Q. I am a 41-year-old active duty military member with 24 years of service, retiring in 15 months. I am debating whether or not to apply for a financial hardship withdrawal from my TSP. As all too common in the military, my family and I moved from our house in one location to our new duty station. The home in the first location did not sell, so we rented. When we had issues with two separate tenants, we had to pay our mortgage and our rent. This double payment quickly depleted our savings. When we moved back to the home, we discovered our tenants were hard on the home and several issues needed to be addressed. We needed a new HVAC, our front and rear porches needed repair, and the interior of the home required painting, carpet cleaning etc. With our saving depleted and our home needing repair, we acquired a large amount of debt. I have consolidated our payments, but the loan coupled with current financial requirements does not allow me to save any money (emergency or otherwise) or invest. I am concerned that I will leave the military and still have this loan hanging over my head. Although it is not ideal to withdrawal, removing the loan and debt would at least put us back at zero and allow us to pay ourselves. I would like to hear your opinion on our predicament. Thank you.
A. The cost of pulling money out of your TSP account will be high. It’s the cost of the early withdrawal penalty, plus the cost of the lost future investment earnings on that money. The benefit will be the saved interest expense plus the earnings on the additional TSP contributions. Your job is to estimate these factors and compare them.
In general, I tend to favor leaving the money in the TSP unless the cost of carrying the debt is high – say, greater than 10 percent annually.