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It’s a little more complicated than the question (at least I think so).

Basic Info:

  • I’m 36
  • I have about $398K in 401k+Roth savings, 15% contribution per paycheck
  • I have a mortgage worth $175K
  • I have a car loan with 37K remaining
  • I have rolling credit card debt (usual monthly expenditures) of around 1K
  • I have about 20K in savings (10K in savings account, 10K in stock)

I’ve been lucky enough to save well for retirement. However, lately I’ve been wondering if I’ve been putting too much into that instead of paying off car/house earlier, having some general spending money (fun?), or having more in on-hand savings.

As the title states: should I reduce my retirement contribution and use the extra for the stuff I mentioned above, or leave it as it is? I am not struggling with the current contribution, but I don’t think anyone would complain about extra spending money.

PS: I am partnered, but we can assume their retirement amounts are non-existent for this question.

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    How much is the car worth? What's your car payment and 401(k) contribution monthly? – D Stanley Dec 4 '20 at 17:49
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    What are the interest rates on the car loan/mortgage? – Bishop Dec 4 '20 at 17:53
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    Car is worth the loan or more (2020 Tesla M3), AFAIK. My car payment is 637 and my 401 contribution is about 600 per paycheck. Interest rate on car is 4.25, and mortgage is 2.490. – Is It Me Dec 4 '20 at 18:23
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    Does the 401(k) have a match? What % do you need to contribute to get the full match? – stannius Dec 4 '20 at 18:56
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    @stannius certainly it's less than 15%. :) – RonJohn Dec 4 '20 at 19:10
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Critical issue, is the mortgage paid down to the point where you are NOT paying the (#@$@!!##) "PMI"?

If not, I would do everything humanly possible to pay down the mortgage to where you can eliminate the PMI, and eliminate the PMI.


If you are not paying PMI, it can only be "one man's opinion"...

House payments evaporate over the years with inflation and become trivial; investments grow (we know what Einstein said on the matter).

So, just put everything possible in to investments.

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  • No PMI involved, so - for your second point - investments inside the 401k bubble or reduce and invest outside on my own? – Is It Me Dec 4 '20 at 18:21
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    Side note: I'm pretty sure Einstein never said that phrase that is often attributed to him... ;) – TTT Dec 4 '20 at 18:25
  • @IsItMe - not everyone here would agree with me but you're so young, I would buy some sort of investment real estate; and (obviously I guess) try to pick somewhere with high growth over the rest of this century. Congrats on the no PMI, awesome! – Fattie Dec 4 '20 at 18:29
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    @TTT - I'm so glad you noticed that !!! I was hoping someone would :) – Fattie Dec 4 '20 at 18:29
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It depends on how aggressively you want to pay off the debt. You can always make up 401(k) contributions (including matches) during the year by increasing your contribution percentage after the debt is paid off. If it takes you more than a year to pay off the debt then you will have some opportunity cost by leaving the match on the table, so it depends on whether it's more important to you now to have a paid-off car (and/or house) versus padding your retirement that you can't use for 20 years.

Mathematically it probably makes more sense in the long run to get as much of that match as you can, but there are some practical benefits to paying down debt, and you might be able to make up that loss in match in future years by increasing your 401(k) after getting debt paid off.

I probably wouldn't suspend 401(k) to pay down the house, assuming the interest rate is low, since it will take several years to pay off, and you'll be missing out on a lot of matches in the meantime. The car is about double the annual 401(k) limit, so I'm assuming it will take you more than a year to pay off (unless you have more discretionary cash flow that you can use). If you can pay it off in a year or two it probably isn't necessary to forego retirement matches.

If anything I'd consider suspending it just to get over water if the car is worth less than you owe on it, then increase your contribution make it up later in the year.

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    There's no question of suspending it, at all. I'm only thinking of bringing down the contribution to 5 or 10%, instead of 15%. – Is It Me Dec 4 '20 at 18:20
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    OK, but the principles are the same. You're leaving a match on the table if you reduce (or suspend). But you can possibly make up that match, and you won't see it until you retire, so there's trade-offs that aren't exactly comparable. – D Stanley Dec 4 '20 at 18:24
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If you had high-interest debt, such as credit card debt, student loan debt, PMI or a higher interest auto loan, I would suggest you lower your 401(k) contribution to just enough to get your full employer match, and focus on paying down the debt.

