- August 30, 2023
- Posted by: legaleseblogger
- Category: Related News
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The Budget Dilemma: Balancing TSP Contributions and Mortgage Payments
As I assess my current financial situation, I find myself facing a conundrum. I am currently only able to comfortably contribute $250 a month to my Thrift Savings Plan (TSP). With a TSP balance of $105,000 and an average yearly return of 20% according to the TSP calculator, I can’t help but feel that my interest earnings are performing exceptionally well. However, with only 4 years left to contribute to my TSP, I wonder if it would be wiser to redirect the $250 monthly contribution towards paying down the principal on my mortgage, thus potentially benefiting from a reduction in my 5.3% interest rate.
Exploring the Benefits of AI Legalese Decoder in Solving the Dilemma
The AI Legalese Decoder could greatly assist in navigating this financial dilemma by providing valuable insights and analysis. By diligently examining the available data and considering various factors, this advanced tool can help shed light on the most advantageous course of action. Here’s how the AI Legalese Decoder could play a crucial role in finding the optimal solution:
1. Comprehensive Financial Analysis: With its powerful algorithms, the AI Legalese Decoder can conduct a comprehensive analysis of your current financial state, projecting the potential outcomes of continuing TSP contributions versus using the funds to pay down your mortgage principal. By factoring in variables such as your income, expenses, and interest rates, this tool can generate detailed forecasts, enabling a more informed decision-making process.
2. Long-Term Planning: As you rightfully mention, contributing to TSP is generally considered a wise long-term investment. By utilizing the AI Legalese Decoder, you can gain access to sophisticated projections that extend beyond the 4-year timeframe you currently have left for TSP contributions. This tool can help you evaluate the long-term impact of both options, considering factors such as compound interest, potential market fluctuations, and financial goals, providing you with a holistic perspective.
3. Tax Implications: The AI Legalese Decoder can also factor in the tax implications of your decisions. By weighing the potential tax advantages of TSP contributions against the interest savings from reducing your mortgage principal, this tool can provide a clear assessment of the overall tax efficiency of each option. It can also help you understand how these decisions align with your tax strategy and long-term financial objectives.
4. Risk Assessment: Assessing the risks associated with both continuing TSP contributions and paying down your mortgage principal is crucial. The AI Legalese Decoder can utilize data-driven models to evaluate the potential risks involved in each scenario. By considering factors such as inflation, market volatility, and the current economic landscape, this tool can help you make a well-informed decision, allowing you to mitigate potential risks and maximize your financial outcomes.
In conclusion, while the decision of whether to continue contributing to your TSP or allocate those funds towards your mortgage principal is nuanced, the AI Legalese Decoder offers valuable assistance in this evaluation process. By providing a comprehensive financial analysis, long-term planning insights, tax implications assessment, and risk consideration, this advanced tool can empower you to make an informed decision that optimizes your financial goals. Ultimately, seeking the guidance of this powerful decoder will help ensure that your hard-earned money is working efficiently towards securing your financial future.
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AI Legalese Decoder: Simplifying Legal Terminology
Introduction:
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Conclusion:
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What funds are you in? 20% is great.
If we fast forward to age 70, investing in TSP will *most likely* give you more money. You can usually expect about 6-8% average annual returns long-term in a properly diversified TSP fund whereas your house interest rate is 5.3%. A good rule of thumb is that, when adjusted for inflation, your money will double every 20 years. There is a real risk that you fall short (approximately 25% odds); this has happened most notably from 1950s – 1970s and again from 2000-2012. Btw, I think your 20% gains is total ROI and not APY.
The real deciding factor is whether your contributions to your house will allow you to finish your mortgage substantially earlier in life. I aggressively invested in paying down my mortgage, which was at 3.5%, because I wanted to be out from it at age 45. What does that buy me? Basically the equivalent of a $1500 / mo annuity that starts at age 45, which coincides with the age I’ll transition to getting a military pension and having my compensation cut to 1/3 of what I make now. It can enable early retirement or semi-retirement. It can enable me to better help my kids through college.
Housing is something you have to have. If you can eliminate or minimize that expense, it’s the same as making more money.
Now, with $250/mo extra contributions you’re probably not putting a huge dent in your debt. I’d use an early mortgage payoff calculator to see what this does for you in terms of years / interest saved. Then think about the value of being done with the mortgage at that age will be to you.
A lot of people tell me this strategy is dumb because my mortgage interest rate is so low. That I’d have more money at 70 if I put more into TSP / IRAs. Well, I want the flexibility to work a job I want to have, not a job I need to have in my middle aged years. There’s also non-zero risk of death before the age of 70. A lot of people tend to ignore this in their financial planning. You can’t spend it from the grave. And even if you live past 70, you’re probably not in the physical condition that will let you use your hard earned money to hike Machu Pichu, the Grand Canyon, and the Great Wall of China when the kids are old enough to stay alone for a week or two.
One thing I haven’t seen mentioned that is an important factor in this decision: inflation.
