Thanks for the tags, Nereo and Dandarc!
I currently have 7 years in and am on the fence about staying in or getting out. I have been taking it one enlistment at a time and really trying to feel things out as I go along. I recently arrived at my current duty station, so I will be here until my 10-year mark. Of course, this is where most of us make the decision to commit or move on to the civilian world. After much pondering and calculating, I may have come up with a scenario where my wife and I (as well as future children) can retire from the military at the 20-year mark being financially independent while probably working part-time jobs in a low cost of living area, doing something we actually want so we can really focus on family and the rest of our lives.
You’re getting good advice,
@Turtlemcshell .
As the professional athletes and actors say, “I am not a retention role model.” You have tremendous human capital both in uniform and outside of the military, and you do not need to suffer 20 years of active duty for a pension... no matter how righteously awesome the pension and benefits may seem to be.
https://militaryguide.com/dont-gut-20-leave-active-duty-reserves-national-guard/The answer is to take it one obligation at a time. Stay on active duty as long as you’re feeling challenged & fulfilled. When the fun stops, there will be no doubt. At that point you should consider the Reserves or National Guard as well as switching to a different specialty. The key is to learn all about those options now so that you can stay open to the opportunities (or move faster when you get the unrefusable offer).
Again, don’t sell yourself short to the military inferiority complex. Tens of thousands of servicemembers leave active duty every year and do just fine. Listen to the podcast “Beyond The Uniform” by Justin Nassiri and join the Linkedin group Veteran Mentor Network. You’ll hear all the good stories there, and you’ll get advice on your own transition.
1) TSP: I am currently only putting 5% to get the 5% match (altogether around 300/month currently). I think I want to use this money in actual retirement (59 ½) when I can withdraw with no penalties. Should I keep adding my 5% or increase my contributions? Would it be better to do the Traditional or Roth? The matching funds only go toward the traditional, so theoretically I can split my allocation if I want. I also am aware of a Roth conversion ladder, so I have been considering that as well.
As many others have said, Roth TSP is the better answer now. Not only are you in a low income-tax bracket, but the Earned Income Tax Credit and child tax credits can nearly wipe out your tax bill.
You can do Roth IRA conversions later in life, especially for your traditional TSP filled with DoD BRS agency/matching contributions. However if you get a military pension then you may be in a higher income-tax bracket (with fewer tax credits). If you get a bridge career after the military then you’ll certainly be in a higher income-tax bracket. If you declare FI at age 50 and stop working for all earned income then the Roth IRA conversion might still be in the same income-tax bracket you’re in now.
I'm pretty confident that by the time you're facing age 70, your RMDs will put you in a much higher income-tax bracket. They'll also tax your Social Security deposits and you'll pay IRMAA on your Medicare premiums. The easy button (especially in your 20s) is to go full Roth TSP and Roth IRAs. And Roth 401(k) when applicable to your spouse.
As others have already mentioned, here’s the military list of ways to tap your military retirement accounts (and your IRAs) before age 59.5 with no penalties... and maybe no taxes.
https://militaryguide.com/early-withdrawals-from-your-tsp-and-ira-after-the-military/2) Roth IRAs: I plan to max these out (wife has no retirement plan through her employer). Any ideas on fund selections? I want to maximize growth, so I am considering high dividend growth funds through Vanguard. I plan to use this as an “emergency gap fund” if needed in military retirement to actual retirement but am open to using this in military retirement by withdrawing contributions. I would love to watch this grow into actual retirement.
The general answer to fund selection is “Whatever’s your asset allocation, in passive index funds with low expense ratios”. In other words pick the asset allocation and then go look for the funds. Build that AA across all of your accounts, not just in each individual account. You might decide to put all of your TSP accounts in the I fund (because that’s the world’s lowest expense ratio for international funds) and put your Roth IRAs in the total stock market index instead of using the TSP’s C fund.
3) Cash: As you can see, I have plenty of emergency funds. The big question here is the house fund. If I stay in, I won’t need this housing fund since the military will take care of housing. I am thinking of doing two things with this: investing it in real estate (least likely) or throwing it into a taxable account with Vanguard index funds (more likely) and add what would be my house fund as my “primary gap fund”. I also think I could do both at once in this scenario where I could “house hack” and utilize my VA or FHA loan and buy a duplex at my next duty station, rent out the other half and live rent free, and then throw the extra money into the taxable account and watch grow. Just another option I am thinking about, but I would love to hear feedback on this. Doing rough calculations, I could easily hit $250,000 and withdraw 4% to supplement pension income.
If you don’t see yourself using the cash for at least 10 years then --> stock market. 5-10 years --> bond fund (or perhaps I bonds or a TIPS fund). Under five years, use CDs or the TSP's G fund.
4) Asset Allocation: Open to any suggestions here. I am newer to investing, so I would love to see multiple views on this. Should I view my military retirement funds as separate from my actual retirement funds? Should I lump them together? Help!
While you’re on active duty, you have a relatively stable income. (Compared to civilians and federal govt agencies outside of the DoD.) That gives you the flexibility to have an asset allocation very high in equities... easily 80% and perhaps up to 100%. You could pick sectors (equity dividend funds, small-cap value funds, international equity dividend funds) or just default to a total stock market index fund.
Instead of picking bond funds, go with large-cap equity dividend funds or TIPS funds or I bonds.
It helps to have a logical math-based asset allocation. Even more importantly, you want an asset allocation which helps you sleep comfortably at night... and which you can easily discuss with your spouse during the next bear market or recession. No matter how much thought you put into your asset allocation, if you’re not emotionally comfortable then behavioral psychology will derail your logical plan every time.
If you really want to dig into the grass then I recommend the Bogleheads wiki. Read this link first and then search the wiki for “asset allocation”:
https://www.bogleheads.org/wiki/Main_Page