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43 y.o. & 50000 in a 403b. OK to use for living expense during 3 yr PhD? Stafford Loan iffy. Will gross 60000/yr after.

Feb 06, 2014 by Cheryl from Lexington, KY in  |  Flag
5 Answers  |  8 Followers
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9 votes
Andy Tilp, CFP® Level 16

I am always heavily skewed on the side of “do not touch the retirement account”. The reason being is the impact of opportunity costs.

If you leave the $50k in the 403b, and then contribute the max ($17500) every year after you get you out of school, then after 20 years of saving (and 8% growth) at age 66, you will have ~$1.175M in the account.

However, if you withdrawal the $50k. Then you will have to start from scratch at age 46. If you contribute the max for 20 years (again assuming $17.5k / yr at 8%), then your end balance will be $880k. That is difference of over $293,000. Work to age 70, the spread only grows wider (to $400k).

If you take the money out and try to catch up to the $1.175M, you would have to save an additional $6400/year over and above the max contribution to your 401k/403b. Put another way, you will need to save an additional 10% of your income over and above your 401k savings.

Sorry to be the nay-sayer, but this is the math behind your question. When you compound opportunity costs of a long time, the impact is dramatic.

With the PhD, will your future income potential eventually grow quickly and to much more than $60k? If so, and you are a very disciplined and diligently saver, maybe taking the 403b will work. If not, and you have no other means to finance the education, I would have to ask the hard question of assessing the value of the PhD.

3 Comments   |  Flag   |  Feb 07, 2014 from Sherwood, OR
James D. Kinney, CFP®

All true, but if this is his dream of all dreams, then he may be best advised to do what needs to be done, we can't allow life to be driven entirely by analytical formulas and maximizing $. Career choices also are not always about maximizing the $ return on investment in education. Certainly care should be taken with the decision - but ultimately no one wants to be 70 years old and say "I coulda been a professor of...if only I'd...."

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Flag |  Feb 07, 2014 near Bridgewater, NJ
James D. Kinney, CFP®

just to be clear, retirement funds should only be used as LAST RESORT, but I would stop short of saying don't go for your dream if that is the ONLY way to make it happen.

Flag |  Feb 07, 2014 near Bridgewater, NJ

thanks for the great thought, I concur.

Flag |  Feb 07, 2014 near Lexington, KY

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6 votes

You should only tap into these 403(b) funds if that is the absolute last alternative. Borrowing via students loans would be cheaper than the penalties and long term cost of using your retirement funds.

View all 7 Comments   |  Flag   |  Feb 07, 2014 from Canton, GA

thanks so much

Flag |  Feb 09, 2014 near Lexington, KY
William Clay Tucker, RICP, CAP, CRPS,...

Another suggestion - if you do use the 403(b), treat it like a loan. Put yourself on a monthly payment schedule after you graduate and invest the payments into whatever retirement plan you have available at that time.

Flag |  Feb 09, 2014 near Canton, GA

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5 votes

Cheryl, I would concur with Andy's comment above. The Opportunity cost of using your "Retirement Savings" for anything else before retirement defeats their entire purpose, and that's why the gov't penalizes you for touching it. Obviously, if that's your last course of action, do it, but try to find some other way to accomplish your goal. I too am sorry for being a wet blanket! Have a nice weekend.

1 Comment   |  Flag   |  Feb 07, 2014 from Bloomingdale, IL

It is my last course of action. thank you for your thought.

Flag |  Feb 07, 2014 near Lexington, KY

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4 votes

Not sure if qualifies as a possible hardship withdrawal. Education costs in the form of tuition and fees are listed, but not living expenses. This is likely your problem with Stafford too, it is supposed to be for qualified tuition expense, which doesn't apply for a PhD program.

It may be an expensive source of funds, because you will owe tax on withdrawals, and a 10% penalty on top of the tax. . I have always found 403b administrators very difficult to deal with. If you separate from employment you have the option of rolling over to an IRA, if for no other reason than that there may be less red tape when you want access to your money.

Remember you will owe at least the 10% penalty on early withdrawal. How much if any additional tax will depend on your tax situation, deductions and exemptions, other sources of income, married or single, etc.

If you do use these funds, make a promise to yourself to rapidly replenish retirement savings as soon as you are done with school.

Guess there aren't any rich uncles you can borrow from?

Good luck.

Comment   |  Flag   |  Feb 06, 2014 from Bridgewater, NJ

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3 votes
Rich Winer Level 20

I am in the NO camp and agree that tapping your 403B to pay for your PhD program should be a last resort, after all other sources of funds have been exhausted. Have you considered a home refinance or a line of credit?

Here are a few good articles you might want to read before making any final decision.

Borrowing from your Retirement:https://guidance.fidelity.com/viewpoints-workplace/borrowing-from-your-retirement-sv

Using a Home Equity Loan for College Expenses:http://www.collegexpress.com/counselors-and-parents/parents/blog/using-home-equity-loan-college-expenses/

Use These 8 Loans to Pay for College:http://www.forbes.com/sites/troyonink/2013/01/22/use-these-8-loans-to-pay-for-college/

Finally, as you last resort, you might consider taking a loan from your 403B if it is allowed by your plan prover. Various restrictions would apply.

View all 4 Comments   |  Flag   |  Feb 08, 2014 from Woodland Hills, CA
Rich Winer

If you've exhausted the other loan options mentioned in the article above, then a loan from your 403B may be your best/only option, if it's allowed. That would allow you to return funds to your 403B without losing all of the opportunity costs others have mentioned. I would suggest you come up with an aggressive repayment plan, ASAP after you've completed your education. You might also consider getting a part time job while you are in the PhD program.

Flag |  Feb 09, 2014 near Woodland Hills, CA

thanks so much for the thoughtful responses, everyone.

Flag |  Feb 09, 2014 near Lexington, KY

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