Author Topic: Introduction and Life Guidance - At the turning point  (Read 3121 times)

KOdelphia

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Introduction and Life Guidance - At the turning point
« on: January 14, 2017, 01:39:26 PM »
Hi everyone, and thanks in advance for the advice.  I'm 29, my wife and I have finally cleared out our college and dumb car debt, and I'm formulating my plan to get out of the game, and could use some perspective and advice.  I'm going to attempt to keep this a reasonable length, so please don't assume I'm asking everyone to do the work for me, but also, please assume I'm an idiot and educate me as much as you are up to. 

The wrinkle in my plan vs the typical folks on here is that I am an officer in the Military, and plan to do my 20 years and retire at 42-45.  Not exactly EER I know, but I love what I do, love serving, and I get these free world travel, health care and retirement benefits that I just don't want to give up.  So anyway, I'm 29, have just over 8 years in (commissioned 6 years ago but got this amazing deal where my last 2 years of college counted as enlisted and towards pay and retirement), and just recently got my debt and everything taken care of.  Make just over 100k annually, only 65 of which is taxable (rest is special pay/allowances), and my wife just got out of the navy, won't have a steady income for a year or so while we move and find her a job or she starts using GI bill, but has a masters in biology and will be fine.  If I retire as planned, I would make something in the range of 45-60k annually in retirement, and plan to buy a house with a ton of money down or outright +/- 3 years of that.  My wife and I have about 25k saved between the two of us, with 12k emergency fund as well(a little high, but we're moving in June.) 

My main question is about retirement investing.  I've been contributing a bit annually to my TSP, and have around 20k in it now, and a lot of military types are all about taking advantage of such a low expense rate investment method.  I'd like to stop working entirely once I retire, and I can't really touch that or the Roth TSP option until I hit retirement age, leaving me an 18 year gap.  I think the sensible plan for me is to just start plowing money into a slightly aggressive Index and bond portfolio with vanguard, in order to have my money work for me but still have at least some of it be available in 10-15 years.  My concerns are:

1) I've already got small amounts in my TSP and a Vanguard Roth IRA, am I being silly/overly risky in not continuing to invest there?  And should I take a tax hit and just pull them to my index investments, put more eggs in a basket instead of letting 2-4 small amounts slowly compound?

2) Will investing 10-15k now and 20% percent of income (about 15-20k a year) really net me that much: eg am I being too conservative in saving?  I ran investment caclulators, and putting in about 250k over the next 10 years nets me around 380-450 depending on the rate or return.  I'm hoping to save more, but I'm still working on converting the wife, and don't want to be over-optimistic.

3) What are the tax advantages or disadvantages I might be missing?  The biggest thing leading me to discount the TSP and Roth options a little lately is that I'm at the exact same tax bracket now that I would be getting with my retirement pension.  Taxes are my current research area and I haven't found anything that isn't ludicrously complicated that solves that problem for me.

Thanks a ton for any and all advice, and please feel no need to be polite, ask nasty questions or tear ideas up. 

Kevin

obstinate

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Re: Introduction and Life Guidance - At the turning point
« Reply #1 on: January 14, 2017, 01:51:50 PM »
From what I can tell, the worst case scenario for having to do an early withdrawal from a Roth TSP is that you pay ordinary income taxes on it.

http://www.fedsmith.com/2015/04/21/penalties-for-withdrawing-from-roth-and-regular-tsp/

That's not so bad if you're managing your income, and no worse than a post-tax account.

Laura33

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Re: Introduction and Life Guidance - At the turning point
« Reply #2 on: January 14, 2017, 06:09:29 PM »
No face punches required at all - you guys are off to an awesome start! 

On 1, there are folks here who know far better than I about options for early access to retirement accounts -- I would read through those blog entries/threads in detail before blowing off that option entirely.  Also remember, even if you can't access your TSP for the first 18 years of ER, that 18 years might be only 1/3 of your total planned retirement.  So even if you cover the first 18 years with taxable investments, you can still use the TSP for the 30+ years after that.

On 2, what is the delta between your pension and your desired ER income?  Hard to say whether your savings will be enough without knowing what kind of gap you are planning to fill.  You've got a great start at it -- debt-free before 30 and substantial pension in just 12 years!! -- but 12 years is also a really short timeframe for the power of compounding to help you, so it's a good idea to sharpen the pencil a little more. 

On 3, even if you don't get the tax bracket arbitrage, do not discount the benefit of tax-free accumulation and distributions.  If your choices are to pay capital gains every year and when you sell (regular taxable account), vs. not paying capital gains at all (Roth), why wouldn't you choose Door #2?

