Author Topic: Critique my thinking/plan  (Read 626 times)

browne497

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Critique my thinking/plan
« on: May 09, 2019, 06:34:18 AM »
I want to know what everyone thinks about an idea I'm thinking about acting on. Within the next 2 years, I should have retirement investments worth around $100k. Once I hit that mark, if my math is correct, by the time I'm 65 just from compounding alone, even if I don't contribute another penny (which I probably still will to some extent) I'd have over $2 million (assuming 10% avg. return before inflation) by the time I'm 59.
I'm also active duty military and am 15 years away from retiring and receiving a lifetime pension of around $1600 (adjusts over time) a month would more than cover my expenses with a paid for house. That's where my question lies.
Once hitting that $100k mark, I would like to begin saving up cash for a house. I change my mind about where I want to live all the time but let's say NW Arkansas for the purpose of this post. I won't be living in NW Arkansas at least until I get out of the military so if I buy a house there, it would likely be a rental property.
Do you guys think it would be a good idea to cut down on investing and save up to buy a house and have it paid for by the time I retire from the military? Or would you recommend that I continue maximizing my tax-advantaged accounts and worry about buying a house when I begin withdrawing money from them and collecting my pension?
« Last Edit: May 09, 2019, 06:36:59 AM by browne497 »

Loud Noises

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Re: Critique my thinking/plan
« Reply #1 on: May 09, 2019, 06:46:40 AM »
Not that it changes your plan, but I would project something closer to 6 or 7% returns before inflation.  It may very well be 10%, but such an optimistic number during the planning process could cause you to save too little.

On the house, I wouldn't start building cash for that yet.  A lot can happen in 15 years.  When you're 5-7 years out, reassess.

Stimpy

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Re: Critique my thinking/plan
« Reply #2 on: May 09, 2019, 07:54:44 AM »
I agree with Loud Noises on the returns.   It's always better to assume a lower percent and have too much then to have a high percent and too little.

As for the house, personal opinion.  Invest in a taxable account for the first 8-10 years just for the house(or other possibilities as stated, things can change in 15 years).  And yes there are taxes involved BUT it all would be long term.   Plus your money won't just be sitting on the sidelines watching. 

Also as stated, at the 5-7 year mark, reassess your plans and see what you want and go from there.  The last 5-7 years you can either keep saving for the house, or do what ever you decided to do. 

Andy R

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Re: Critique my thinking/plan
« Reply #3 on: May 09, 2019, 08:41:54 AM »
Why are you even mentioning nominal terms at all.
The 10% you are referring to has historically been 4% inflation and 6% real.
So in the time it takes to go from 100k to 2mil nominal, it would only have grown to 625,000 in real terns of buying power.
I mean what is the point of even saying the number "2 million" when in terms of what you can buy with it, it will really be only 625,000.

Now that you have seen the real number, how does that fit in with your plan?

BicycleB

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Re: Critique my thinking/plan
« Reply #4 on: May 09, 2019, 09:36:18 AM »

Do you guys think it would be a good idea to cut down on investing and save up to buy a house and have it paid for by the time I retire from the military?

To me, "investing" and "save up to buy a house" are the same thing. Either way, you are setting money aside instead of spending it. While you wait to buy the house, you invest the money you have saved.

As to whether to buy a house now or after retirement, I think that buying a house now when you're going to be stationed all over the world at Uncle Sam's whim is more work than it's worth. You'll probably make just as much money from financial investments, so you don't need the house from an investing standpoint.

By the way, the Military Guide to Financial Independence discusses many topics like this. The book and the website are both written by @Nords, a Mustachian and longtime military member.

https://the-military-guide.com/
https://the-military-guide.com/dont-buy-home-active-duty/

ILikeDividends

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Re: Critique my thinking/plan
« Reply #5 on: May 09, 2019, 04:50:25 PM »
I won't be living in NW Arkansas at least until I get out of the military so if I buy a house there, it would likely be a rental property.
I would think long and hard about this wrinkle in your plan.  Rental properties don't manage themselves, and finding a fee-based property manager worth a sh*t is hit and miss, at best.  By the time you realize you struck a "miss" it will be too late.

What will you do if your property manager just walks away from the deal after the first hiccup?  It happened to me, and they left me high and dry.  Turns out the contract doesn't really obligate them to do much of anything other than try to rent your place out and collect the fee you are obligated to pay for as long as they choose to remain engaged.

What if you have to do an eviction?  Place a new tenant while remaining in compliance with Federal and State fair housing laws?  Comply with local rent control or other regulations?

How will you manage repairs?  Neighbor complaints?  You name it.  Anything can happen, and if you're not in the area, the problems--whatever they might be--won't just go away.  They typically just get worse if left unattended over time.  Think leaky roof, busted water pipe, delinquent tenant, etc.

When my last house was first built, the crew unknowingly drove a nail into a water pipe during construction.  The nail plugged the hole, so no one knew about it.  It took 30 years for that nail to rust away and for the pipe to spring a leak that pretty much sunk my downstairs bathroom into the ground.  It had to be completely gutted and rebuilt, starting at the frame, after the leak was fixed.

