Author Topic: Case Study - What is my best course of action?  (Read 3593 times)

MilitaryMustache

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Case Study - What is my best course of action?
« on: January 28, 2014, 01:19:12 PM »
Good Day generous and knowledgeable Mustachians! I am a 30 year old Active Duty Marine finally able to start growing my ‘stache. I have read a good bit of the blog posts over the last year, but would like help/advice on my specific situation. Please let me know if I need to change anything about how I presented the information, or if you need any other info.
 
Monthly Totals
$10,057.05 – Total Gross Income
($4,233.73) – Total Fixed Expenses
($1,300.00) – Total Variable Expenses
($600.00)- Total of Revolving Discretionary Accounts
$3,923.32 – Available Funds per Month

Monthly Income
-Gross
$2,734.50 – Basic Pay
$357.55 – Basic Allowance (Subsistence)
$1,647.00 – Basic Allowance (Housing)
$450.00 – Special Duty Assignment Allowance
$1,490.00 – Rental Income
$~3,000.00 – Sole Proprietorship Business (Profit)
$10,057.05 – Total Gross Income

Current Monthly Expenses
-Fixed
$1,650.00 - Mortgage (Primary)
$981.00 – Mortgage (Rental)
$341.00 – Family Van (still owe 15k @5%APR)
$110.00-Student Loans (still owe 5k @3%APR)
$~300.00 – Utilities total (AVG)
$120.00 –Auto Insurance
$140.00 – Cell Phone Family Plan
$90.00 – Cable/Internet Services
$$365.00 – Mandatory deductions from my Paycheck (including Fed/State tax)
$136.73 – Roth Thrift Savings Plan Contribution
$4,233.73 – Total Fixed Expenses

-Variable
$250.00 – Gas
$700.00- Groceries
$150.00- kids Items
$100.00 – Pet Care
$100.00 – Household
$1,300.00 – Total Variable Expenses

-Discretionary
$600.00- Total of Revolving Discretionary Accounts
***I do not spend this amount a month, but the $600.00 is the contribution and the balance rolls-over (Miscellaneous purchases, entertainment, gifts to include Christmas – and family vacation with the residual)

Net Worth
$509,680.00 – Total Assests
$455,100.00 – Total Liabilities
$54,580.00 – Net Worth

Assets
$293,000.00 – Primary Residence
$157,000.00 – Rental property
$16,500.00- Vehicle
$4,500.00- Savings and Checking Accounts
$4,680.00 – Roth TSP Investment Account
$20,000 –Estimated Household Possessions
$14,000- Retail Value of Cost of Goods Sold (Business)
$509,680.00 – Total Assests

Liabilities
$284,000.00 – Principle on Primary (4.4%)
$145,000.00 – Principle on Rental (3.7%)
$14,800.00 – Principle on Vehicle (5%)
$5,000.00 – Student Loans (3%)
$6,300.00 – Credit Debt (Business on 0% CC)
$455,100.00 – Total Liabilities

Above is a snapshot of where I am. I have been in the Marine Corps just shy of 7 years, and plan to do at least 20 years in order to rate a retirement.  I will be eligible to draw a pension at age 43 – 13 Years from now (if the current policy exists then ) and in today’s money would be about $2,400 before taxes. I’m not interested in full early retirement.  Once I retire from the Marine Corps in 13 years, I would like to work part-time, and be financially free enough to be able to hold a job for enjoyment. In other words not have a second career, but a job in line with more of a hobby or mentoring position with the youth. For the sake of this scenario, assume a job which grosses 30k in today’s money.  I am able to contribute $17,000 max/year (no match from employer) into a Roth TSP (my current 12 Month Performance Indicator Percentage is 18.5%).  Since I will not be able to draw from the TSP until 59 1/2, I will need money tucked away to supplement my pension and part-time job salary to carry me from 43 until that age (From reading the blog, I assume that this will be achieved with Index Funds) I’m not sure how to estimate my annual spending at that point, but I do know that I would like to travel quite a bit and live the life of a semi-retired person (Golf + other hobbies/entertainment).

