Looking Forward: Military Officer

[edmunddashel]

CASE STUDY

Me = Age 30, PhD physical therapist.  Recently commissioned, O-3 officer.  Currently in an O-5 billet, staying in traditional retirement system.  I’ll need 20 years to retire.  I have a ton of student loans, which I will not pay for as long as I remain in the service.  My wife and I like working and have no desire to retire early. 

Current base pay = $48.5k plus $22k in tax-free income. 

If I retire in 20 years = If I retire as O-5, I’ll have a $53k/year pension (ending pay would be $106k/year plus $25k tax free income).  If I retire as O-6, my pension will be $61k/year and my ending pay will be $121k plus $25k in tax free income.

If I stay in 30 years= O-5 pension would be $82k/year, ending pay $109k + $25k tax free income.  O-6 pension would be $102k/year, ending pay of $136k plus $25k tax free income

Wife = Age 30, teacher.  Earns $45k/year.  Will retire in 20-25 years with an ending salary of $85k/year and will collect a pension of around $47k/year.

Question 1: Should we prioritize Roth or traditional accounts?  I was thinking Roth since I’ll be receiving tax-free pay (housing and subsistence allowances of around $25k/year) for as long as I work.  I’m currently maxing out my Roth TSP and a Roth IRA, slowly working on my wife’s 403b.

Question 2: Are target/lifestyle funds sufficient for allocation?  We are currently using these with a 80/20 split.  Considering the pensions we anticipate getting, would it be wise to be heavier in stocks?  We are risk tolerant, especially since we plan on working for several more decades.

Any other tips, suggestions, or advice would be appreciated!

[Travis]

I can't speak for the medical branch promotion rates, but in general I advise officers not to count on hitting 20 until they're damn close.  How do your taxes look?  I'm an O-4 with 18 years and contributing to traditional TSP keeps me in the 15% bracket, but if you're planning on continuing working you may want the fewer taxes on the back end by staying Roth since you'll have retirement income taxes, current job taxes, and eventually investment income taxes.  Staying heavy on stock indexes is a probably a good bet given returns and the odds of you making retirement.  If I make O-5 and retirement, then my portfolio becomes a second retirement package so more risk can be taken with it.

[MishMash]

You can't allocate your BAH or BAS towards the Roth 401k option in the TSP, they don't allow you to do it so you would be paying taxes on the base income at your current rate and contributing to the Roth from that.  Second Travis, you need to take a look at your tax situation.  For us we do pre tax while he's stateside, it keeps our Federal rate low (and kept us out of AMT zones for years). 

I wouldn't do a target date, your pension is pretty much your bond fund in retirement planning.  You are better off doing an allocation to the CSI funds, then adding 10% to the G fund if you want bonds.  The target date funds usually have lower overall returns due to the bond allocation.

If you deploy then immediately max out your contributions to the Roth 401k option as it will then be going in tax free, growing and coming out tax free.  You can also fund 5500 each to a regular Roth IRA each year too.

[edmunddashel]

I can't speak for the medical branch promotion rates, but in general I advise officers not to count on hitting 20 until they're damn close.  How do your taxes look?  I'm an O-4 with 18 years and contributing to traditional TSP keeps me in the 15% bracket, but if you're planning on continuing working you may want the fewer taxes on the back end by staying Roth since you'll have retirement income taxes, current job taxes, and eventually investment income taxes.  Staying heavy on stock indexes is a probably a good bet given returns and the odds of you making retirement.  If I make O-5 and retirement, then my portfolio becomes a second retirement package so more risk can be taken with it.

I completely understand your take regarding officers and pensions.  Without elaborating too much, I have a pretty nice setup.  Due to technological limitations, it is unlikely that I will relocate very often.  I have a small department, many of my colleagues are O-5 and O-6, and I have a lot of autonomy.  It feels more like a civilian position in many regards.  I'm pretty set on staying in for 20 years, even though I know most officers do not.  Things could change, as life happens, but I hope not.  I specialize in certain  procedures that are valuable to the military and can only be performed in a handful of locations.  I'm up for promotion in 2-3 years  and hopefully things go well.  Until then, I'll keep working hard and hope for the best. 

As far as the 15% tax bracket, with some of our side income that we bring it, we may be able to make it, at least for the next year.  We would be cutting it close.  If we can make that tax bracket next year, it wouldn't be something we would be able to do for long.

You can't allocate your BAH or BAS towards the Roth 401k option in the TSP, they don't allow you to do it so you would be paying taxes on the base income at your current rate and contributing to the Roth from that.  Second Travis, you need to take a look at your tax situation.  For us we do pre tax while he's stateside, it keeps our Federal rate low (and kept us out of AMT zones for years). 

I wouldn't do a target date, your pension is pretty much your bond fund in retirement planning.  You are better off doing an allocation to the CSI funds, then adding 10% to the G fund if you want bonds.  The target date funds usually have lower overall returns due to the bond allocation.

If you deploy then immediately max out your contributions to the Roth 401k option as it will then be going in tax free, growing and coming out tax free.  You can also fund 5500 each to a regular Roth IRA each year too.

Yes, I'm aware that only basic pay can be contributed.  I'm currently contributing the maximum to my Roth TSP in addition to my Roth IRA.  The odds of me getting deployed is rather low but, in case I do, I'll make good use of the Roth TSP.  I'll look into reallocating my TSP funds and I'm sure that question has been posted somewhere in these forums.  I'll have to get to searching.

[edmunddashel]

I appreciate the feedback I've received so far.  I welcome any and all additional guidance you all can provide me.  Thank you in advance.

[Sailor Sam]

Your predictions for retirement pension seem oddly high. Are you factoring inflation or COL in? If so, what's your formula?

Answer 1: You'll probably spend most your career in the 15% tax bracket on gross income, thanks to the hefty tax free allocations. At that tax percentage, most advisors say the choice between Roth and traditional accounts is pretty much a crap shoot and a coin toss. Do whatever feels right, then hope.

Answer 2: I personally use the L2050 fund, and use my after tax accounts to keep my overall allocations at 90/10. I started in the L2040, and switched when the new one came out. I'll probably switch to the L2060 when it comes out.

Advice: spend your career hoping the pension will happen, but saving like you'll never see a penny. I've seen some really good careers fizzle, or end with a horrific bang. It takes not just skill and determination to make 20 years, but also a good pinch of luck.

So good luck!

PS: did you enjoy knife and fork school?? ;)