Managing those problems remotely can be tricky, at best, doubly tricky if the property is vacant when the problems arise, and certainly more expensive to deal with than if you are local.  Just granting access to repair people becomes a non-trivial problem if you are not there to unlock the front door for them.  Inspecting their work, afterwards, to make sure they actually did what you needed them to do, is equally challenging from afar.

And, of course, in the worst scenarios, your property is only generating unexpected expenses and no income.  So there's that, too.

Personally, even if I intended to manage rental properties after a military career, I certainly wouldn't venture into that space for the first time if I were living outside of the area.  It's not at all a passive investment.

In my experience, property managers are sales people first.  They will tell you anything to get you signed on.  But they are only actual property managers for as long as nothing of any consequence goes wrong.  Then they simply return your keys and walk away when you need them most.  If you don't have a viable backup plan for dealing with all possible contingencies yourself, I wouldn't even contemplate doing this while you are in the service.

And unless it's truly a passion of yours, a 2nd career that you really want to actively pursue, I wouldn't do it after your service, either.
« Last Edit: May 09, 2019, 11:38:16 PM by ILikeDividends »

Nords

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Re: Critique my thinking/plan
« Reply #6 on: May 09, 2019, 11:48:48 PM »
Thanks for the tag, @BicycleB

I want to know what everyone thinks about an idea I'm thinking about acting on. Within the next 2 years, I should have retirement investments worth around $100k. Once I hit that mark, if my math is correct, by the time I'm 65 just from compounding alone, even if I don't contribute another penny (which I probably still will to some extent) I'd have over $2 million (assuming 10% avg. return before inflation) by the time I'm 59.
I’m not going to join the debate over percentage points of long-term stock market returns, but it’s worth converting your analysis to real dollars.  If you keep all of your inputs as numbers after inflation (for example 6%-7% APY instead of 10%) then your spreadsheets stay in today’s (real) dollars. 

As others have mentioned, you don’t have to keep adjusting your results for inflation.  Your numbers at age 65 will seem a lot more reasonable to your current spending instead of looking like Monopoly money after four decades of inflation.

I'm also active duty military and am 15 years away from retiring and receiving a lifetime pension of around $1600 (adjusts over time) a month would more than cover my expenses with a paid for house. That's where my question lies.
I see this sentiment a lot, and let me kill the buzz by pointing out that this is far more unlikely than you estimate.  You’ve probably already seen the statistics.  I get the unhappy e-mails from military families who are experiencing those statistics.

Instead of setting yourself up to gut it out to 20, keep working on your FI plans now as if you won’t get a pension.  If you continue a savings rate of at least 40% of your gross income then you’ll reach FI in the next 10-15 years even without an active-duty pension.  Better still, it gives you the flexibility to decide whether to stay in uniform.

(By now about 300 other forum members can practically recite the next couple paragraphs from memory.)

I’d suggest that you take it one obligation at a time.  Stay on active duty as long as you find it challenging & fulfilling.  When the fun stops then consider leaving active duty for the Reserves or National Guard.  They offer more of the enjoyable aspects of military life (like camaraderie and shared value) without so much of the sucky parts. They’re almost always a better work/life balance than active duty.  Better yet, if you enjoy drilling out to a Reserve pension then your FI assets only have to bridge the gap until your military pension starts (around age 60).

Learn as much as you can about those options now so that if the time comes then you can be confident in your decisions without having to ramp up a steep learning curve.  When bad things happen (drawdowns, diseases, injuries, accidents, disabilities, combat) then you’re already in a position of financial strength without having to depend on a military pension.

Do you guys think it would be a good idea to cut down on investing and save up to buy a house and have it paid for by the time I retire from the military? Or would you recommend that I continue maximizing my tax-advantaged accounts and worry about buying a house when I begin withdrawing money from them and collecting my pension?
This is more of an asset-allocation decision. 

Although you could save up cash for a house, your low returns on cash would be a drag on your portfolio’s overall compounding.  I think it’s also very difficult (and risky) to do a good job of buying a home even right after you leave the military, let alone while you’re on active duty.
https://the-military-guide.com/dont-buy-home-active-duty/
https://the-military-guide.com/dont-buy-home-leave-active-duty/

Instead I’d keep living on base, or renting and house-hacking with roommates.  Continue to maximize your contributions to your TSP and your IRA, and put even more in taxable accounts. 

When you predict that you’re <10 years away from buying a home, then you can start shifting some of your assets to I bonds or a TIPS fund or a short-term bond fund.  As you get within 3-5 years then you’d go to CDs. 

Once you leave the military and you’ve rented for another 12-18 months, you’ll have a pretty good idea of where you’ll live for the long term (at least five years).  You can start researching the area and identifying neighborhoods, then wait patiently for a distressed seller.

Maybe you’d want to pay for the entire purchase in cash (and negotiate a substantial discount), but you could also simply save up at least a 20% down payment.  You could take a 30-year VA loan for the balance and then pay it off (with extra principal payments) on a 15-year amortization schedule.

Full_Beard

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Re: Critique my thinking/plan
« Reply #7 on: May 10, 2019, 01:04:40 AM »
I'll echo the chorus - 10% isn't very realistic. Older but informative chart:

http://archive.nytimes.com/www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html

As far as I know, it hasn't been updated, but the point that people over estimate their returns when, in fact, the best 20 years in history returned 8.4% (after inflation) suggests you'd be wiser to plan on 5% or 6% and keep socking it away.