1.)   I am looking for help with how to best split my available balance into the index funds and TSP or if there is another suggested investment strategy. Also, should I be trying to pay down the principle ahead of schedule on any of my liabilities with this balance?

2.)   I am presented with the opportunity about every 3 years to buy a new home with only 5% down. As I get change of station orders, my primary residence becomes a rental (or I can sell), and I can take out another mortgage for a primary at the conventional 5% down.  Is there any guidance as far as how many rentals I should hold on to vs when I should sell one of my previous homes? One of the biggest challenges is that they can potentially be spread out all over the country. (Currently my rental is in New Orleans (Hometown), and primary (and potential future rental) is in Houston, TX)

***While I will/do appreciate all comments/advice, I am mainly looking for help in the specific areas mentioned above, and in-line with my projected future as described. I sincerely appreciate any future assistance with my situation!

Thank You in Advance,
MilitaryMustache









Richard3

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Re: Case Study - What is my best course of action?
« Reply #1 on: January 28, 2014, 02:01:19 PM »
Pay down the vehicle loan first with any extra money. 5% is attractive enough (especially if you don't get tax deductions on that interest like you do the others) that it's worth taking. It may also help you get your next mortgage cheaper (I have no idea but that sounds plausible).

I would consider selling the vehicle to buy something cheaper that doesn't involve borrowing money. Your vehicle is not an asset, it is simply a method of pre-paying transportation expenses. That's another guess obviously, your van may be perfect, I dunno.

Quote
Is there any guidance as far as how many rentals I should hold on to vs when I should sell one of my previous homes?

I'm not a landlord but I say if the rentals are profitable and at least cash neutral after mortgage and expenses then keep em all. You've got access to cheap money (assuming home rates and generally < landlord rates for you guys like they are here) which is very helpful to real estate success.


Do you always get the Special Duty pay? Or is that an average or just what you get at the moment? If it's random I wouldn't count it as income for budget purposes, more like a windfall that can be tucked away when you do get it.

Your pets and groceries seem expensive, but I know nothing.

Shop around for insurance / cell phones, get rid of cable, think about if it's possible to use less gas.


Lots of guesswork but I hope that gets you thinking of options at least.

Mori

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Re: Case Study - What is my best course of action?
« Reply #2 on: January 28, 2014, 02:28:31 PM »
Number 1 I'm still figuring out myself so I don't really have any advice on that.

Number 2:

As far as the rentals go, I say as long as they are cash positive (or at least not negative), and you have a good management company, I'd get and keep as many as I could stand to keep track of. :)

biggerpockets.com is a good place to start looking at rental info, if you've never been there. Lots of stuff in the forums.

Your interest rates on the home loans are small enough I'd hesitate to pay them off quickly. There's also the fact that once it's on the principal you can't get it back and I'm not seeing a lot of actual cash on hand. I'd bump that up to cover a few months of mortgage payments in case you have an eviction issue (or a roof issue, or a hurricane....) first.

Johnny Aloha

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Re: Case Study - What is my best course of action?
« Reply #3 on: January 28, 2014, 03:38:49 PM »
1.)   I am looking for help with how to best split my available balance into the index funds and TSP or if there is another suggested investment strategy. Also, should I be trying to pay down the principle ahead of schedule on any of my liabilities with this balance? 

I'd recommend opening a Roth IRA (wtih Vanguard of course), ASAP, because you can make penalty-free principle withdrawals from a Roth (effectively serving as an emergency fund).  Don't think TSP has those priveledges.

