Author Topic: Investment order in my situation (Military, etc.)  (Read 1129 times)

browne497

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Investment order in my situation (Military, etc.)
« on: October 03, 2017, 02:22:26 PM »
Hello, all

I originally posted this in the investment alley section and was referred here. I've been reading MMM's blog for a few months now and I'm hooked. As you can tell from the title, my question is about investment order in my situation. First, let me explain said situation.

I'm 23 years old and am in the military (going on 4 years). I fully intend to do my full 20 at least assuming I can make rank as needed. My income last year was approximately $37200 with $14,616 (money earned with the military's intent to be used for housing and food but what I didn't spend I could use as I please) being tax free. I've recently PCS'd to the UK and it will be a little bit before I am sure what I will be earning here. Some things regarding my pay change with this move. Though my monthly housing allowance is bumped up significantly to 950 pounds a month ($1260 give or take depending on the day), unlike living in the US, I'm not allowed to save what I don't spend from this so I'm just going to be using the full amount for my home. I also get an additional allowance here specifically for utilities and from my understanding I can use any excess from that as I please, as well as an allowance for Cost of living adjustment as things are more expensive here generally speaking. These are all tax free so my taxable income should remain the same until February but the difference will be minimal. I'm unsure if I will receive any additional pay not mentioned as of right now but I'm too impatient to wait until I find out to post this. USAA's military pay calculator estimates I will make roughly $5200 a month with $1260 of it obviously being allowed for rent only.

Now to my question. I've read the Investment order post but be it from my inability to comprehend or truly needing a different order, I am here to ask about it. My priorities are early retirement (or at least having the freedom to do so without any worries) and being able to buy a home in cash when I get out of the military (assuming I can in fact stay in for 20). However I'm not sure how to go about maximizing my efforts in both goals. Maxing out my roth IRA and Roth TSP are certainly more plausible now with the increase in pay but it still doesn't leave me with much to put in a taxable account to save for the house. Maybe my thinking is misguided but a taxable account just seems like the easiest way to save for a house for 17 years and take out the money when it comes time to buy. So I guess my question is just how should I allocate my income? And is the investment order post appropriate for me? Thanks in advance.

P.S. If more information is needed, feel free to ask for more, and if I already gave to much, feel free to laugh at me :D

Travis

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Re: Investment order in my situation (Military, etc.)
« Reply #1 on: October 03, 2017, 10:00:44 PM »
I would caution against going the taxable account-only route for a couple reasons. The first is the TSP has the lowest fees in existence. Even if your pay doesn't rise high enough to need the tax-deferment from using the TSP for a few years, the expense ratio savings will add up over 17 years.  Are you in the window to go on the new retirement system and get the matching funds? If so, that will be a huge boost to your savings.  If you go that route, then at the bare minimum you should put in enough of your paycheck to get the match each month.

I also wouldn't have your heart set on cashing out and putting it all down on a house.  Even after you retire, your TSP funds will continue to grow after you've stopped contributing.  TSP funds can be slowly converted to an IRA after you retire, so if you've saved money there and in a more liquid account you could possibly tap the latter account while your TSP transfers over the course of a few years (someone smarter than me on the IRA conversion ladder chime in here).  You'll find plenty of debate on this forum about whether it's best to pay down a mortgage as fast as possible or pay it out over time with the strong possibility of those investment funds you're still holding onto continuing to grow.
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NorCal

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Re: Investment order in my situation (Military, etc.)
« Reply #2 on: October 03, 2017, 11:04:09 PM »
Here's how I would think about it.

Figure out how much (roughly) the house you want to buy will cost.  Assume that home will increase in price by about 3% annually for 20 years.  A $250K home today will probably cost ~$400K in 16 years.  Calculating this in Excel uses the formula =FV(3%,20,0,-250000,0).

Assuming your investments grow at 7%, you would need to invest ~$16K annually to buy a $450K house in 16 years.  Obviously, real returns on investments will be different, but you can adjust contributions up or down over time depending on how life goes.  You can then put everything else in the TSP (which is a good deal).  The formula to calculate this in Excel is =PMT(7%,20,0,-450000,0).  You can adjust the assumptions to fit your actual scenario.