Finally, I know you didn't ask, but don't forget to save for periodic large expenses -- awesome job clearing the car debt, for ex., but you will need another car at some point; when you get that house, it will need a roof/boiler at some point, etc. etc. etc. 

lhamo

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Re: Introduction and Life Guidance - At the turning point
« Reply #3 on: January 15, 2017, 12:24:07 PM »
Run, don't walk, to this site, and get to know the founder, Doug Nordman (aka Nords), who posts here regularly.  He is awesome, and will take you surfing if you make it to Honolulu:

http://the-military-guide.com/

Goldielocks

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Re: Introduction and Life Guidance - At the turning point
« Reply #4 on: January 15, 2017, 01:07:42 PM »
My advice is to think of your retirement needs as three buckets:

A) Money needed once you are age 60 (or 65) and can access IRA retirement investments / Soc. Security, etc. --- Figure out how much you need saved to fund this phase of life.  Can be saved in IRA's and not touched, without worry about being locked away.  Pension and Soc. Security reduces the amount needed, maybe to zero.

B) Money you need between the age of 42-45 and age 60-65.   (Hint, you may not be able to excute a Roth conversion or backdoor if you have an excellent pension, so Roth and basic non tax deferred accounts may be needed)

C) Money you need now, until age 42 (may include plans for kids, or travel, or wife not working, etc).   This will show if you need to make more second income or if you can live larger than you are today.  The amount to be saved to fund A and B above need to be collected during this phase.

Good luck and Congrats on "I have finally cleared out our college and dumb car debt, "  !!!

KOdelphia

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Re: Introduction and Life Guidance - At the turning point
« Reply #5 on: January 15, 2017, 03:43:55 PM »
Thanks everyone!  I'm going to give a few quick replies then do my homework for some longer ones.  Addressing Goldielocks' B) and C) and Laura33's/my second part:  Really, we're pretty sure my pension (which should be 45-65k) will be enough or more than we need, and the idea brewing in my head is to grow a solid chunk of my money until now and 40-45 to make that easier, basically by buying a house or land around then.  We talked some more today and plan on putting at least the minimum of 5,500 in a Roth IRA under the wife's name, and putting at least a similar amount into my TSP, Roth or otherwise, so we're definitely not discounting it.  But like Goldilocks said, really between pension and social security we'd be at 71-100k a year, and with food retirement accounts it could easily go to 150-200, which quite frankly sounds like much more money than I know what do with.  In regards to the "didn't ask," definitely still appreciate it.  The military makes all that easier and harder - we'll be stationed in California then probably Japan, so I'll only be renting for a solid part of the rest of my career, and won't need a car for all of it, but I could always get stationed in the middle of nowhere Nebraska instead and things could change: that's kind of the basis of my idea of putting in aggressive index funds to keep my money slightly available, but to leverage my steady employment and inability to be a home-owning grown-up into an opportunity to grow my money.

I guess what I need to do is figure out or take a guess at how much money I will need for the 20 years in between and figure out the best path to get there, and what I need to do with my retirement accounts to best employ them then. If I'm sure I'd be good with the pension and ss past 60, I can come up with a bit of a spend-down plan for the middle.  I'll probably just assume something like 500,000 for a very safe high amount for house/property and work and renovations and other moving costs to spend right at retirement, and something like 20-30 for each year after that to be safe, bringing me to around 880,000 total.  I'll start figuring out something from that.  I definitely appreciate all the replies and anything else I didn't ask, please feel free to tell anyway,really appreciate anything.

Laura33

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Re: Introduction and Life Guidance - At the turning point
« Reply #6 on: January 16, 2017, 06:47:55 AM »
Thanks everyone!  I'm going to give a few quick replies then do my homework for some longer ones.  Addressing Goldielocks' B) and C) and Laura33's/my second part:  Really, we're pretty sure my pension (which should be 45-65k) will be enough or more than we need, and the idea brewing in my head is to grow a solid chunk of my money until now and 40-45 to make that easier, basically by buying a house or land around then.  We talked some more today and plan on putting at least the minimum of 5,500 in a Roth IRA under the wife's name, and putting at least a similar amount into my TSP, Roth or otherwise, so we're definitely not discounting it.  But like Goldilocks said, really between pension and social security we'd be at 71-100k a year, and with food retirement accounts it could easily go to 150-200, which quite frankly sounds like much more money than I know what do with.  In regards to the "didn't ask," definitely still appreciate it.  The military makes all that easier and harder - we'll be stationed in California then probably Japan, so I'll only be renting for a solid part of the rest of my career, and won't need a car for all of it, but I could always get stationed in the middle of nowhere Nebraska instead and things could change: that's kind of the basis of my idea of putting in aggressive index funds to keep my money slightly available, but to leverage my steady employment and inability to be a home-owning grown-up into an opportunity to grow my money.