2.)   I am presented with the opportunity about every 3 years to buy a new home with only 5% down. As I get change of station orders, my primary residence becomes a rental (or I can sell), and I can take out another mortgage for a primary at the conventional 5% down.  Is there any guidance as far as how many rentals I should hold on to vs when I should sell one of my previous homes? One of the biggest challenges is that they can potentially be spread out all over the country. (Currently my rental is in New Orleans (Hometown), and primary (and potential future rental) is in Houston, TX)

Well, this comes down to personal preference.  If you want to be a landlord, then buy as many as possible!  But if you don't strongly consider renting since the transaction costs are high.  Run the NYT buy vs. rent calculator.  Also consider the local economies - Houston has tons of jobs, does New Orleans?

If it were me, I'd grab as many 5% down deals as I could with a few conditions:
- assuming I could avoid PMI - I think Navy Fed has 5% down no PMI loans (you just pay slightly higher interest)
- good neighborhoods
- good cash flow after allowing for maintenance, vacancy, and property management

MilitaryMustache

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Re: Case Study - What is my best course of action?
« Reply #4 on: January 28, 2014, 03:52:31 PM »
Thanks for the replies.

I am strongly considering making a move with the vehicle. It's a 2011 Chrysler T&C w/ 40k miles that I bought used. It's in excellent condition, so my decision will ultimately come down to - do I apply my available $4k/month to paying off my current van vs selling it and saving for 3 months to downgrade to a 2006 Honda Odyssey w/ considerably more miles. I am leaning towards keeping my current vehicle and paying it off in 4 months, but I wasn't sure if the 5% interest on it is worth losing out on the 18%+ that my TSP is earning right now.  Is there more to that decision than looking at just the interest rates? Am I missing something?

There's not much money in the bank accounts now because I just dropped the 5% + closing costs on the second home.

My Dwelling and homeowner's policies will cover the aforemention home repairs. I know this firsthand because I pocketed $6k after repairs from hail damage last year. Also, the tenant has another 14 months on the current lease. The $4k in savings will cover 4 months of mortgage payments on the rental. I also have a security deposit of $1490 that is not included in the financial summary. That can cover eviction filing fees.
Due to my job security and healthcare coverage for the family, I feel that the $4k is adequate for an emergency fund. Am I off-base here?

My grocery bill is for me, my wife and 3 kids. We eat a lot of meat. Staying strong helps ensure that job security in my line of work :)

The special duty allowance is guranteed for the next 3 years, and possibly through the rest of the 20 after that. My next promotion should take place in the next 6-8 months and will come with a total of $600/month raise (I didn't include that in the financial summary)

Auto Insurance is rock bottom with USAA.

The phone plan, cable/internet is a luxury that I am comfortable paying for at the moment. I know that these are usually frowned upon 'round these parts, but with me frequently out of the house due to training and deployments - it helps keep my wife sane after the kiddos are in bed. Of course I would love to cut that spending, but I've learned which battles to fight. My wife is not a spender in other areas, and since I don't know what it's like first-hand to do her job at home - I respect her wishes with this. Also, early retirement is not my goal. As stated above, I am planning on working part-time from age 43 until I can't any more. I just want to be financially free enough at that point to be able to chose a "feel-good" job without the pressure of having to cover all of my expenses.

Sorry for the way in which I structured this reply (This is the first forum that I've ever posted in). As I get more savvy with all of this I'll try to include those cool little quotes. Please keep the advice coming, I am very grateful.  So far I've got that I should pay off teh vehicle. How should I be invested after that to accomplish my goals?

CrochetStache

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Re: Case Study - What is my best course of action?
« Reply #5 on: January 28, 2014, 04:06:24 PM »
How many rentals is your wife willing to handle while you are away on deployments? The management companies only deal with so much. Plan for the worst, such as two homes needing major repairs at the same time while you are deployed and the management company having it's own family emergency and not able to help in a timely manner, etc.

$4K seems very low for an fund with rentals and your own family of 5. Boost it in both cash and Roth IRAs for both you and your spouse.

MilitaryMustache

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Re: Case Study - What is my best course of action?
« Reply #6 on: January 28, 2014, 04:15:30 PM »
Johnny Aloha - Thank you, but I have a couple follow-on questions.

