Post by riotingparrot on Jan 20, 2013 8:34:06 GMT -5
Here is the situation:
Husband and wife will both be retiring from a federal job with pension that starts immediately after retirement. This will be in 4 years when they are both 41. Each of their pensions will be about $3300 and adjusted for inflation, so a total of $6600/month in today's dollars. He has no debt, she has $51,000 in student loans. Their joint income is about $230,000 year. They both will work after "retirement" but not in a federal job again, but will probably have the same income. After retirement, neither of them will be eligible to put money in the Roth TSP. They don't have much for savings compared to their income (~$50,000), and don't own a house. They have been using the income to pay off her student loans. No kids. They don't see a need to save much for retirement beyond their federal government pension. The current plan is to pay off the student loans before retirement and then start saving a little for retirement after that, but by then they wouldn't have access to the Roth TSP, and might not qualify for a Roth IRA. Would it be better to max out the Roth TSP while they are eligible to contribute and then pay off the student loans more slowly (interest rate averages 5.5%)? Or pay off SL aggressively, save only $5000 or so in the TSP, and then just save a little more for retirement later? Or don't they need much additional retirement savings anyway? They don't plan on living extravagantly in retirement.
When do they plan on retiring, and does the pension include health care? Also, are they going to elect to have spousal benefits on their pensions (so if one passes away before the other, the survivor receives the other's pension until their own death? I think this is called spousal benefits, or something similar...).
Doesn't that pension work out to be about 1/3 of what they currently earn? And there is no need to save beyond what the pension provides? I'm confused. Even living simply, dropping to 1/3 of their income could be rough... I think it might be time to prioritize both the Roth TSP (and other retirement investments) and paying off the loans above what else the income is being spent on.
(please keep in mind, I'm a regular on the MM board, and so I'm giving out tough-love type of advice here... I can't imagine being OK with living on a pension of 1/3 of what I'm used to living on after retirement...)
So the student loan rate is 5.5%? That seems kind of high for a student loan, but I'm guessing it's from a long time ago?
Generally speaking, if they can make more than 5.5% (or whatever the interest rate is on the student loans) in retirement savings, they should use the money for that. If they CAN'T make 5.5% on investments, then they should pay off the student loans first. Usually student loans are such a low interest rate that it makes sense to pay them off after doing everything else....but 5.5% is high enough (for a student loan), and with the market the way it is...well, it might make sense to pay them off first.
Despite that, I am one of those people who HATES debt, and would rather pay off any debt before doing anything else with my money. But my financial advisor reminds me that it's a numbers game, and you can't argue with the math.
If this couple doesn't have a financial advisor, I would recommend they get one.
Post by iluvmytxrgr on Jan 22, 2013 8:49:53 GMT -5
So, the couple will have over $6K in income from pensions plus they are planning to work after retirement. If it were me, I would try to live as sensibly as possible. With no kids, there is really no need to have a home with more than 2 bed rooms. I would rent a modest home, live off the $6K a month, use the other incomes to pay off debt and then start banking it after the loans are history.
You really should save as much as possible even if you are getting a pension. Had my grandparents not worked so hard to build a nice savings after my grandpa retired from the Army, they would be screwed right now. With the medical issues they have both had, they have no choice but to pay for supplemental insurance. They still have medical bills on top of what their insurances pay. Add unexpected issues with their cars and their house and they would have been screwed with out that savings. I agree with the suggestions that you talk to a financial planner. They can help you figure out the best way for you to save or invest. They can help you come up with a plan to follow.