Q&A: $100K in Student Loans and Trying to Do Better than 3% Per Year

Q: Going to be graduating soon and my job will pay very well. I will need to pay off >$100,000 in student loans which I plan to pay down very aggressively but after that I’m not sure where to invest my money to build wealth. I plan to also max out 401(k). We also are renting our apartment and plan to stay a couple years, depending on where I get a job, to pay off debt, then will look to buy a home. I am looking for advice on how much to save and how to go about it. I’m 33, no kids yet, married.

A: Congratulations, sounds like you are well on your way. I like the idea of paying down your debt aggressively. It’s also great to hear that you are looking to max out your 401(k) plan; hopefully your employer is also matching a portion of that. The rule-of-thumb advice suggests that you should be investing at least 15% of your gross wages. Obviously, if you feel comfortable saving more, go for it. Maybe you want to carve off a little bit and create a “down payment on a house fund.” Ideally once your student loan is paid down to a point where lenders would feel comfortable loaning you 80% for a home, you could then look to buy a home. The longer your money is invested (in the stock market and in your home) the better off you will be. (Yes, I know that many think that you shouldn’t think of your home as an investment, but being a southern Californian, I can’t help but think of it that way.) Best of luck to you!


Q:  I am 40 years old and have about $400K in 401K savings. Historically, my returns have averaged 3% per year. How can I maximize my returns?

A:  First off, congratulations on amassing $400K in your 401(k) account. That’s quite an accomplishment, especially by your 40th birthday. Relatively few people in the USA have amassed that much wealth. Nearly two-third of the population have less than $1,000 in savings. Having $400k in wealth (presuming you have a spouse and no debt) puts you in the 17th percentile in the USA, according to wealthometer.

If you are earning just 3% on your money, I am suspecting that you are either investing too conservatively or your employer has a very poor investment lineup for its 401(k) options.

Assuming that your employer has an S&P 500 index fund in its lineup, I would suggest that you put a healthy portion of your money into that. I’d also suggest — again, if it’s offer to you — that you put a sizable portion into short term government bonds. The allocation between these two assets classes is up to you. Some people choose a fixed ratio (i.e. 60/40 stocks/bonds), others choose to vary the allocation based on their age; the older you get, the more conservation (i.e. more bonds) you would want to have.

While you might think that having a significant portion of your money in the stock market is risky, consider this. Warren Buffett, arguably the best investor in history, has structured his will so that his wife will have 90% of her money in an S&P 500 index fund and the other 10% in short term government bonds.

Back-testing Buffett’s 90/10 strategy over a very long period of time (think nearly 100 years) has indicated that this strategy is relatively similar to most other asset allocations. The best performing allocation in that test was a 60/40 stock/bond allocation. Further, due to inflation, allocations with less than 40% in the stock market performed much worse than those with 40% or more in the stock market. The failure rate — that is, the percent of times that the back-tested strategy ran out of money — with 30% in stocks was 5 times higher than with 90% in stocks.

No need to complicate this. Keep it simple. You can very likely do better than 3$ annually.

Best of luck.

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