I guess what I need to do is figure out or take a guess at how much money I will need for the 20 years in between and figure out the best path to get there, and what I need to do with my retirement accounts to best employ them then. If I'm sure I'd be good with the pension and ss past 60, I can come up with a bit of a spend-down plan for the middle.  I'll probably just assume something like 500,000 for a very safe high amount for house/property and work and renovations and other moving costs to spend right at retirement, and something like 20-30 for each year after that to be safe, bringing me to around 880,000 total.  I'll start figuring out something from that.  I definitely appreciate all the replies and anything else I didn't ask, please feel free to tell anyway,really appreciate anything.

Wow, if you're going to have a pension that alone is all you need, you're already killing it -- all of these other questions are good things to noodle through and figure out, but you're starting off 90% there.  The real key is going to be avoiding lifestyle creep with all of that excess cash/stipend -- your biggest risk is probably getting to your ER point and realizing that your're now used to living on $65K/yr (because you had all that extra income you didn't "need" to save because you had a pension), but your pension is $45K. 

Lkxe

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Introduction and Life Guidance - At the turning point
« Reply #7 on: January 17, 2017, 05:43:13 PM »
So when the CO (of my heart) was 29, we were at a similar place financially, but his oldest was 11 and our oldest was four. We owned a car, had paid off his student loans, but he had only had his commission for three years. Now at 47 he is retired (yep completely) on a 25 year pension of 60000 after federal taxes. I really can't tell you what you should do with all that extra money. We didn't have the TSP for the majority of his career and with the new improved GI bill and it's transferability we saved a large sum in three 529's we will not need ( one left maybe they will all get PHd's)

The real difference for us was on a Officer's salary and moving every 18 months ( never got two gigs in the same state) I never bothered to be anything but a student and a dependapotamus, and CFO. Woot for my kids (ten years apart) Our stache is really my in case the CO croaks before I get old fund. It could be higher but I'm fairly happy with the 500k we've got.

Ps There are no middle of nowhere Nebraska jobs left except Offutt (been there, it's nice but I'm from Illinois so used to the Midwest thing) And you won't have two tours in Pascagoula so lucky you. 


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« Last Edit: January 17, 2017, 06:03:10 PM by Lkxe »

Nords

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Re: Introduction and Life Guidance - At the turning point
« Reply #8 on: January 21, 2017, 10:50:51 AM »
Run, don't walk, to this site, and get to know the founder, Doug Nordman (aka Nords), who posts here regularly.  He is awesome, and will take you surfing if you make it to Honolulu:

http://the-military-guide.com/
Thanks, lhamo!

Look for the book in your base library, your local public library, or (possibly) your base family support center.  Some of the centers have been buying the book & pocket guide from GSA using command funds.  The last six months of sales were huge and next week I'm sending another large royalty donation to Fisher House Foundation.

The wrinkle in my plan vs the typical folks on here is that I am an officer in the Military, and plan to do my 20 years and retire at 42-45.  Not exactly EER I know, but I love what I do, love serving, and I get these free world travel, health care and retirement benefits that I just don't want to give up.
I hear that a lot, but I'd suggest that you take your career one obligation at a time and have a Plan B.  I realize you may be obligated even past the 10-year point (especially Air Force aviators) but your priorities can change-- or the fun could stop.

Stay on active duty as long as you're feeling challenged & fulfilled, but as soon as the fun stops then consider going to the Reserves or National Guard.  Don't grimly clench your jaw and commit to a far-off pension while risking your physical, emotional, and mental health.

The real value of the military pension is in its inflation adjustment and its cheap healthcare.  You can reach financial independence without any pension (let alone a military one) and if you do move to the Reserve/Guard then your assets only need to bridge the gap to that pension at age 60. 

Only one out of six servicemembers stays in the military long enough to earn a pension (even a Reserve/Guard pension).  Don't paint yourself into a corner for a pension that's over a decade away.  You have far more human capital than that, and you'll be able to achieve financial independence even without the military pension.

My main question is about retirement investing.  I've been contributing a bit annually to my TSP, and have around 20k in it now, and a lot of military types are all about taking advantage of such a low expense rate investment method.  I'd like to stop working entirely once I retire, and I can't really touch that or the Roth TSP option until I hit retirement age, leaving me an 18 year gap.  I think the sensible plan for me is to just start plowing money into a slightly aggressive Index and bond portfolio with vanguard, in order to have my money work for me but still have at least some of it be available in 10-15 years.
Yes, the TSP has the world's largest index funds with the world's smallest  expense ratios.  Vanguard & Fidelity are coming a lot closer these days, but the TSP is still lower.

