Author Topic: Career switch or no? Plus tax/investment/landlord stuff  (Read 991 times)

Guide2003

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Career switch or no? Plus tax/investment/landlord stuff
« on: June 23, 2017, 12:43:55 PM »
TL/DR: Should I get out of the military and self-fund ER, or stay in for the benefits and more comfortably FIRE at 42 with a pension?

Life Situation: MFJ, Iím 30, wife is 27 and stays at home. No biological kids but we foster between 0-4 kids at any given time. Because of the variable income and expenses that come with that Iíve left kid expenses out of our budget (except for the tax estimation from MDMís spreadsheet since we average credits for 2 kids/year). With the monthly stipend we generally net a slight positive with the kids, at least during school months. Iím in the military and move every 3-4 years within the US. As of summer 2017 I have 5 years of commitment left to pay off and then 7 years before retirement eligibility.

Gross Salary/Wages: Just broke the $100k mark this summer and wonít get another big raise for a couple years. Occasional per diem for travel is not included but is negligible. Note that with the military pay structure, only $79k is taxable with a small annual COLA increase and the remainder scaled for your zip code.

Pre-tax deductions: Term life for me at $8 and dental for my wife at $11

Other Ordinary Income: Again, Iím excluding the non-taxable foster stipend since itís used for kid expenses that are not listed.

Qualified Dividends & Long Term Capital Gains: $6200 on dividends last year, which are reinvested

Rental Income, Actual Expenses, and Depreciation: None

Adjusted Gross Income: AGI from last year was $71k. I had a slight pay raise since, got the $3k benefit of TLH, and we did some Traditional TSP last year that brought it down.

Taxes: With four exceptions, FITW=$300 and FICA=$227. No state income tax. 

Current expenses:
I used MDMís spreadsheet categories for this. We have used Mint/Personal Capital to track expenses but in the last couple years we havenít groomed the data too well, thus the high ďmiscĒ category. Iím a huge believer in the ďartificial scarcityĒ concept, so I could easily initiate another $800 automatic deposit to taxable investments and weíd adjust accordingly. I paused that when Betterment increased their rates and we wanted to shuffle cars and get our house ready to rent or sell next year, all of which will be done with the ďmiscĒ funds.

Mortgage                 430.93
Property Tax               33.08
Home/Rent Insurance   100.70
Car Insurance              67
Car Maintenance, Registration, etc.   100
Charitable contributions   1100
Christmas/Holidays      40
Clothing/Shoes           20 (We rarely buy clothes, and when we do its from thrift stores)
Dining                  400 (This is our primary source of entertainment and includes babysitters)
Electricity                    110
Emergency Fund           0
Entertainment              30
Financial Fees              76 (Betterment's .25%)
Fuel/Public Transport   60
Groceries                     500 (This could be brought down some, but time is money right now)
Household Maintenance   20
Internet                        30
Miscellaneous               981 (I know this is high but read above)
Parking/Tolls                2
Pets                             15
Phone (cell)                 50 (2 lines on Cricket)
Recycling/Trash           20
Subscriptions (paper/magazines/etc.)   8
Travel/Vacation           800 (This category is also a little loose and flexes with life events)
Umbrella Insurance       0 (Should I have this?)
Water/Sewer                19
Wine/Beer                    30
Work/Professional fees   9
TOTAL EXPENSES        5071
   
Roth IRA                     916.66 (maxes both of ours)
Roth TSP                     1500  (maxes mine)

   
Expected ER expenses: None forecasted at this point. I want to get into slow travel, and possibly do a long RV trip, but we arenít thinking that far ahead yet.

Assets: We have $300k in non-tax advantaged investments, $115k in tax sheltered investments ($27.6k of that being Traditional, the rest Roth), about $15k in the bank.
HouseóZillow says $125k but letís call it $100k. Bought for $76k and put $15k into it.
Carsóthree cars sub $4k. Weíll be selling one in the next month
Gunsóaround $20-30k depending whoís in office (come at me bro). I buy and sell some on a slowly revolving basis, and others are NFA regulated so not liquid #repealthehughesammendment
ToolsóI used to work construction/carpentry so I have a lot of tools that are worth much more in my hands than on craigslist.
Almost all our household items are homemade, gifted, or thrift store purchases and I donít plan to extract monetary value from the rest.

Liabilities: We owe $54k on a 15 year/3.375% mortgage. Instead of paying cash we put 20% down but then opted for biweekly payments on a 15 year loan to accelerate payment, so we havenít fully committed to either school of thought on that.

