down loans vs adding to 401k)?

Basic details:

  • Age: 28
  • 401k balance was ~48k, now ~$36k in the midst of this pandemic
  • Total of loans is $44k, currently making payments of $670/mo targeting the highest interest rate loans
    • $ 2.6k @ 6.5%
    • $ 27.3k @ 5%
    • $ 14.2k @ 3.1% — 4.4% (several smaller loans here, split up among these rates)
  • 401k contributions are at 15% of $80k salary ($12k/year)
  • Wife and my combined income is $105k
  • Current mortgage principal is $172k with ~30k home equity
  • Cars are both paid off
  • Q - is the match a bad ass 100.000% CASH MATCH (if so, congrats), or is it some promise / stock / other talk ? – Fattie Mar 27 at 20:26
  • @Fattie Deposits money straight into my 401k, in which I'll be fully vested after 3 more years (+20% vested at the conclusion of each year of employment). – maxathousand Mar 27 at 20:29
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    Where else can you get 100% ROI? – shoover Mar 27 at 20:37
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    @shoover I was looking for other perspectives that perhaps I had not considered, and did receive just that. – maxathousand Mar 27 at 20:43
  • @maxathousand , if you look over this site you'll notice I am "debt enemy #1" !! But that does seem like an incredibly / unbelievably good deal, so, why not go for it? AND, PAY OFF THE DEBT ASAP IN ADDITION Congrats and good luck – Fattie Mar 28 at 15:07
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Nothing beats a 100% gain, so you should strive to max out the 19500 limit every year. Only further money should go against open loans (within the options you have).

Saving 4% or even 6% interest on a paid-off part of a loan is nice, but poor compared to making 100% on match - its 96% (or 94%) more, or about twenty times as much.
Seen in absolutes: if you put an extra $10000 against a loan of 6%, you get a saving of $600 every year until the loan runs out. If you put the $10000 in your 401k, you get a $10000 match this year - that is 15 times that $600 - and in addition, 4-10% gain per year on top of it every following year - an extra $800 to $2000 per year, with no time limit, and which alone is much more than the saved interest.

There surely is a value to the psychological advantage of being loan-free, but are you willing to pay that price for it?

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    Yeah, essentially they are giving you free money to add to your retirement, and that's BEFORE the compound interest that will take place on it in the next 40ish years. Making SURE you're maxing it out early is a much better long term policy. – Anoplexian Mar 27 at 15:36
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    @Anoplexian-ReinstateMonica It's not free money. It's unavailable until you reach age 59 1/2, which is a significant constraint. If Congress were to remove the contribution limit then they'd be offering you the chance to make even more "free" money - would you recommend that OP contribute 100% of their income to retirement funds and starve to death? I agree with this answer's reasoning in this case, but your "free money" logic is incorrect. At a certain point it makes sense to turn down even a 100% employer match in exchange for liquidity. – tparker Mar 27 at 16:29
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    @tparker I put this math in another comment, but I think given 100% match, it is to OP's advantage to get the full match and even if they withdraw that full match and pay the early withdraw penalties and income taxes, they are still ahead. 100% match is crazy good, in a world where 10% is usually considered extraordinary. – R. Hamilton Mar 27 at 18:08
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    This answer triggers a pet peeve: The 100% match is not directly comparable to a 6% interest rate because the later has a time dimension (per year). If the earth took twice as long to orbit the sun, we would quote the interest rate as 12% but the match would still be 100%. We cannot say that one is more than the other. Rather, dimensional analysis says that the ratio between them is a time: 100% / (6%/year) = 16.7 years. In general, the longer one's time horizon, the more important annual returns are and the less important a one-time return (like the match) is. – nanoman Mar 27 at 23:04
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    You are all ignoring that the 100% match will produce interest in the following years too. They are not dead capital. – Aganju Mar 28 at 3:15
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You're going to get varying opinions depending on people's level of debt adversity, but here's what I did when I was in the same position at your age (and had a 15% match as well):

  • Temporarily suspend your 401(k) (yes even with a 100% match) to get the loans knocked down.
  • Pay as much as you possibly can to the student loans, which seems to be about $20k/year based on your current monthly payment and what you can afford to contribute to 401(k)
  • After 1 or 2 years, the loans should either be gone or small enough that you can feel the end and get them over the finish line.

