Wednesday, October 15, 2008

More on 401(k) vs. Debt

Funny how the universe seems to converge. Yesterday my husband and I were contemplated suspended his 401(k) contributions to put toward debt. Nelisha Wilson of the Coors Investment and Retirement team gave sound advice tell us to stay in. Then later in the day I turned on NPR in my car just as a caller was asking Liz Pulliam Weston a similar question. The difference was that the caller wondered if he should reduce his contributions and put the rest toward debt.

Liz Pulliam Weston advised that it may be okay to reduce contributions as long as it was a short-term plan to control debt. She also advised not to reduce below the level that is needed for the employer match.

So last night we discussed this at home. We figured out that we would have an additional $150 after taxes to put toward debt. This is if Neil reduces his contribution but stays in enough to earn a 3% company match. As of last night we figured this was probably not worth it considering Ms. Wilson's point about a sale on stocks--which by the way was also pointed out by Ms. Pulliam Weston.

But I had to do the math and returned to the calculator. First, I have to say that I'm not proud of the debt we are carrying. Second, we are sticking to our plan to be rid of it in 2 years or less.

Here's what we're looking at:
credit card 1, Interest rate 26.99%, balance $10,000
credit card 2, Interest rate 12.99%, balance $10,000

Plan A
If we continue 401(k) contributions as is and pay $1,000/month to debt
credit card 1 will be paid in 1 year, 4 months
credit card 2 will be paid in 2 years
The total interest paid would be $3,421

Plan B
If we reduce 401(k) contributions and increase take home pay by $150/month then add this to the debt payment plan to make it $1150/month
credit card 1 will be paid in 1 year, 1 month
credit card 2 will be paid in 1 year, 8 months
The total interest paid would be $2,813

Plan be would rid us of credit card debt 4 months earlier and save us $608.

The big question:
What would we lose in retirement earnings? That's the one thing I can't figure out how to calculate. It's a gamble. Do we give up funding our retirement with ($150 x 24 months) $3600 to save $608? Currently the 401(k) is losing over 7%/quarter.

What would you do?

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