In Part 1 of this series, aptly named A Good Problem to Have: Part 1, I write about how I am striving for optional early retirement and how I’ve found a way to shave a few years off my timeline.
I am working towards a pension, and I purchased a year and a half of service credit for about 4K. I have the opportunity to purchase a second year and a quarter–this is the good news. The problem? It costs 10K, and I don’t have 10K in cash.
More good news, though. I have some other options to pay for the service credit.
I could transfer the money from my 403B (similar to a 401K). My 403B has been earning a good amount of interest, though. Plus, those funds are meant for a little later in my retirement, so they are staying put.
The other option is to have the funds taken out of my paycheck pre-tax over the course of 1, 2, 3 or 4 years starting January 2021. Since I am sure I want to purchase the time, and since I want to have the funds taken out of my paychecks, the main decision now is whether I want to go with the 1, 2, 3 or 4 year plan.
The main factors I need to consider are how much I can handle being taken out of my paychecks and how quickly I can pay the 10K. The service credit I’m purchasing is still accruing interest, so the longer it takes for me to pay for it, the more interest will accrue and thus, the more I need to pay. Here is the breakdown.
- For comparison, if I were able to pay for the full amount with cash, it’d be 10,097.35.*
- If I chose to have the money taken out of my paycheck for 1 year, it’d be 400.98 a paycheck (I’m paid every other week, so that’s 26 checks a year) which would total 10,425.55 (the number is actually a few cents off. I’m not sure why, but I’m not worried about it). (That’s 328.20 more than if I could pay it in a lump sum).
- For 2 years, it’d be 207.23 a paycheck, or 11,103.17 total (about 677.62 in interest more than if I did one year. 1005.82 more than lump sum).
- For 3 years, it’d be 142.61 per paycheck, or 11,824.88 total (about 721.71 more in interest more than if I did 2 years, 1399.33 more in interest if I did 1 year. 1727.53 more than lump sum)
- For 4 years, it’d be 110.30 per paycheck, or 12,593.46 total (768.58 more than 3 years, 1490.20 for two and 2167.91 more than 1 year) 2496.11 more than if I paid lump sum.
*(I bolded, italicized, and underlined numbers for easy visuals.)
Let’s see how each option would affect my money situation.
It’d be great to have the payments taken out over the shortest amount of time–1 year. It comes with the least amount of interest. But I currently keep about 520 out per paycheck for a variety of things–paying extra towards the mortgage, having a personal emergency fund, having a car fund to pay for my next car, and having funds for clothes, eating out, etc. If I had the retirement system take out 400.98 a check, I would have 120 money per paycheck, 240 a month for those things. That would not be enough unless I put less towards my 403B this upcoming year. This option would be 328 more than the lump sum.
If I were to choose option 2, which takes out 207 per paycheck, I’d have about 310 left per paycheck, that’s 620 per month. I usually pay 400 towards the mortgage principal, put 150 in my car fund, 75 in my emergency fund, and 25 for my house repair fund. That’s 650 a month so I’d have to put 30 less into one of my funds or towards the house and keep a little out for travel, clothes, etc. This option would cost me 1006 over the lump sum.
Since the 2 year option is almost doable, I’m guessing the 3 year will work. I’d pay 143 per paycheck. Right now I keep 520 out per paycheck, so that’d be 377 per check, or 754 a month. If I spend 650 a month, I’ll have 104 extra for clothes, travel, etc. That still doesn’t feel like very much. This option would cost me 1730 over the lump sum.
Since we’ve gone this far, we need to check out the last option. It’d be 110 out of a paycheck, that’d leave me 410 per check, 820 per month. 820-650 = 170 a month for travel, clothes, etc. This option feels the most reasonable, but of course it’s the most expensive–about 2500 over the lump sum. Instead of the time costing about 10K, it’d be about 12,500.
A few other factors I haven’t yet mentioned:
1) The money comes out of my checks pre-tax. If I were to pay for the credit with cash, it’d be after tax. This makes having the money taken out of my paycheck more desirable.
2) Paying for this time now should give me about 2% more of my paycheck per year when I retire. As an example, I’d get 68% of the average of my last 4 years of my paycheck instead of 66%, so this is an easy win.
3) I’ll be able to pay less extra towards the mortgage as time goes on since the interest goes down and principal goes up. I have a pretty low rate for my mortgage though (3.525%), so it won’t be a huge change.
4) I’ll also likely get raises, though pretty minimal, over the years.
Without further delay, the winner is….
Option 1! I’m going to pay for it in a year by having 400 taken out of every paycheck for 2021.
Are you surprised? What would you do?
Peace Out (and In),
The next post in this series is A Good Problem to Have: Part 3
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