Specific Question(s):
1. Main thing on my mind right now is career advice. My skill set is becoming increasingly lucrative in the civilian realm, but I still have five years of commitment to the military. I like my job currently, but Iím worried that as I promote I wonít like it as much in the future. Also, the civilian life I anticipate would resemble ER much more than the life I currently live. In December I have to decide to either A) decide now to leaving the military in five years to get 4.5 years of a 5% match on TSP contributions with the new BRS or B) give up the matching contributions for those years and stay seven years past my commitment and get the full military pension ($3800/mo in todayís dollars, with cheap medical coverage for life and space-a travel). I guess a third option is to pick Option A and then stay in until retirement eligible with the reduced pension, but Iím pretty sure that would be a financial mistake that could have been averted by making a better decision now. Going with Option A, Iíd have to go through a semi-rigorous application/interview/transition process and would take a pay cut for a few years but then probably see my pay go well above what I make now after five years in that job. Option B seems like a lot to commit to (living in cityís Iím not excited about, possibly being relegated to a desk job, and overall reduced personal freedoms), but Iíd keep great benefits while Iím in, realistically have better potential to save, and end up with the unmatched stability of retiring with military retirement benefits.

2. For the tax guruís, should I be in Roth or Traditional plans? We max IRAís and my TSP (401k) and might try to max one for my wife if she worked. Also, this year we are attempting the staggered deduction strategy and deferring all possible deductible expenses to next year FWIW.

3. My $300k taxable and $70k of Roth are with Betterment in 90/10, but I think Iím to the point where I understand and could manage a lazy portfolio to avoid their (rising?) fees. Collectively I think thereís about $70k of capital gains in the last two years. Anything to consider before switching to 100% stock in hopes of getting back to vanguard funds and then transferring over to VG? We have TLH rolled over from last year, and Iím planning to talk to my accountant about how to minimize the tax burden of this move.

4. For you landlords out there should I consider renting my house or selling it next year when I move? I am hesitant to do the long-distance landlord thing but would like to try it at some point to make sure itís not for me, and this cheap and durable house seems decent for a trial period. I think I could expect rent of $900-1000 from a military tenant.

5. Iím open to any general or fine-tuning suggestions although I know I havenít provided the best expense breakdown. Been looking forward to getting this up so I can refer to it in future more targeted posts.

I know its long, but thanks for reading to the end! Looking forward to the comments.
ďWe think sometimes that poverty is only being hungry, naked and homeless. The poverty of being unwanted, unloved and uncared for is the greatest poverty. We must start in our own homes to remedy this kind of poverty.Ē Mother Teresa

Nords

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Re: Career switch or no? Plus tax/investment/landlord stuff
« Reply #1 on: June 27, 2017, 11:54:06 AM »
TL/DR: Should I get out of the military and self-fund ER, or stay in for the benefits and more comfortably FIRE at 42 with a pension?
Short answer:  stay on active duty as long as you're feeling challenged & fulfilled.  When the fun stops, consider the Reserves or National Guard. 

Again, for the sake of those readers stumbling across this thread via search, the issue is that you're getting more senior and closer to the pointy end of the career pyramid.  Good billets might be hard to find, and the assignment officers might play hardball for "career enhancement", "breaking out of the pack" and the dreaded "hardship tour".  Once you get to 14 years of service (or so), they think you'll do anything to stay on active duty until 20.  Yet your priorities might have changed (especially if you've started a family) and you may not need the active-duty pension.

Grimly clenching your jaw and gutting it out to 20 will risk your physical, emotional, and even mental health.  (Your family will think you're a lot of fun too.)  Meanwhile you have skills which are valuable outside the military, and you could greatly improve your quality of life with part-time military as well as part-time work.

You can probably reach FI (on your high savings rate) before 20, so if you go Reserve/Guard before then you'll be able to continue drilling until you reach 20 good years.  Your pension would start at age 60, not 42, but your investment portfolio would only have to cover the gap between leaving active duty and starting your Reserve pension.  You'd also have Tricare Reserve Select & Tricare Reserve Retired health insurance-- not as cheap as Tricare Prime but still cheaper than most.

Umbrella Insurance       0 (Should I have this?)
Yes, you should buy umbrella liability insurance when your gross worth exceeds the limits of your liability insurance on your home & autos.  Gross worth, not net worth, because the judge & jury only care about the plaintiff's injuries and not your mortgage or your other debts. 