I knew some people stationed in Germany who managed to get the full housing allowance even when they were paying less than the stated rate.  It fell somewhere in legal/ethical realm of gray area, but it is possible.

Back when I served, there was also an option to invest in a guaranteed 10% return savings account while in a war zone.  Do this if you ever end up near the two-way firing range.

Laura33

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Re: Investment order in my situation (Military, etc.)
« Reply #3 on: October 04, 2017, 06:54:56 AM »
First, remember that you can take out your contributions to a Roth IRA at any time, and you can take out up to $10K of earnings to buy your first home.  That will provide a significant chunk of cash that you can use to buy a house, if you so choose.

Second, you have the benefit of knowing your target RE date with a degree of certainty most don't have.  So take advantage of that to plan your investments over time to maximize your overall 'stache.  Sounds like you want both a 'stache to supplement your pension (which you are going to want to grow to last another 50-60 years), and a chunk of accessible cash @16 years from now for one-time use on a house.  So for the next 10-12 years, throw as much as you can at the Roth to build up your long-term 'stache -- the primary benefit of the Roth is that you get tax-free growth and withdrawals, which will help maximize your long-term 'stache, so you want to focus on that now so it has as many years as possible to grow and compound.  Then, when you are maybe 5 years out, take a look at your overall situation and figure out how much accessible cash you need to buy the house you want.  Divide that amount of money by the numbers of years you have left, and then each year put that amount into a regular taxable account instead of your Roth.  Since that is short-term money, put it in something like a money-market or CDs; the fact that it's a taxable account won't hurt you much at tax-time, because you're not looking for growth from that account.  Meanwhile, all the money you put in the Roth over the prior 10-15 years will continue to grow while you pile up your house fund.

Third, I second the notion that you may well not want to buy a house all in cash.  But since you don't actually have to start saving for that for many years yet, you don't have to make that decision right now.

Finally, don't sweat the details now.  You have many years to go, and it is very likely that your situation will change, your needs/desires will change, the tax laws will change, and the economy will change.  So rather than trying to foresee the future, just save as much as you can now, using the approach that current information suggests will maximize your returns (that would be throwing everything you can at tax-sheltered options).  Then, as things change, you can re-evaluate whether that approach still fits your goals and is still the best path to get you there.
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Sun Hat

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Re: Investment order in my situation (Military, etc.)
« Reply #4 on: October 04, 2017, 09:35:51 AM »
The only things that I'll add will be to self-insure against the possibility of not making rank to stay in to 20:

1) Look for a balance between being the very best and ensuring that your specialty isn't too niche. I particularly like the USMC idea of marine first, specialty second (I may be paraphrasing that wrong) it's a reminder to be and think like generalist soldiers first rather than as techies/widget operators). It'll ensure that you remain suitable for a range of positions at the higher rank.

2) Take any leadership training / mentoring opportunities available. Look around for inspirational leaders and observe for what makes their leadership style work. Don't be afraid to ask them about their approach (in private and don't be a suck up about it, just ask frankly). You want to become like the good leaders and not like the bad ones - learn the differences. If someone wants to mentor you - thank them and accept.

3) Take any education course that you're eligible for. Yes, it will require more work, but they're good for evaluations and civilian courses will open doors if/when you get out.

4) Choose a spouse carefully. If you marry someone who can't handle paying bills, handle emergency household repairs, and other stresses of having you away from home, then you're going to be an administrative headache. Marry an asset.

5) PT matters. Even for desk workers. Especially for desk workers who are evaluated by combat arms soldiers.

browne497

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Re: Investment order in my situation (Military, etc.)
« Reply #5 on: November 12, 2017, 03:50:41 AM »

**Update**

Thank you all for for your advice. A little update for the time being. I moved roughly $3500 from what was a little over $8000 in my savings to my Roth IRA to max that out for the year. I also upped my TSP contributions from 5% in the roth (I was previously only contributing 15% to retirement before I moved to the UK) to 6% traditional (just to prep for opting into the new blended retirement system and receiving
the 5% match) and 56% Roth. That's the most that I am allowed to contribute through the MyPay website. I'm not sure if this will be enough to max out the TSP for a year.