1.) When I read about The Vanguard Total Stock Market Index Fund - is that the fund you invest in through your IRA?

2.) So, I can make principle withdrawals penalty-free at any age with an IRA?

I saw a link to a calculator in another thread that computes how long until you can retire. I'll have to give that a look to see if I can tailor it to my needs.


Johnny Aloha

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Re: Case Study - What is my best course of action?
« Reply #7 on: January 28, 2014, 07:26:16 PM »
Johnny Aloha - Thank you, but I have a couple follow-on questions.

1.) When I read about The Vanguard Total Stock Market Index Fund - is that the fund you invest in through your IRA?

2.) So, I can make principle withdrawals penalty-free at any age with an IRA?

I saw a link to a calculator in another thread that computes how long until you can retire. I'll have to give that a look to see if I can tailor it to my needs.

1) Yes, I invest in it (and so does my wife in her IRA).  If you want to make it even more simple, which is what I recommend for family who don't want to learn about investing, just pick a "target retirement" fund through vanguard.  Make sure you are comfortable with the potential volatility so that when the market drops 30% you don't panic and sell - you buy more!

2) As long as the IRA has been open for 5 years you can withdraw contributions penalty free.  So if you make $5k contributions 5 years in a row, you've contributed $25k.  If the value is $15k and you are in a pinch, you can withdraw it all penalty free.  If it's worth $50k, you can withdraw $25k penalty free.  If you withdraw all $50k in the latter scenario, you'll owe 10% penalty plus ordinary taxes on the earnings (25k).  Make sense?

Of course you don't want to withdraw money from the Roth, you want it to keep working for you.  But if you are the kind of person that doesn't want to keep an emergency fund sitting in a savings account earning 0.01%, this is a good alternative.

MilitaryMustache

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Re: Case Study - What is my best course of action?
« Reply #8 on: January 28, 2014, 09:51:38 PM »
Johnny Aloha - That makes sense. I still have to crunch the numbers, but my basic strategy is to max out my wife and I's Roth IRAs - Vanguard Total. I will hopefully not have to touch that until age 43. Those accounts + military pension + part-time job should be more than enough to live on until 60 when I can draw from my Roth TSP. If I contribute 700/month for the next 13 years of service and then allow that to grow for another 17, I think I will be fine. Does that sound like a good plan? How would I go about matching specific numbers to this strategy. ie what rate of growth do I calculate the accounts and how far out from 60 should I start to reduce my risk in the TSP. I guess I'm just looking for a standard schedule for when to taper the risk and what rate gets assigned at what point in the calculation. Thanks for the help!

Also, what is the best option if I want to invest after the Roth IRAs are maxed out and the TSP contribution matches what I need for 60 and beyond....Something that I can access the money without penalties, so I'm guessing not a traditional IRA since my understanding is that I can't touch that account un til 59 1/2 as well.
« Last Edit: January 28, 2014, 10:14:49 PM by MilitaryMustache »

MilitaryMustache

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Re: Case Study - What is my best course of action?
« Reply #9 on: January 28, 2014, 10:11:35 PM »
How many rentals is your wife willing to handle while you are away on deployments? The management companies only deal with so much. Plan for the worst, such as two homes needing major repairs at the same time while you are deployed and the management company having it's own family emergency and not able to help in a timely manner, etc.

$4K seems very low for an fund with rentals and your own family of 5. Boost it in both cash and Roth IRAs for both you and your spouse.

That is a great point. I don't think that I will have more than a primary and 2 rentals at a time....and the sweet spot will be where I am now  - primary and 1 rental.  I am definitely going to open up th he IRAs this week. If I were to invest in the Vanguard Total, would I open that account directly through  Vanguard or a bank like USAA or NavyFedCU. Thank you. Having access to the Roth IRA after 5 years makes that my top priority. I should be able to eliminate the car debt and max out both my wife and I's IRAs. I may also be able the stash a good chunk into the Roth TSP this year as well. I can't wait to crunch some numbers tomorrow!! Thank you for the help.