Borrowing against a pension for investing?

[Fireup2020]

I mentioned on my welcome post that I am working on my short term savings.

All my "savings" is in retirement accounts (TSP, pensions, Deferrred comp) where AM NOT TAKING ANY money out - loan or authorized early w/d. On the flip side, because of my pension contributions - I have a little bit of money (I'd only be willing to take out a 5-10K loan)

Here's the kicker - my pension dollar amount has little to do with my contributions - it is based on my highest paying 12 months and my number of years employed and age of FIRE Loans are charged approx 4.25% interest.

Does it make any sense to this board to borrow $$$ out of my contribution collection to invest in something like a VG Target retirement account?

I'm also considering borrowing some of this in about 18 mos to replace my car (currently at 92K miles) - figured this interest rate is lower than typical for a used car

My vacation savings account (a personal priority) and regular "emergency" fund are growing slowly at $100 per mo each - just FYI.

I'm open to suggestions

 

[W2R]

Personally I wouldn't suggest borrowing against your TSP. Consider the difference in interest rates to be a form of insurance. No investment is a sure thing. You never know what life will bring. Others may disagree and I know that I tend to have a cautious point of view.

Wait - - I just re-read your post and apparently I read it wrong the first time. So you're NOT talking about borrowing against a TSP or pension? Never mind the above answer, then! But the same goes for your "contribution collection" as you call it. I'm not quite sure what that means, but I'd suggest looking away from any of this for your investing seed.

 

[donheff]

Fireup, are you in the Federal system? If so, the TSP is a key component of your retirement. You want to max it out and leave it be. It doesn't make sense to touch the TSP absent a true crisis. How could you possibly make money by taking it out of the most cost efficient set of index funds on the planet and placing it elsewhere? Are you planning to use it to fund a Roth IRA at Vanguard or some other strange gambit?

 

[W2R]

Not only that, but in the TSP he has access to the "G" fund which is not really a mutual fund but a special case - - annual yield has only varied between 4.11% to 6.77% during the past ten years. From a TSP website publication, The G Fund offers the opportunity to earn rates of interest similar to those of long-term Government securities but without any risk of lossof principal and very little volatility of earnings. The objective of the G Fund is to maintain a higher return than inflation without exposing the fund to risk of default or changes in market prices. The G Fund is invested in short-term U.S. Treasury securities specially issued to the TSP. Payment of principal and interest is guaranteed by the U.S. Government. Thus, there is no “credit risk.”

I'm not saying that the G fund is the be-all and end-all, but this is a fund that he would not have access to in a Roth or anywhere else other than the TSP. It is nice to preserve that option.

But if you reread his post - - he says "All my "savings" is in retirement accounts (TSP, pensions, Deferrred comp) where AM NOT TAKING ANY money out - loan or authorized early w/d." It's very unclear to me exactly what he is talking about spending if he is not talking about a loan from these accounts. The current TSP loan interest rate as of today is 4.625% so he must be talking about something different.

 

[Fireup2020]

Good morning all,

LOL - sorry for the misunderstanding. I am NOT talking about any investments that grow (pre-tax deferred comp or TSP) I work for the state (my former active duty and current reserve duty fund my TSP and I am NOT touching that)

We kick in money towards our pensions, but come retirement, the calculation is based on our salary, years employed, and age. Since this money is not earmarked just for my pension, I posed the question about borrowing against it.

Hope this helps explain....thank you for your advice! Oh, and I am a "she" for the earlier poster

 

[ats5g]

Good morning all,

LOL - sorry for the misunderstanding. I am NOT talking about any investments that grow (pre-tax deferred comp or TSP) I work for the state (my former active duty and current reserve duty fund my TSP and I am NOT touching that)

We kick in money towards our pensions, but come retirement, the calculation is based on our salary, years employed, and age. Since this money is not earmarked just for my pension, I posed the question about borrowing against it.

Hope this helps explain....thank you for your advice! Oh, and I am a "she" for the earlier poster

So, if I understand you correctly, the state makes you put a % of your salary into a fund which in turn is used to pay state retiree pensions. I assume that the state also puts in some money for each pension participant.

Questions:

1) Does the state actually let you borrow from this fund?

2) If so, are you looking to borrow money from the pension fund to invest in a TR fund from Vanguard?

3) If so, where are you going to be investing this money? taxable account, Roth, etc.

No offense, but this seems like a hairbrained idea to me.

- Alec

 

[jdw_fire]

Here's the kicker - my pension dollar amount has little to do with my contributions - it is based on my highest paying 12 months and my number of years employed and age of FIRE Loans are charged approx 4.25% interest.

Does it make any sense to this board to borrow $$$ out of my contribution collection to invest in something like a VG Target retirement account?

If the 4.25% is fixed for the life of the loan, not only does it make sense to borrow it to invest, it even makes sense to borrow it to invest in CDs that are paying more than that. This type of thing has been discussed here based on borrowing from low interest rate credit cards. Make sure you write off the interest you pay on your taxes as an investment expense and any money you make on the spread is, after taxes, free money.