Also, I should point out that my reasoning for wanting to pay for a cash at the time of this original posting was that I was still a follower of Dave Ramsey's 'Baby Steps'. Being that he advocates for never borrowing unless on a 15 year or less mortgage and I didn't plan on buying a house for roughly 14 years (assuming I stay in service that long). I have since come to the dark side that MMM has swayed me
to by getting a 2.5% cash rewards credit card. So while buying a house in cash someday would still be cool. It's no longer the end all be all goal, though I still plan on using a 15 year mortgage or less with 20% or more down when the time comes. My question now ties into wanting to begin investing in a taxable account. Maxing out my IRA and TSP next year ($2000 a month) will take up around around 40% of my income. What I would like to know is how much liquid cash should I have at my disposal before beginning to invest in index funds in a taxable account. As it stands, I have around $4300 in my savings for emergencies. I don't see myself needing much for that purpose alone as I'm pretty well sheltered and taken care of by the Air Force against any road bumps in life especially being single. I guess I'm just asking for the green light to begin furthering my investments. Thanks again for your input and I look forward to more.

Bimmy

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Re: Investment order in my situation (Military, etc.)
« Reply #6 on: November 13, 2017, 09:58:46 PM »
To echo Sun Hat- I love the idea of staying to 20 years. A military retirement is an amazing thing. I had every intention of staying to 20 years. An on the job accident changed all of that for me. I was forced to separate. I would encourage you to acknowledge that plans change. Sounds like you are off to a good start. I would keep the savings up AND I would make sure you finish your CCAF and Bachelors while you can use tuition assistance.

 I graduated from American Military University. Excellent program. I know airman like to rag on the CCAF. These are often the same airman found taking a smoke break every half hour.

 

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Travis

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Re: Investment order in my situation (Military, etc.)
« Reply #7 on: November 16, 2017, 11:19:18 AM »

What I would like to know is how much liquid cash should I have at my disposal before beginning to invest in index funds in a taxable account. As it stands, I have around $4300 in my savings for emergencies. I don't see myself needing much for that purpose alone as I'm pretty well sheltered and taken care of by the Air Force against any road bumps in life especially being single. I guess I'm just asking for the green light to begin furthering my investments. Thanks again for your input and I look forward to more.

One of the great things about a secure and salaried job - your pay is virtually guaranteed for years.  I gradually reduced my emergency fund over the course of a year from an astronomical number to something I was more comfortable with as I analyzed what the fund was meant to cover.  I don't own a house, and I don't have anything that needs a cash buffer except for occasional plane tickets (somewhat predictable) and car repairs.  Since neither of these should be more than my next month's paycheck I finally felt secure keeping right about 2 month's pay in savings/checking.  I have the money I'm going to spend this month and as a buffer what I'll spend next month. If something big comes up I can dip into that fund and adjust my investing next month to compensate.  The credit card was a good move since if something truly big came up you have that credit line to cover it immediately and adjust your spending/saving over the next month or two to make up for it.  The catch of course is to make sure you're still living within your budget/means despite the credit available.  Feel free to experiment to find your comfort zone since it is half math and half emotional security.
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neverrun

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Re: Investment order in my situation (Military, etc.)
« Reply #8 on: November 19, 2017, 04:09:51 PM »
At your stage, I would ask myself what am I comfortable with as an emergency fund, along with what I would need it for.  I'd be comfortable with $5,000-$10,000 in your scenario because worst case scenario you will have investments/retirement you can also tap.

As far as TSP for next year, I know on the civilian side I can deposit a $ amount vs. a percentage.  Basic rule we get told is after 10% of pay, switch to the $ amount, especially in anticipation of the blended plan, the G matches by paycheck not total amount.