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Employee had this question.

Posted: Mon Jul 09, 2018 5:52 pm
by Regularguy
They have one year to retire. They have 10000 in credit card debt. Should they reduce their contribution from the max of 692.00 per pay plus catch up to just the matching 5% to pay the down debt, or pay debt when they retire from a lump sum? interest on the debt is 7%

Re: Employee had this question.

Posted: Mon Jul 09, 2018 9:27 pm
by ravnrob2
will you receive a payout for annual leave saved when you retire? you could use that to pay off credit cards...you could also stop the catchup and cut your contribution from $692 to $350 possibly...a year doing that will get you over the threshold

Re: Employee had this question.

Posted: Mon Jul 09, 2018 10:08 pm
by LittleKing
So my curiosity is what is the expected return on the investments? Is it higher or lower than the 7% on debts? Also how much of the money is represented in the 5% match? So, the general idea is that closer to retirement, you are investing safe, so if your expected rate of return is less than 7%, I would be inclined to go for the debt myself. This frees up cash flow. However, remember that the 5% match is like a percentage guaranteed return. if it is half of the invested amount per pay period, and that is a 100% return just in itself. That is money working for you that you did not have to invest yourself. I would really have to evaluate the percentages and the expected return to really make my own decision in this case.

Re: Employee had this question.

Posted: Tue Jul 10, 2018 7:24 am
by floridabre
the easy answer is keep contributing to get the 5% match as a minimum then evaluate return on the invested amount that exceeds the amount needed to get the matching - is the expected return greater than 7% - if not use these funds to pay down the credit card debt.

I am wondering the circumstances that led to having a 10000 credit card debt - are they living paycheck to paycheck?, which implies they may not be ready (financially) to retire - or maybe they have been earning much higher than average returns on investments (like more than 10%) and have their cash tied up in investments?

Re: Employee had this question.

Posted: Tue Jul 10, 2018 2:31 pm
by ArrieS
It doesn't matter if the expected return is more or less than the 7% on the credit card debt.

The debt is currently being paid off, I assume they are at least making minimum payments, and they are planning to pay it off in one year.

The reason it doesn't matter is because they have a plan to either pay it off over a year or all at once in a year. The money that would have been invested will continue to compound. A years worth of interest at 7% is very little compared to a loss of 3%, 4%, 5%, etc compounded over time. The money lost in interest for a year is a fixed amount at the worst end. The money lost from compounding to them and their family in theory is ad infinitum.

There are a lot of factors, but from the amount of information I have, it would seem best to wait and pay it off and not sacrifice investing in the TSP since the debt one way or another will be paid off in a year where the money in the TSP can compound tax free for as long as it stays there.

For example, the current G fund rate is 2.875%. It would only take 3 years to earn more than what was lost in interest at 7%.

Re: Employee had this question.

Posted: Tue Jul 10, 2018 3:24 pm
by Regularguy
good advice, ArrieS .

Re: Employee had this question.

Posted: Wed Jul 11, 2018 8:28 am
by robika
I agree with ArrieS in that there will be money lost from compounding, however the amount lost will be very dependent on how your friend intends to invest in the future and how much they have in the TSP to begin with.

Using ArrieS' example, $500k TSP balance, and some rough figuring, if your friend kept all their TSP funds in G it comes out to about $460 difference in compounded interest after 30 years. But if he/she decided to try and get the 12% return that most of us here shoot for, that could amount to about $32k difference in compounded interest in 30 years!

Re: Employee had this question.

Posted: Thu Jul 12, 2018 2:21 am
by evilanne
If they have a loan outstanding when they separate, any balance will be considered a distribution and will be taxed at their marginal tax rate. Depending on their age, there could also be a penalty--I'm not sure how they determine the payout from a loan.

I tend to agree with floridabre in questioning whether or not they are really ready for retirement with large credit issue unresolved

Re: Employee had this question.

Posted: Fri Jul 13, 2018 5:03 pm
by Regularguy
Thanks Evilanne, The credit debt was left over from a divorce cost, not day to day living. No outstanding TSP loans. The answer may be keep making your max tsp contribution even though they wont have the benefit of compounding interest for long and then pay off credit debt before retirement. This will help to begin learning to live on less. May have to wait till she is 57.