If you had a higher savings rate and/or were targeting early retirement, a lot of people recommend saving in non-retirement accounts so that you can more easily access the money before you turn 55 or 59 1/2.

You should be proud of your savings rate and amount. That said, it's basically "par" - just about the recommended amount, no more and no less. So in your case, I would keep on keeping on. Keep your 401(k) contribution as-is. Pay the loans off on schedule or pay extra (especially on the car loan) if you have extra money, from bonuses, etc. If you have a little room in your budget, set up an automatic contribution to the savings (emergency fund?) account to beef it up over time.

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I come from a perspective of an old guy software engineer that has been hurt by debt and have seen tough economic times in the engineering sector. I was doing quite well in 2001, who lost his job soon after the twin towers came down, and was under-employed for about 3 years. It took until 2016 for me to match/exceed my salary that I earned in 2001.

Since about 2006, software engineers have enjoyed plenty of employment and good salaries. Will that change in the future? It seems unlikely but it could happen.

I'd rate your personal finances at a B+ to A- you left out some important info, your income, house value, house payment. Provided your income remains somewhat constant, you are going to retire well. So you could just continue to march.

It seems that you bought a lot of car, which is pretty common. Cars are a real suck on wealth building because of the depreciation and the costs associated with buying a car. You probably paid around 3k in sales tax and in three short years, that car will be worth about 58% of its value. Assuming you paid around 45K for the car, you would have turned 48K into 26K assuming a zero percent car loan. That is tough to overcome. What helps you overcome that is your high 401K balance.

For some that is a choice they make, but I would ask you to be deliberate about your choice.

If it was me, I would cut down the 401K to match only, and aggressively pay off the car. I might sell the car if I could not pay off the balance in a year and get something nice but gently used. Once that is done, I would do the 15%, but also start trying to retire the mortgage early. Doing this will greatly insulate yourself from down turns in your own or the broader economy.

But in the end you are doing really well and are probably better off suited to giving advice rather than taking it. Very few households have 400K in retirement savings, fewer people your age do. While I would not advise this, you should be able to retire comfortably, if you never put another dime into your 401K.

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  • In comments, OP stated that the interest rate on the mortgage is 2.49% and on the car 4.25% (definitely not zero). The only problem with paying down the mortgage is that it doesn't make you more resilient to income shocks until it is completely paid off. – stannius Dec 4 '20 at 22:12
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If your goal is to retire comfortably at a “traditional” age (65-67ish), your best odds are to continue to consistently save 15% towards retirement and make your living expenses fit in what’s left over.

In my opinion, you have too much car to support on your $48,000/year income. I’m estimating that number based off the comment that your $600 401k contribution is 15% of your income, coming out to an income of $4k/month. If you’re paid more often than monthly, my estimate is obviously wrong, but the point is that if you’re having to choose between paying for a car and funding retirement, that’s a problem.

But it looks like you are able to control your spending and are able to save a good amount, so you don’t need our permission to spend your money on something you enjoy.

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I’m 36

Great !

I have about $398K in 401k+Roth savings, 15% contribution per paycheck

Great !

I have a mortgage worth $175K

What's your interest rate ? Anything less than 3% I would probably leave alone.

I have a car loan with 37K remaining

What's your interest rate? Anything more then 3%: pay it off.

I have rolling credit card debt (usual monthly expenditures) of around 1K

NO, NO , NO. NEVER carry credit card debt: pay it off every month or cut up the card.

I have about 20K in savings (10K in savings account, 10K in stock)

Good. Make sure you have at least 3 months of living expenses in a liquid account.

Should I reduce my 401k contribution to pay of car/house payments earlier?

Depends on the interest rate. Compare the interest rate of the loan to what you think you can get on your investments. 401k is an excellent investment since it's pre-tax money (depending on your tax rate).

At the moment I would recommend

  • Debts with a interest rate less than 3%: keep and invest in 401k instead
  • Debts with interest rate 6% or more: pay off. Cut your 401k contribution but ONLY until it's paid off.
  • Everything in between: depends on the details
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    "NO, NO , NO. NEVER carry credit card debt: pay it off every month or cut up the card." Read the question's comments. Especially the one that says, "I pay off in full every month, so no interest." – RonJohn Dec 5 '20 at 1:39
  • My mortgage interest rate is less, but car is 4.25% – Is It Me Dec 5 '20 at 2:38

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