1. Main thing on my mind right now is career advice. My skill set is becoming increasingly lucrative in the civilian realm, but I still have five years of commitment to the military. I like my job currently, but Iím worried that as I promote I wonít like it as much in the future. Also, the civilian life I anticipate would resemble ER much more than the life I currently live. In December I have to decide to either A) decide now to leaving the military in five years to get 4.5 years of a 5% match on TSP contributions with the new BRS or B) give up the matching contributions for those years and stay seven years past my commitment and get the full military pension ($3800/mo in todayís dollars, with cheap medical coverage for life and space-a travel). I guess a third option is to pick Option A and then stay in until retirement eligible with the reduced pension, but Iím pretty sure that would be a financial mistake that could have been averted by making a better decision now. Going with Option A, Iíd have to go through a semi-rigorous application/interview/transition process and would take a pay cut for a few years but then probably see my pay go well above what I make now after five years in that job. Option B seems like a lot to commit to (living in cityís Iím not excited about, possibly being relegated to a desk job, and overall reduced personal freedoms), but Iíd keep great benefits while Iím in, realistically have better potential to save, and end up with the unmatched stability of retiring with military retirement benefits.
How about the third option?  It'd leave you in the most flexible position.  You'd receive matching Thrift Savings Plan contributions (you're already maximizing your TSP contributions) which would likely compound enough by age 60 (especially in the C, S, and I funds) to make up for the lower BRS pension. 

It avoids the transition pain of Option A and you're not locked into Option B's years of active duty. 

You could run the DoD BRS calculator at
http://militarypay.defense.gov/Calculators/BRS/
to put some numbers in a spreadsheet.  If you think your skills will make you eligible for the continuation pay bonus,  then read paragraph 8 of the Implementation Document at
http://militarypay.defense.gov/Portals/3/Documents/BlendedRetirementDocuments/FINAL_BRSImplementationGuidance.pdf?ver=2017-02-27-084532-740
and see if you can estimate the compounding of that bonus amount.  You'd be able to receive continuation pay concurrent (not consecutive) with other bonus/re-enlistment programs as long as the other program allows it.

Roth IRA                     916.66 (maxes both of ours)
Roth TSP                     1500  (maxes mine)[/i]
   
2. For the tax guruís, should I be in Roth or Traditional plans? We max IRAís and my TSP (401k) and might try to max one for my wife if she worked. Also, this year we are attempting the staggered deduction strategy and deferring all possible deductible expenses to next year FWIW.
Military pay is generally lightly taxed because of all the untaxed allowances.  I think that as long as you're taxed in the 15% income-tax bracket or lower, then it makes sense to pay the taxes now and contribute to a Roth TSP, your Roth IRAs, and a Roth 401(k).  For many servicemembers, the Earned Income Tax Credit and Childcare Tax Credit also reduce the final tax bill to a very small amount.  Again, you'd pay the taxes now and use Roths.

If you think that you're going to reach FI and have very little earned income for the next 10 years then you could try a Roth conversion ladder.  However you're already starting from a low military tax bracket (plus tax credits) and trying to convert in the 0%-10% income-tax brackets (perhaps without tax credits).  I'm not sure that the hoop-jumping effort would be worth the savings, but you might be able to give that a good spreadsheet scrub.

3. My $300k taxable and $70k of Roth are with Betterment in 90/10, but I think Iím to the point where I understand and could manage a lazy portfolio to avoid their (rising?) fees. Collectively I think thereís about $70k of capital gains in the last two years. Anything to consider before switching to 100% stock in hopes of getting back to vanguard funds and then transferring over to VG? We have TLH rolled over from last year, and Iím planning to talk to my accountant about how to minimize the tax burden of this move.
Capital gains are the key to moving to funds with lower expense ratios.  (We have this problem in my house too.)  You could switch over to 100% equities in the TSP right now, and you could also do it tax-free in your IRAs. 

One option would be to have Vanguard do the transfer of assets "in kind" from your taxable Betterment account.  Vanguard will probably hold the Betterment shares for free and would also sell them for free.  Then (in your Vanguard account) you could slowly sell them for cheaper Vanguard funds while you're in the 15% income-tax bracket, which means that your capital gains are taxed at 0%. 

   
HouseóZillow says $125k but letís call it $100k. Bought for $76k and put $15k into it.

Liabilities: We owe $54k on a 15 year/3.375% mortgage. Instead of paying cash we put 20% down but then opted for biweekly payments on a 15 year loan to accelerate payment, so we havenít fully committed to either school of thought on that.

