The POWER of TSP contributions...and a long digression on student loans


It's a Sunday evening and I'm sitting here geeking out. Every time I listen to a finance podcast, I get all motivated to increase my TSP contributions. So, I'm going to document some of the considerations, but at least at this point in my typing, I don't intend to put all the numbers together and make a decision right this second...but hey, you never know.

The Deal-io: When I started working for Uncle Sam, I knew they matched TSP contributions up to 5%. Now the little catch here is that it takes 3 years for 1% of that to vest, but the rest of it is yours right off the bat. (And if you read the fine print of the TSP website, all those non-vested 1% TSP contributions are what keep the investment expenses so low - they apply all that defaulted money towards that. Cool, huh?) Right away, I signed up for the 5% because I'm no fool!

After that, I made sure I had enough to live on. You know, starting a new job and all. I had a budget and thought I knew how things would play out, but in my case, I moved from a state with no income tax to one with income tax, I bought a better healthcare plan, dental and vision insurance, yada yada yada. I try to play it a little safe. But the numbers looked good! I quickly raised my contribution to.....(drumroll here)....6%! Woo! Burning down that road to FI now!

What I noticed when I did this (and I'm going to use actual numbers, because if I told you what my GS and step are, you would have a really excellent idea of what I make anyway) is that although my take-home pay could have changed by the amount of the contribution difference ($35.09 - High roller!) it didn't. That is because I made my government retirement account a traditional account, so I don't pay taxes on that shit. So even though I was contributing $35.09 more per month, my take home pay only declined by $23.81. I saved $11.28 in taxes. Hm.

That is lovely, and really motivates me to increase my TSP contributions some more. My hesitations are as follows:
     1. You only get to contribute $5500 to a Roth IRA per year, and I don't want to lose those contribution amounts so that I can one day take out all that principle when I retire early and shouldn't touch the interest and my traditional retirement accounts. (I know I CAN, it's just trickier.)
     2. Student loans. I hate those fuckers with a passion. I hate them more than usual this month because some software glitch caused one of my student loan servicers - who I've been using for over a year, mind you, with no problems - to suddenly try to withdraw my payments from my HSA. I had a balance of $0 in my HSA because I was in the process of closing it now that I have sweet, sweet, government-sponsored Cadillac-level insurance. It is now closed, and they're telling me that for some reason, their software is still trying to take the now-delayed payments out of the wrong account. *facepalm* 

Now, let me take a little digression here. A lot of bloggers will tell you to pay off your student loans immediately, like YOUR HAIR IS ON FIRE. They say it's a guaranteed whatever-% return on investments. Well....true. What I think they might not see, however, is that it is a guaranteed return on investments only for the term of the loan. If you invest that money, it's NOT a guaranteed return on investments, but it's for the rest of your ENTIRE LIFE (if you do it right). Therefore, by paying the loans down instead of investing, in the long term, you actually might lose money. (Lots of caveats this week: of course that hypothetical scenario depends on what the market does. If you invest and then it goes to shit, bad bet. If you invest and the value triples in the next year, good for you! But on average if the market returns 7% and you've refinanced your loans for closer to 5%, which I have, then I'm losing that 2% compounding for the rest of my life.) 

(As an aside, if you want to refinance with Earnest because you're as impressed with them as I have been, please use my affiliate link, we'll both get money! $200 at the moment, to be exact! That's here. That's totally not the point of this blog, but free money is the best kind, so whatevs.)

As outlined above, I have a bunch of competing interests here. I've been trying to take a balanced approach, with trying to pay off one student loan a year, then increasing my TSP 1%, then throwing anything left over to a Roth, but I'm not sure that's actually the smartest thing to do. Maybe I should try to max my TSP first to reduce my tax bill? The reason I've been paying off student loans on occasion is because it increases my cash flow, which I really, really love. 

Another side note: When I refinanced my loans, I didn't do it as one lump sum. This was intentional, and mostly to manage the cash flow side of the equation. If you refinance as a lump sum, your payment is a gazillion dollars until the one loan is paid off, or you refinance it. If you refinance them in at least a few separate batches, you can pay one off, then have that extra $200-a-month (or whatever) payment to do with what you will, whether that be put towards another loan, pay for an unexpected expense, or get a muthafuckin' pedicure every now and then. (I think they're overrated, but I hear a lot of women do that shit.) So yeah, cash flow, bitches.

Just typing this all out has helped me to get a little clarity on the situation. I'm leaning towards paying off one little piddly $3k-ish loan I have left in June (3-paycheck month, woo!) then increasing my TSP to a 7% contribution to celebrate the death of that $90-a-month payment. Honestly I can probably increase it to more than 7%, but I'll do that first and then nudge it up another % or two if I feel comfy with that. I'm thinking contributing much to my Roth right now is probably silly considering I'm in a fucking awful tax bracket (that $11 I'm saving is about 32%, UGH!), so I'll stick with the traditional TSP contributions and kicking my student loans' asses for now. 

Any math wizards out there want to run the numbers for me and see if I'm doing something stupid? How about that whole getting your money back out thing - am I being silly by NOT doing my max Roth contribution each year? I'm always open to suggestion and changes of course.


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