Here's why:

  • I was tired of paying 5% in unsecured debt on top of my mortgage
  • I knew I was going to have to pay it anyway (nothing to sell to cover it unlike a car loan)
  • I wasn't going to see any of that retirement money for 30 years
  • The match was in my company's stock, and I wasn't comfortable having that much in one stock.
  • I knew I had plenty of time (30 years) to make up for the 2 years of lost match
  • Student loans are not bankruptable (although I wasn't really concerned about that)

Here's what happened:

  • I paid off the loans in 2 years
  • I started contributing 15%, maxing out after 3 years
  • With the extra cash flow, my wife was able to go part-time while we had young children, and we were able to upgrade our house and still be on track for retirement

Put in "big number" terms, you can pay 0% for two years and then 20% for 5 years, or 15% for 7 years - so 100% or 105% over those 7 years isn't a huge difference, and may even even out when you consider salary increases.

Now, that's what I did. What you should do will depend on how much you want to get that student loan paid off sooner than the 7-8 year plan you're currently on. If you have the discipline to not take on any more debt, you'll be fine either way.

Many people on here will disagree on giving up the match from a pure math standpoint, but I valued the peace of mind of having that debt gone more than having money sitting in the bank that I couldn't touch for 30 years.

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    I disagree with the recommendation to throw away money for purely psychological reasons. – Aganju Mar 27 at 2:06
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    you are throwing away the 100% match for this year. – Aganju Mar 27 at 13:12
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    Jibbly. What about the psychological cost of passing away the opportunity to give yourself a $20k raise for the year? Normally I can buy the advantages of tackling debt quicker even if mathematically imperfect -- the human brain does sometimes require being tricked. But there is little guarantee that that 100% match will be around any future years -- and the math here isn't just a few % imperfect; it is heavily skewed toward the match -- that I think suggesting to pass on it is overall terrible advice. – R. Hamilton Mar 27 at 15:08
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    Heck. Someone check my math here, but I think 100% match is actually good enough that OP would be ahead to get full match, and then early withdraw those funds and use THAT to pay the student loans. Early withdraw would be 10% penalty + regular income tax rate... call it 40% in total. 60% * $19500 is still $11700. End result, $19500 in the 401k AND $11700 paid to student loans/year. – R. Hamilton Mar 27 at 15:28
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    This is horrible advice. Do not suspend 401k contributions for a measly 5% loan. – Brady Gilg Mar 28 at 0:11
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Your loans are fairly small and at fairly low interest rates, such that making the full 401k contribution is preferable. There is just not that much to be gained by paying them off quicker, compared to building a formidable 401k.

But in contrast to the other answers, I want to emphasize that time horizon is the key variable in how important the match is to your decision. If you had large student loan payments at 6% interest stretching as far as the eye can see, then even with a 100% match, it would really matter what ongoing return you can get in the 401k. Small differences in annual return get magnified over a lifetime.

For example, compare the result after 45 years from investing $X per year at 6% (as extra loan payments) versus investing $2X per year (your $X plus the company's $X) in the 401k. "Obviously" the free money is better, right? But not if the annual return in the 401k is less than 3.7%. This example omits taxes and inflation, but the point is that the match is a one-time multiplier and does not compound.

Asymptotically, if you expect to live forever, the amount you save, the match, etc., become irrelevant and the only thing that matters is the annual return. $1 per year invested at 6% will eventually beat $1,000,000 per year invested at 5.9%. (Spoiler: It takes about 15,000 years.) Of course we do not live forever, but this illustrates a trend.

