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  • Reacting to the economy again: Cutting back on retirement savings in favor of reducing debt

    As I mentioned last week, I’ve been thinking about reducing my retirement savings and using the money to pay off debt instead. We’ve decided to go ahead with the plan, and I’m very excited about it.

    It wasn’t an easy choice to make. The standard advice during tough economic times – especially for folks like us who have decades until retirement – is to keep up with retirement savings. And we are big believers in saving for retirement. We are committed to not being a burden to our children in our old age, and to retiring with enough years and money to fully enjoy ourselves.

    However, I’m confident that the choice we’ve made to reduce our retirement savings for a year is the right one for us. The money will be redirected toward paying off my student loans, which will be paid off in full in a year – leaving us with only the mortgage as our debt.

    One reason I say this is the right choice for us is the psychological benefit. I can’t tell you how excited I feel about having zero non-mortgage debt.

    Another reason this is the right choice for us is the financial freedom we’ll gain from paying off my loans. The monthly payment we make is pretty substantial, and we’ll be able to redirect all of those funds into other financial goals. Like retirement. Or saving for college. Or paying for private school, should we decide to go that route.

    A third reason to opt for paying off my loans right now is the guaranteed 4.5% rate of return. In this economic climate, that’s pretty tough to beat.

    And the fourth reason for paying off my loans is the strong likelihood that any money we invest in the market right now will lose value. And there’s a very real possibility, if not probability, that it will not have regained its value by the time my loans are paid off. As Janette mentioned on my last post, I could park the money in a money market fund until the market recovers, but by then, I will have paid off my loans and be in a position to invest more than the contributions that I won’t be making.

    There are a couple of points I want to make, though. First, we’re still saving for retirement. We’ll just be saving a little less.

    And second, this is what’s right for us. As demonstrated by the comments of Mercedes, Janette and Tony’s Mom on my last post, it’s not the right decision for everyone. The retirement vs. pay off debt debate is one that’s frequently addressed in the personal finance blogosphere, and for good reason. The decision on how to prioritize is an individual one.

    I know one thing, though: I can’t wait to be debt-free!

    Image credit: Yahoo! Finance.

    The Economy: How are you responding?

    I haven’t talked about it much, but that doesn’t mean I’m unaware of the current financial crisis our country is going through. I was initially planning to write about how I’m ignoring the meltdown and plugging along because I have faith that eventually things will turn around. But then I realized that it’s not quite true.

    I do have faith that things will eventually get better. That much is true. But it does appear that in the short term, things are going to stay bad and probably even get worse.

    What isn’t true about my original statement is that I’m ignoring what’s happening in the economy. For one thing, I’ve already reacted by spreading my money around. Instead of keeping almost all of our funds at one bank, we’ve transferred enough money to cover a couple of months’ expenses to two other banks. I hate the added complication to keeping track of our money, but the peace of mind is worth it.

    Another thing I’m thinking of doing is stopping some (not all) of my monthly retirement contributions and using that money to pay off my student loans instead. It would accelerate the payoff date to sometime next year, which is tantalizingly soon. It would mean a guaranteed return of 4.5% after taxes. But it would also mean risking a (small) percentage of my retirement savings if the market turns around in the next year (although I could cut the payments and increase my contribution whenever I want to).

    I’m also keeping a close eye on mortgage rates again. With the Fed rate cut earlier this week, I’m hoping that rates will go down enough to make refinancing worthwhile. We’ve been in our house for long enough and have a low enough rate that rates would have to get absurdly low for us to benefit while still making the regular monthly payment. But if we are able to refinance to a lower interest rate and continue making the same payment that we’re currently making, then we would be able pay off the mortgage faster and save tens of thousands of dollars in interest over the life of the loan.

    Are you doing anything to respond to current economic conditions, and if so, what?

    Image credit: Yahoo! Finance.

    Are you concerned about inflation yet?

    I’m starting to be. Mostly because I went to Target and picked up a couple of staple toiletries that I haven’t bought in several months. The store brand contact lens solution was $5.99 for two 12-oz. bottles – up from about $4.34 at the beginning of January. Neutrogena body wash (the orange kind with salicylic acid) was also $5.99. It was $4.99 the last time I bought a bottle.

    Plus MetaMommy tells me that the price of flour is rising dramatically. Add that to the rising cost of milk and eggs, and we’re talking noticeable budget adjustments.

    I’ll post about how to cope with these rising costs after I’ve gotten some sleep.

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