Actually you really can touch that traditional TSP or Roth TSP after you leave the military, and it's easier than you'd expect. 

You essentially roll it to a traditional IRA and convert to a Roth IRA.  You roll the Roth TSP to a Roth IRA and wait five tax years.  The amount of the conversion can then be tapped tax-free and penalty-free.  Read more on this forum about the IRA conversion pipeline or read this post:
http://the-military-guide.com/early-withdrawals-from-your-tsp-and-ira-after-the-military/

If your spouse is completely out of the military (not in a Reserve'Guard unit) then she could also roll over her TSP to the equivalent IRA account and (if needed) convert it to a Roth IRA now.  You'd be that much further ahead on the conversion pipeline when you leave active duty.

You can also withdraw existing Roth IRA contributions at any time for any reason. 

Finally, when you have a high savings rate then you'll have substantial assets in taxable accounts to spend down while you're converting your TSP and IRA assets.

The key is to boost your savings rate.  Maximize your contributions to your Roth TSP (or traditional TSP when you're deployed), and maximize your contributions to your Roth IRAs.  Maximize your spouse's contribution to her 401(k) (or bridge career equivalent). 

All that income you've been dedicating to paying off your debts?  Now you can put it toward the TSP and IRAs.

1) I've already got small amounts in my TSP and a Vanguard Roth IRA, am I being silly/overly risky in not continuing to invest there?  And should I take a tax hit and just pull them to my index investments, put more eggs in a basket instead of letting 2-4 small amounts slowly compound?
Keep maximizing your contributions to those accounts.  Let them compound in there until it's time to roll them over and convert to a Roth IRA.

2) Will investing 10-15k now and 20% percent of income (about 15-20k a year) really net me that much: eg am I being too conservative in saving?  I ran investment caclulators, and putting in about 250k over the next 10 years nets me around 380-450 depending on the rate or return.  I'm hoping to save more, but I'm still working on converting the wife, and don't want to be over-optimistic.
Try to boost your savings/investment rate as high as possible.  For example, investing 40% of your gross income for about 15 years will get you to financial independence even without a military pension.  That's a full TSP contribution, two Roth IRA contributions, and investing even more in taxable Vanguard accounts.

Since you're on active duty with a relatively high probability of continued employment, you can invest in an aggressive asset allocation-- I recommend the TSP L2050 fund and the Vanguard total stock market fund.

3) What are the tax advantages or disadvantages I might be missing?  The biggest thing leading me to discount the TSP and Roth options a little lately is that I'm at the exact same tax bracket now that I would be getting with my retirement pension.  Taxes are my current research area and I haven't found anything that isn't ludicrously complicated that solves that problem for me.
You're right-- your military compensation is very lightly taxed, and you should use the Roth TSP and Roth IRAs as much as possible.  (You can use the tactics mentioned further up this post to tap the Roth IRA contributions anytime, and later to access the rolled-over Roth TSP funds that end up in your Roth IRA.)  However when you deploy to a combat zone with tax-exempt pay your taxes will be even lower, yet you'll maximize your Roth IRA contribution and put even more in your traditional TSP.

Another advantage to ending up with Roth IRAs is that you'll avoid the RMDs of the traditional TSP, the Roth TSP, and the traditional IRA.  That will simplify your life considerably during your later years.

As for the phrase "ludicrously complicated", I wouldn't bother with a 72(t).

Once you've had a chance to decide on your TSP & IRA plans, we can discuss the military's new Blended Retirement System.  In general, you should consider converting to the new BRS.  The calculators will be out later this month (DoD is beta-testing now) but the simple answer is that you'll have enough time for your DoD matching contributions to grow beyond the value of the portion of the current High Three pension that you'll give up.

lhamo

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Re: Introduction and Life Guidance - At the turning point
« Reply #9 on: January 21, 2017, 10:54:14 AM »
I told you Nords was awesome!

But Nords, I think you meant the TSP has the world's LOWEST expense ratios, not the LARGEST

Nords

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Re: Introduction and Life Guidance - At the turning point
« Reply #10 on: January 28, 2017, 11:01:29 AM »
I told you Nords was awesome!

But Nords, I think you meant the TSP has the world's LOWEST expense ratios, not the LARGEST
Yikes, you're fast.  I thought I'd edited that before anyone saw it...