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  • This is the only correct answer currently given to this question. – tparker Mar 29 at 3:23
  • I think the logic is quite obviously wrong - after a further year, 2X at 3.7% become 2.074X, which is more than 1.06X, and it stays that way for decades. Assuming a 3.7% return is the second part of the error; of course if you invest poorly, you will get less than 6%, but the long term average in good investments is between 8 and 10%. Using an arbitraily (and absurdly) low gain will of course tilt the result, and even then it takes over 32 years to catch up (longer than that loan runs too, probably.) – Aganju Mar 29 at 15:09
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    @Aganju I don't think we're really disagreeing that much. I wrote "making the full 401k contribution is preferable". But I'm saying the answer in general is more complex than comparing 100% with 6% and saying "100% is more" -- they aren't comparable in that way, as I noted in my comment on your answer. You're right about 2.074X versus 1.06X after one year. You got 32 years (presumably compounding a lump sum with no additional contributions), but I got 45 years because I specified the contributions were ongoing ("per year"). ... – nanoman Mar 30 at 3:12
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    @Aganju ... If OP could withdraw from the 401k each year after getting the match as R. Hamilton has suggested, that would indeed make it a no-brainer, but alas, as I have noted, this is typically not allowed (it's not just tax + 10% penalty, it's forbidden outright). While indeed the 401k option results in accumulation that starts out higher and (in your words) "stays that way for decades", the 401k will sit until OP's retirement which is decades away, so it's nontrivial whether it will still be better by then. But we agree that in OP's case it will. – nanoman Mar 30 at 3:19
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Nothing beats retirement savings. If I knew at age 28 what I know now, I would live in my car so I could max out my 401K contribs. Match or not!

You cap out at $19,500, your employer is contributing another $19,500. That's $39,000/year toward retirement. Doing this so early in life will assure you a respectable retirement. The advantage you have is indescribable.

Not least, it is merely thrifty to max out that 100% match while it is available to you. You sure won't get it most places.

401Ks are a fortress

Life may have its misadventures. But a 401K (and IRAs in certain states) are a fortress of invulnerability. Funds in a 401K cannot be forcibly taken from you. Not by bankruptcy and not by lawsuit. To me more precise, they're not quite yours -- they are a fund held in trust for your benefit at retirement. Unlike most trust funds, you can violate that for a relatively low consequence - 10% (and then, of course, paying the tax, assuming it's not a Roth, which has taxes prepaid).

So even if you suffer a life calamity that drives you to insolvency or bankruptcy, do not liquidate 401K assets to try to pay down debts. Make the creditor wait, or declare bankruptcy: the 401K will ride through completely intact.

Student loans are also not clearable in bankruptcy (at least, not so far). But ironically, that means you should not rush to pay the student loan while other basic financial needs exist. For instance an emergency fund is more important than rushing down student loans. Put it this way, the debt "isn't going anywhere" lol.

How urgent is it to max, really?

Now, does "not having fully funded your 401K" qualify as "financial stress"? That's a good question. I would say, having witnessed the power of compounding, and the sadness of missing the opportunity at a young age when it matters the most, yeah -- definitely.

Every dollar you put in at age 28 is $8 you don't have to put in at age 49. It's actually possible at your age to max your IRA for 12 years, then stop altogether, and never contrib another dollar. **That means you're not in your 40s scrambling to play catch-up with your 401(k), in a game you have (effectively) already lost. So yeah. Some ramen-eating today amounts to caviar in midlife, nevermind what it does for you in retirement.

Of course, the young won't appreciate this :)

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  • Can you explain why being "not clearable in bankruptcy" makes student loans "a low priority debt if you are in financial stress"? I would think debts that are clearable in bankruptcy would be the low priority. If I have $20k credit card debt, I don't want to scrimp to make extra payments and then have bankruptcy wipe out only $10k when it could have wiped out the whole $20k. Student loan payments won't be "wasted" in the same way. – nanoman Mar 28 at 0:29
  • @nanoman Your interpretation wasn't where I was going with that statement, but I can understand how you made that interpretation. Fixed. – Harper - Reinstate Monica Mar 28 at 4:18

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