Working with the federal government we are all taught about
the three legged stool for a comfortable retirement. That consists of our
annuity (pension), Thrift savings plan (TSP) and Social Security. But what if,
you were able to lessen the need to access your social security and TSP during
retirement.
It doesn’t matter if you are 5, 10, 15 or even 20 years from
retirement, you can make retirement a little bit easier. The most common way is to start lowering or
eliminating debts. Most of our money tends to go toward housing expenses and
cars. Many people tend to keep mortgages and car notes way into retirement. But
eliminating those two bills can give you a sense of financial peace.
Let’s say you have a car you just purchased at $20,000 and a
$200,000 house that you now owe $184,000 on after 5 years of ownership. There
are two ways to pay off debt. One is to pay off debt with the highest interest
rate first and the second is to pay off the debt with the lowest amount owed
first. I am more partial to the second option because it frees up extra cash
faster. So, if we look at the $20,000 car purchased on a 5 year note at 3%
interest rate your payment will be $359 a month. If you could find an extra
$100 a month to add to the principle, your car will be paid off 13 months
early. Meaning, in less than four years you will have freed up $459 a month in
cash.
At this point we will start to allocate that extra money
toward the house. By the time the car is paid off you will have owned your house
for 9 years. Going with our example, if you bought the house for $200,000 on a
30 year note at 5% interest your payment would be $1074 a month excluding taxes
and insurance. At the end of 9 years of ownership you will still owe $167,300
and 21 years left. Just adding $400 of the $459 you were paying on your car
will pay the house off 8 years early. Meaning you will own your house free and
clear in just 22 years versus 30 years.
All of this also takes for granted that you keep your new
car for a minimum of 10 years and start paying cash for your cars. If you
remember we still have $59 left over from paying off the car in 4 years. What
if you saved $50 a month for 6 years you will have $3,600. Now if we assume the
car you purchased 10 years prior was a Toyota Camry, the car will be worth
between $6,500-$7,500 and adding that to the $3,600 you already have will give
you over $10,000 to spend on a new to you car.
After all of this hard work, you will have freed up around
$1,500 in cash. Do you think you could live on your annuity once you have
eliminated your house and car payments? This means your TSP and social security
is free cash to do with what you want. If you have dreams of travel or working in
your dream job, having disposable cash will give you more options in
retirement. Making your retirement years stress free and you will not have to
work just to get by.
Ms. Smart