Inflation is inevitable! The value of stocks are (usually?) adjusted with inflation…For example: the popular burger joint you invested in raises its burger prices to account for inflation. This inflation is due to increased supply costs and demand due to increased money supply in circulation.
Assuming this burger joint is a solid and profitable business, it will make more money because the value of the dollar decreased. It will make the same percentage of profit, but that will equate to more money to keep up with inflation. Likewise, your stock value will also increase to the inflated value of that stock (while you still get the same/similar percentage of profits/dividends).
Now, let’s say you bought a house a couple decades ago, but only made minimum mortgage payments on a $950, 30 year, fixed mortgage on a 3 bedroom, 2 bath house. If you still own that house today and were making minimum payments on it the whole time, then $950/month for a 3 bedroom/2 bath house in 2023 in a desirable area is an incredible deal!
My point is this: Let inflation eat away your (mortgage) debt. Personally, I would continue to invest in a solid diversified portfolio of stocks with a proven record of average 7+% growth over several decades. I would not pay down my mortgage unless I had a lot of extra cash OR I expected the housing market to crash hard/soon, which could happen. Otherwise, your current mortgage today, will be significantly easier to pay in 20 years, due to inflation.
I would rather pay my mortage off in 2043 dollars instead of 2023 dollars. Your 2023 dollars are far more valuable now than your 2043 dollars will be, so I would invest my 2023 dollars now instead, and let it grow as part of my investment portfolio.
Even if the housing market does crash, it will likely rebound, eventually, and long-term inflation is probably never going to stop happening.
Are you doing any other kind of retirement savings? Only $250/month is on the low end regardless.
Your TSP is not earning 20%. I’m not sure what you’re putting into the TSP calculator you are using, but you’re likely making 6-10% annually over time.
This year has been very good recovery year, but 20% is an outlier year.
I lost about 10% last year, and I’m up 18% this year. It averages out over time.
As far as whether it’s better to put toward your house?
Look into an amortization calculator and see what additional principle payments will do for you over time.
Usually, extra payments on your principal home balance can have significant reductions in interest on the life of the loan, but we have no data here to actually help you.
We don’t know how much your payment is, what type of loan you have, and how much you owe on the house. Knowing you have a 5.3% interest rate is worthless in a vacuum.
For most people under the age of 50, then the TSP is (by the dollar value) a better option.
Most advisors would tell you to transition later in your career to ensure your house is paid off a few years before retirement, so you can “dry run” your retirement finances and transition into retirement without that burden and with a tested plan.
Really I don’t think there’s a blatantly wrong option… “The Money Guy” would say TSP, whereas Ramsay would say mortgage. They’re both pretty smart so I can see arguments for each.
I would probably go TSP (I’m 38), but… that’s just like… my opinion, man.
I mean, your TSP average rate of return is 20% and you interest is 5.3%. 20>5.3. I would keep contributing to TSP. However, if you feel like you absolutely have to put extra money towards principal you can consider splitting 250 into 150 and 100 or 125 and 125 to cover both.
When did you start investing in your tsp?
TSP
I’ve retired early only because I invested and NOT paid the house off.
People often ask if they should contribute to the TSP because they only have x years left. But the account is still yours after you get out. You can leave your money in the TSP or roll it out to IRA(s). But it’s still yours. You’re not looking at 4 years growth- you should be considering the opportunity cost from now until 59.5+ because most/all of the dollars will stay there to grow even after you’re eligible to withdraw without penalty. All that to say- you should look at the long term effects, not the next 4 years.
Your mortgage rate is only 5.3%. Higher than the last several years, but still lower than the S&P500 returns over the long term (around 10-11% over 20+ year stretches). So you’d be saving a guaranteed 5.3% but giving up the opportunity cost of about double that amount.
20>5.3
Here is how I think about the paying off the mortgage scenario vs investing for future. You can always borrow for a house but you can’t borrow for your retirement.
Prioritize the retirement fund. Once you have that sufficiently funded then consider paying off the mortgage.
Why not split it up?
definitely put into your home! paying off debt is a guaranteed return, while the markets are not. plus the benefit is both immediate and long term. plus it will benefit your credit.
There’s no easy answer to that. You should be getting your TSP match first. If you already are, then the answer kinda depends. A lot of people might disagree with me, but I value being debt free over the possibility of higher returns later. If you plan on keeping this house long term, then in my opinion you should pay the extra money towards your house. If you plan on selling in the next couple years, you’d *probably* be better off putting that money in TSP.
I’m currently paying extra on my house over putting more into TSP because I can rent my house for 6-800 more than my mortgage and I don’t plan on selling until I know I’m done with the military and I know I’m not going to live in this area.
TSP.
There are much better things than the TSP, but if you don’t have other options you should likely stay put. I don’t think you’re averaging 20%. Where are you getting that number from?
Pay minimums on the mortgage. Max out your retirement accounts (TSP or Roth tsp, Roth Ira) . If you have extra money then make principal only payments to your mortgage.