Which first: Debt or Retirement?
Imagine you’ve got $150,000 cash burning a hole in your pocket. Of course, you could go to Vegas, Ibiza, Majorca, Fyre Festival or anywhere else you want to blow that kind of money, but you’ve got a serious choice to make. Do you pay down your student debt or do you get a head start on retirement?
The comforting choice would be to pay down your student loans. After all, we see tons of FB posts where people are bragging about finally making their final student loan payment, and they’re happy, for good reason. We all look at the posts and say: “Wow, I wish that my student loans were paid off. That’s one lucky doc.” But should we feel that way?
How about the other FB post where a 45 or 50 year old doctor says: “Well, it’s been a great run, but I’m officially retired as of right now.” No matter how much you love practicing your trade, there has to be a bit of envy when you see someone retiring at a young age. Maybe you don’t want to retire young, but to be able to do so is certainly something we would all want.
Back to the $150,000…
Let’s say you’re 35 years old and you’ve got exactly $150,000 in student debt with a 5% interest rate. You’ve got 15 more years until it’s paid off. Paying your monthly payments and waiting to the end of those 5 years means you will have paid a total of $213,514.32. So, waiting to pay it on time cost you roughly an extra $63,000 in payments. Feeling like this is the right option, right?
Now, consider you dropped that same $150,000 in a retirement account making 8% return per year. In 15 years, when you’re 50 years old, you’ll have $475,825.37. Think about that. With no extra work, your $150,000 earned you an additional $325,000. Not bad.
When you’re paying down the student loans, you’re paying simple interest, which means that the amount you owe is just that. Interest is calculated up front and no matter what happens, your payments are fixed and that’s that. When you’re investing, you’re reaping the rewards of compound interest which means that you get interest upon the growing sum, year after year. So, the “snowball” gets bigger and bigger at a faster rate the longer it grows.
Some say “there is no right or wrong answer” and that’s not entirely true. While it’s fair to say that you must do what makes you feel safer, there’s no question that 15 years later, investing the money makes you $262,000 richer than paying down the loans.
You have to decide which is best for you, but the next time you see the person who said they paid down their 15 year loans in 5 years, keep in mind that at 8% average rate of return over the life of the investments, those 5 years cost them an additional $250,000 in interest earned that they can never get back.
I’ll take the peace of mind that comes with making an extra $225,000 and pay the extra $63,000 in interest. But as always, be sure to consult your financial advisor. They may have other suggestions for you.
Wishing you all the best!!!
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GLENN KRIEGER IS AN ORTHODONTIST WITH 20 YEARS OF RESTORATIVE AND COSMETIC DENTISTRY EXPERIENCE BEFORE HE RETURNED TO ORTHODONTIC RESIDENCY. DR. KRIEGER LEARNED ABOUT THE IMPORTANCE OF WELL-DESIGNED PRACTICE POLICIES AND SYSTEMS DURING A YEAR AT THE SCHUSTER CENTER FOR PROFESSIONAL DEVELOPMENT IN SCOTTSDALE ARIZONA, AND AN UNDERSTANDING OF GENERAL ACCOUNTING PRACTICES AND INDUSTRIAL PSYCHOLOGY AT THE UNIVERSITY OF WASHINGTON GRADUATE BUSINESS SCHOOL’S “DENTIST AS CEO” PROGRAM. HE IS THE HOST OF “THE ORTHOPRENEURS PODCAST”, MANAGES THE ORTHOPRENEURS FACEBOOK GROUP AND RUNS THE ANNUAL ORTHOPRENEURS SUMMIT.