4. For you landlords out there should I consider renting my house or selling it next year when I move? I am hesitant to do the long-distance landlord thing but would like to try it at some point to make sure itís not for me, and this cheap and durable house seems decent for a trial period. I think I could expect rent of $900-1000 from a military tenant.
"I think" is the start of a business plan, but you'd want to analyze your market's rents and figure out your capitalization rate.  I'd pay the minimum required on the mortgage while you have tenants in the place, because you're going to want a sizable emergency fund for maintenance, repairs, and vacancies.

Keep in mind that the IRS assumes you're depreciating the structure (not the land) and will expect you to pay 25% depreciation recapture when you sell the place. 

It's a relatively cheap experiment to determine whether you want the hassle of long-distance landlording, but you should be ready to sell.

Author of "The Military Guide to Financial Independence and Retirement".   All royalties (and writing revenue) donated to military charities.
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Guide2003

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Re: Career switch or no? Plus tax/investment/landlord stuff
« Reply #2 on: July 03, 2017, 02:14:34 PM »
Wow Nords, thanks for the detailed response!

Short answer:  stay on active duty as long as you're feeling challenged & fulfilled.  When the fun stops, consider the Reserves or National Guard. 
Yeah, I've listened to several podcasts where you recommend this approach. 100% chance I can keep it fun until year 13, and I'd say 80% chance the fun will last until year 17. At that point, I think the idea of a pension would get me through the remaining years. I should have tenure in 2 years, and if my specialty stays in demand like I think it will, I'll be able to stay in decent billets without having to worry about career progression and promotion, which seem to take the most fun out of the job. I think the "grass is greener" effect and being able to chose where I live are the only things that make me think I would enjoy life on the outside better. Plus I'd need a huge paycheck and some ridiculously hardcore saving to match the pension I'd give up from 42-60.

Yes, you should buy umbrella liability insurance when your gross worth exceeds the limits of your liability insurance on your home & autos.  Gross worth, not net worth, because the judge & jury only care about the plaintiff's injuries and not your mortgage or your other debts. 
Good tip. I'll call my home/auto insurer and see what they have.

How about the third option?  It'd leave you in the most flexible position.  You'd receive matching Thrift Savings Plan contributions (you're already maximizing your TSP contributions) which would likely compound enough by age 60 (especially in the C, S, and I funds) to make up for the lower BRS pension. 

It avoids the transition pain of Option A and you're not locked into Option B's years of active duty. 
Running the calculator with reasonable combinations of variables it looks like I make out best in any circumstance with the legacy system. I don't like how it shows my personal contributions added to the BRS results as if I wouldn't have them with the legacy system. I'm nearly certain I'll get the minimum continuation bonus, and my service is tight-lipped on what those of us who have obligated service until year 13 should expect for a continuation bonus that's offered prior to year 12. If they are giving us the exact same retention bonus package that they offered in 2000 without correcting for inflation, I don't get the warm and fuzzies for counting on anything more than the minimum five years from now. I think I'd seriously regret opting into the new system if I ended up making it to 20, so I'd kind of like to make up my mind now. Plus, the calculator only shows about $20k worth of matching in the five years of obligated service I have left. Obviously that would grow to a sizable chunk until I touch it after 60, but I think I'm willing to give that up for the opportunity for the larger pension.

Military pay is generally lightly taxed because of all the untaxed allowances.  I think that as long as you're taxed in the 15% income-tax bracket or lower, then it makes sense to pay the taxes now and contribute to a Roth TSP, your Roth IRAs, and a Roth 401(k).  For many servicemembers, the Earned Income Tax Credit and Childcare Tax Credit also reduce the final tax bill to a very small amount.  Again, you'd pay the taxes now and use Roths.

If you think that you're going to reach FI and have very little earned income for the next 10 years then you could try a Roth conversion ladder.  However you're already starting from a low military tax bracket (plus tax credits) and trying to convert in the 0%-10% income-tax brackets (perhaps without tax credits).  I'm not sure that the hoop-jumping effort would be worth the savings, but you might be able to give that a good spreadsheet scrub.
Thanks, I have been meaning to sit down with my accountant about this to get his opinion, but that confirms what I've been thinking. I need to do more reading on the subject, but I was wondering if it was possible/advisable to contribute to traditional and then do a backdoor roth the year I separate with minimal income. Until then I'll press on with the Roth contributions since it seems like us 15%ers are in a grey area.

Capital gains are the key to moving to funds with lower expense ratios.  (We have this problem in my house too.)  You could switch over to 100% equities in the TSP right now, and you could also do it tax-free in your IRAs. 

