DFA reader Josh asked:
I am in the military and at the point were i can get a bonus of $30,000 if I reduce my retirement to 40% of my base pay at 20 years – or – stay with high 3, which is 50% of my base pay at 20 years. There are options on how to get the $30,000: one payment, two at 15,000, three at 10,000, four at 7,500, or five at 6,000.
I have done some research on the subject and everything thus far says taking the 30,000 is a bad idea, but I like to cover all bases before doing anything. Also right now I have about $125,000 in debt, but I make enough to still meet all my bills. What would be the better thing to do, take the bonus and pay off debt, or keep the retirement plan for 50%?
Josh, I believe you’re referring to the military’s REDUX retirement system. Since I’m unfamiliar I included a few great articles from The Military Wallet in the Resources and References section below. Check them out.
In general, here are three important factors to consider before tapping into retirement to pay off debt:
- your goals
- the type of debt you have
- your debt-to-income ratio.
Everyone has different retirement goals.
How old you are, how much you have saved, and whether or not you plan to retire at all are several criteria to help layout your goals.
I don’t plan to retire. My goal has always been to find my passionate life’s work and pursue it, in some manner, until I’m gone – so my income may be rolling in until I die.
If your plan is to work a career for so many years and retire to something else, your goals will be different because you plan to live off retirement savings.
Define your goals to best answer the question.
Type of debt you have
Everyone has different types and amounts of debt.
Josh has $125,000 but we’re not sure what type of debt that is.
If the debt is low interest rate mortgage or student loan debt, tapping into savings to pay it off may not be a great idea.
If it’s high interest credit card debt, the decision will probably be different.
Define the type and amount of each debt to best answer the question.
Your debt-to-income ratio
Commonly referred to as your “DTI,” your debt-to-income ratio is a personal finance benchmark that relates your monthly debt payments to your monthly gross income.
Everyone has a different debt-to-income ratio.
Josh mentioned making enough to meet his bills but didn’t specify how much he makes or if he has extra income at the end of each month.
If paying the minimum payments on your debts leaves you with little to no money at the end of each month, taking the bonus to kick-start better financial health may be a good idea.
If you have extra money after meeting your monthly budget, it may be best to leave savings alone and use the extra to speed debt repayment.
Define your DTI to best answer the question.
References and Resouces
- “Your Debt-to-Income Ratio: What It Is and Why You Should Care” on FiveCentNickle.com
- “Is REDUX Retirement Worth it?” on The Military Wallet
- “Can Your Investment Returns Make REDUX a Good Retirement Option?” on The Military Wallet