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I am a young Federal employee that puts 5% of salary into TSP. I am also in graduate school and am paying out of pocket. Would it make more sense to allocate more $ to the TSP and take out a student loan for the grad school?

Apr 26, 2013 by Laura in  |  Flag
7 Answers  |  7 Followers
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11 votes

Yes. Think long -term. First make sure your graduate degree is viewed as a "good investment" - one that will increase your lifelong earnings. Also, a student loan is often deferred or at a low interest rate. The fact that you are young makes the decision to contribute and earn a long term return that exceeds the interest rate on the student loan a good bet. Look beyond the G Fund and think long term.

1 Comment   |  Flag   |  Apr 26, 2013 from Westlake, OH
Laura

Unfortunately, with the issues of sequestration, my Agency isn't offering me any money toward my education up to this point.

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Flag |  Apr 26, 2013

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9 votes

Laura - Congratulations that you have decided to get an advanced degree. It will help you throughout your career. As you are already investing 5% into TSP (hopefully with a long term focus), then I would not suggest adding any more money at the expense of increasing your student debt load. This decision - like all financial planning - has to be dealt with a balance of objectives. I would suggest continuing to invest 5% until you complete your schooling and then after the debt is paid increase the amount saved for your retirement. Good luck with your studies.

2 Comments   |  Flag   |  Apr 26, 2013 from Allendale, NJ
Laura

Dan- Yes. I was thinking the same thing as far as the % contribution with school as a variable. However, I do feel as though I could contribute a bit more (say 7%), pay for school, and still have enough money for rent and a little for fun. My only concern is if I need a lot of money for some emergency, then it would be tied up in the TSP rather than in my savings.

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Flag |  Apr 26, 2013
Daniel Patrick Crimmins

Which is why you should add to your cash reserve account to provide liquidity in case of an emergency . The TSP account invested - appropriately for retirement - should not be considered available money for an emergency. After you have increased this cash reserve account to a sufficient level, you can always increase the percentage for retirement later.

Flag |  Apr 26, 2013 near Allendale, NJ

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5 votes

Hi Laura! I won't rehash the answers given, but want to point out that if you don't yet have an emergency fund built up, start as soon as you can. 3 to 6 months of salary is a standard goal, but yours may be different. You don't want to have long term funds tied up in your TSP for a short term emergency. It sounds like you have lots of competing goals right now, so you may want to sit down with a fee-only planner for an hour or two and discuss the the best way to address them all. Good luck!

Comment   |  Flag   |  Apr 26, 2013 from River Hills, SC

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5 votes
Jason Hull Level 20

Laura--will you get a step up once you complete the degree? I'm not sure with the job freezes which were in place before sequestration that they'll be open to moving you up in step or even in GS level, but, if you will get a known and guaranteed pay raise as soon as you get the diploma, AND you, by freeing up more money now, could take more courses and graduate more quickly, then I'd recommend dialing back on the TSP contributions and paying in cash with that money. Once you get the degree and the raise, max out your TSP contributions and don't get on the hedonic treadmill (http://www.hullfinancialplanning.com/get-off-your-hedonic-treadmill/). If you can't accelerate your degree, then just carry on with the course you're plotting. The risk side of the deferred taxes vs. student loans would make me want to stay away from student loans if you can cash flow the education.

Comment   |  Flag   |  Apr 26, 2013 from Fort Worth, TX

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3 votes

Laura,

Does your agency offer education benefits? You may be able to get the help you need without having to take a loan.

Also, you didn't specify, but since you are young (and presumably in a low tax bracket), take a hard look at contributing to Roth-TSP...but make sure you also consider matching and other variables as well.

Personally, student loans make me a little nervous. If it were me, I'd take a look at your whole financial situation including worse case scenarios (My Gov't job gets cut and I have loan payments) before signing on the dotted line.

1 Comment   |  Flag   |  Apr 26, 2013 from Alexandria, VA
Laura

I am 26, and I am not necessarily in a low tax bracket. I have enrolled in a financial planning program to get some more information regarding the different TSP allocations (as I am currently all in G, and I know that this is too conservative an approach to take at my age) and to figure out my next steps. During that time, I will certainly also ask about the Roth-TSP. I don't know much about it at all.

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Flag |  Apr 26, 2013

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2 votes

Laura, I agree with Dan Crimmons regarding your allocation of cash flow and the 5% contributions. Regarding your questions about fund allocations within your retirement plan, I provide free 401k/403b guidance at my website www.portfoliowisdom.com , which you are welcome to review A growth asset allocation based on my methodology model portfolios currently looks like this ... US Large Cap - 13.70%; International Large Cap - 10.92%; Global Bonds (non US dollar) - 9.37%; 10-20year US Treasuries - 20.52%; US Inflation-protected Treasuries (TIPS) - 20.42%; US Small Cap Stocks - 9.62%; US Real Estate Index - 15.44%. Obviously, this cannot be a personal recommendation, but shows what the current model growth portfolio looks like, based on current asset class volatility (risk). Again, feel free to check out the web site for back-tests, disclaimers, or to ask me any question. You are asking wise questions and making good choices... My compliments.

Comment   |  Flag   |  Apr 26, 2013 from Hendersonville, TN

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0 votes

Laura, at 26, I think 5% into the TSP is fine. I’m not sure what interest you are paying on student loans, but I think you might want to balance your excess cash. I think you would feel better with student loans behind you, and would work toward that goal. Definitely build an emergency fund, but I would look at the student loans, that appear to be growing, as existing debt that you want to address. Try to find a balance you are comfortable with.

Comment   |  Flag   |  May 06, 2013 from Delray Beach, FL

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