One option would be to have Vanguard do the transfer of assets "in kind" from your taxable Betterment account.  Vanguard will probably hold the Betterment shares for free and would also sell them for free.  Then (in your Vanguard account) you could slowly sell them for cheaper Vanguard funds while you're in the 15% income-tax bracket, which means that your capital gains are taxed at 0%. 
The reason to switch to a different equity ratio is to try to get Betterment's algorithms to put me back into 100% Vanguard products to minimize trading fees when back at Vanguard. Again, it sounds like  I need to get with my accountant to figure out the best way of doing this.

"I think" is the start of a business plan, but you'd want to analyze your market's rents and figure out your capitalization rate.  I'd pay the minimum required on the mortgage while you have tenants in the place, because you're going to want a sizable emergency fund for maintenance, repairs, and vacancies.

Keep in mind that the IRS assumes you're depreciating the structure (not the land) and will expect you to pay 25% depreciation recapture when you sell the place. 

It's a relatively cheap experiment to determine whether you want the hassle of long-distance landlording, but you should be ready to sell.
I'm going to keep tracking with this thought and hopefully the house will be ready to rent or sell either way in a year!
ďWe think sometimes that poverty is only being hungry, naked and homeless. The poverty of being unwanted, unloved and uncared for is the greatest poverty. We must start in our own homes to remedy this kind of poverty.Ē Mother Teresa

Guide2003

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Re: Career switch or no? Plus tax/investment/landlord stuff
« Reply #3 on: July 03, 2017, 02:22:55 PM »
For anyone else reading without commenting, any suggestions on how I can structure my questions so they are easier/more tempting to answer? Thankful for any input you guy can give.
ďWe think sometimes that poverty is only being hungry, naked and homeless. The poverty of being unwanted, unloved and uncared for is the greatest poverty. We must start in our own homes to remedy this kind of poverty.Ē Mother Teresa

MDM

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Re: Career switch or no? Plus tax/investment/landlord stuff
« Reply #4 on: July 03, 2017, 04:16:05 PM »
Military pay is generally lightly taxed because of all the untaxed allowances.  I think that as long as you're taxed in the 15% income-tax bracket or lower, then it makes sense to pay the taxes now and contribute to a Roth TSP, your Roth IRAs, and a Roth 401(k).  For many servicemembers, the Earned Income Tax Credit and Childcare Tax Credit also reduce the final tax bill to a very small amount.  Again, you'd pay the taxes now and use Roths.

If you think that you're going to reach FI and have very little earned income for the next 10 years then you could try a Roth conversion ladder.  However you're already starting from a low military tax bracket (plus tax credits) and trying to convert in the 0%-10% income-tax brackets (perhaps without tax credits).  I'm not sure that the hoop-jumping effort would be worth the savings, but you might be able to give that a good spreadsheet scrub.
Thanks, I have been meaning to sit down with my accountant about this to get his opinion, but that confirms what I've been thinking. I need to do more reading on the subject, but I was wondering if it was possible/advisable to contribute to traditional and then do a backdoor roth the year I separate with minimal income. Until then I'll press on with the Roth contributions since it seems like us 15%ers are in a grey area.
If you want to make an informed (or at least a good guess) choice, you'll need to calculate your current marginal tax saving rate and (at least estimate) your future marginal tax rate on traditional withdrawals.

Note that marginal rate is not necessarily the same as tax bracket.  Various credits, etc., you have now might cause the marginal rate to be higher than your bracket, favoring traditional contributions now.  Various phaseouts, etc., you may incur in the future might cause the marginal rate to be higher than your bracket, favoring Roth contributions now.

See "Why #4" in Investment Order for some ideas on calculating those marginal rates.

Guide2003

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Re: Career switch or no? Plus tax/investment/landlord stuff
« Reply #5 on: July 06, 2017, 05:59:47 PM »
If you want to make an informed (or at least a good guess) choice, you'll need to calculate your current marginal tax saving rate and (at least estimate) your future marginal tax rate on traditional withdrawals.

Note that marginal rate is not necessarily the same as tax bracket.  Various credits, etc., you have now might cause the marginal rate to be higher than your bracket, favoring traditional contributions now.  Various phaseouts, etc., you may incur in the future might cause the marginal rate to be higher than your bracket, favoring Roth contributions now.

See "Why #4" in Investment Order for some ideas on calculating those marginal rates.
Thanks MDM! You've helped me in the past with tax rate questions. Doing some retirement calculations has helped me project some better numbers than my initial wild estimates. I'll look through the investment order again and work out those numbers.
ďWe think sometimes that poverty is only being hungry, naked and homeless. The poverty of being unwanted, unloved and uncared for is the greatest poverty. We must start in our own homes to remedy this kind of poverty.Ē Mother Teresa