Author Topic: Windfall/Bonus preplanning  (Read 1017 times)

gliderpilot567

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Windfall/Bonus preplanning
« on: November 12, 2015, 10:40:23 AM »
Situation. Active duty military, 10 years in. Next year, I plan to sign the pilot bonus, which is $250k: I can elect to take half up front and the rest evenly over the next 8 years; or, I can elect to take 25k/year for 9 years. After running some scenarios I am almost certain that the half up front lump sum is the better choice so that I can start more money compounding sooner, even if I pay more taxes initially. So that is not really my question, although feel free to chime in if you have thoughts on it. My question, if you read on, is how best to allocate the money to investments.

We are planning to be debt free except for the house by early next summer (about $30k in debts remaining - 20k in student loans at mostly 7%, and 10k left on a car note at 3%). We have one over-leveraged rental property that we'll be in a position to sell and just about break even, so I'm planning to rid us of that encumbrance as well.

The 112.5k bonus, if I accept it, is expected in Sep/Oct of 2016. After that, there will be a $14k bonus paid every year on the anniversary, through 2024. Accepting the bonus commits me to active service through 2025, at which point I'll get the mil pension and we should be close to FIRE if we do this right.

My taxable income is $88k (and will be next year). This is not including the tax-free housing allowance, which happens to almost exactly cover our mortgage payment (not utilities; those come out of regular expenses). We plan to continue to live in houses for which we pay at or below the housing allowance, so for the most part that part of the equation is a wash for now.

I expect at least one more promotion during my career, and the standard 1-1.3%ish annual military pay raise. By 2025 my taxable income should be around $102k in 2015 dollars based on the current pay tables. This will yield a pension of about $50k in 2015 dollars, depending on what the average of my final 3 years is. Add the pension (which is inflation protected) to 4% of whatever we can invest by then and we will be in good shape to FIRE or at worst begin a PT bridge career. I will be 42 and she will be 44.

Currently, my wife works and makes about $43k, but we will be relocating at the end of June so she'll only work half a year. It will be a short one-year assignment, to school, so she doesn't plan to work after that for the rest of 2016.

This means that we're expecting a 2016 income of $109k, plus the $112k half-bonus for a total of $221k gross. Again, this does not include $18k in housing allowance and about $3k subsistence allowance, neither of which are taxable. There will be various relocation allowances and travel vouchers and such, but those mostly wash out.

We have 4 kids under age 17. Planning to continue to file taxes as married/joint.

So after all that, my question is: what do we do in the rest of 2015, and then what do we do in 2016, to best exploit this windfall? I will have about $7-8k cash on hand at the end of 2015, which is currently planned to pay off student loans, but we can redirect it into an investment if it makes more sense. Right now there is only about $2.5k in my TSP and a few hundred in her 401(k), due to our facepunchy past, so we want to build those up ASAP.

I will max out my TSP and her 401(k), to begin with. Where does money go next? Looking to maximize our stash at the end of 2025, while minimizing our tax liability next year.

Expenses, if needed for anyone's math, are around 36k/year. This does not include the house. Yes I know, not very mustachian, we are busting our butts to mustachify our lifestyle. Great progress since last year when we were 130k in the red and spending like consumer suckas.

Thanks for reading! Looking forward to the advice.