Author Topic: Military Family-investing for dummies  (Read 4675 times)

inthenavy

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Military Family-investing for dummies
« on: March 10, 2014, 07:14:48 PM »
Hello,

I am a military spouse looking for some wisdom as my husband I learn how best to invest his hard earned money.  Forgive me if these questions have been posed before- I have a newborn baby and a deployed husband living away from friends and family (=exhausted!). 

My husband and I are 29.  We got serious about our finances when we discovered I was pregnant one year ago, and ended up paying off over 60,000 debt this January.  Things really kicked into high gear in October when I discovered this blog, it changed our lives, thank you all.  Now that I am on unpaid maternity leave, our take home is about 4600 a month.  (I plan on resuming work part time when my daughter is one until she enters kindergarten, then probably work full time, I'm an SLP)  We are putting 1500 a month in a Roth TSP in order to max that out at 17500 this year.  We only have a little more thank 6k for our retirement so far, so we have a lot of catching up to do.  Our goal is to be close enough to FI that my husband can retire from the military in 14 years, he is a rescue swimmer and I just can't have him jumping out of helicopters at 45! 

I am pretty confident that right now our spending is sufficiently mustachian (except our electric but that's another post), but my question is how to invest our leftover money each month, which is about 1400 after deducting 1500 for the Roth TSP.  Our take home pay will decrease to about 4000 when he returns from deployment in a couple months.

So my questions with ~1000-1500 "extra" per month" with 1500/mo already going towards roth tsp:

1) how do we invest for a mid-term goal like 15-20 years?   We want to have enough money to buy a fixer upper and renovate it with cash. (250k in todays dollars?? a guess), Like most military, we move every 2-3 and everything I have read indicates that buying a house in the military is a gamble, so we rent a modest 2 BR for 950.  We have about 5k from our tax refund to open a brokerage account at vanguard but that's where my knowledge ends, any fund suggestions?

2) Should we fund roth IRAs before investing for a house or do both simultaneously?  I feel like we are so behind in retirement savings that we should fully fund our roths first, but I'll do whatever is best.

3)Does anyone have any experience using the GI bill for their children?  My husband already has his BA and doesn't need another degree.  We only plan on having one child, though Im open to the possibliity of having 2.  My husbands GI bill will cover all of the expenses for one child (though my husband thinks he has two GI bills, which I'm still trying to figure out).  Dave ramsey suggests you don't invest in a 529 if you have a GI bill, but instead invest in a taxable mutual fund just in case they change the legislation, so that's another mid-long term goal, approx 19 years.

Thank you for your help and for reading this, now I have to go wash a boatload of dirty fuzzi bunz...

*edited because I didn't estimate the expense of our housing costs. Let me know if I left anything else out



« Last Edit: March 10, 2014, 07:26:25 PM by inthenavy »

Nords

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Re: Military Family-investing for dummies
« Reply #1 on: March 11, 2014, 12:08:19 AM »
I love rescue swimmers-- I served with a submarine-qualified independent-duty corpsman who started out as a rescue swimmer.  He has a chestful of ribbons & medals but unfortunately he's earned every one of them.  Today he's happily retired and a ponytailed goateed biker in Las Vegas.

But I digress.

My first suggestion is to figure out your asset allocation.  You should work through the Bogleheads Wiki to confirm your goals.  (http://www.bogleheads.org/wiki/Main_Page)  Then you should figure out how much you want to invest in equities and how much you want in other assets.  My opinion is that if you're earning a steady military paycheck (and perhaps someday getting a military pension) then you can afford to be aggressively invested in equities.  Of course if you're a new investor then you also have to decide how to handle your risk tolerance and market volatility, so you might want to be less aggressive in equities.  If you're saving for a goal that's less than a decade away (a rental down payment?) then you might want to use a short-term bond fund.

The asset-allocation wiki has a lot of "Well, duh" moments, but it's intended to make sure that you cover all of the concerns.  Putting together an "investment policy statement" helps you commit to your choices and sleep well at night.  Otherwise you're randomly picking funds from a bunch of dart-throwing monkeys on Internet forums.

Speaking of dart-throwing monkeys:  once you decide on an asset allocation, you could put most of it into the TSP's C, S, or I funds-- or the L2040/L2050 funds.  In the Roths you could use Vanguard's total stock market fund and (as you get closer to buying the real estate) Vanguard's total bond market index fund.  My spouse and I have military pensions, and those cover most of our expenses, so we have all of our TSP account in the S fund.  When my daughter opens her TSP account in a couple months, she's putting her money into the S & I funds because of their low expense ratios. 

From the military perspective, you're right:  you want to max out the Roth TSP, and then try to max out both of your Roth IRAs.  If your spouse is deployed to a combat zone (with tax-free pay) then you should try to contribute to the traditional TSP all the way up to your IRS limit of $52K (!), but that's only available when he's getting the tax-free pay in a combat zone. 

You're also right to rent, unless you want your next transfer to make you accidental long-distance landlords.  Since you may not be buying a home for at least the next 10 years, you could start out with an aggressive asset allocation in mostly equities, and then dial it back with a short-term bond fund and CDs as you approach the purchase date.  If you do that in the Roth IRAs, then you could withdraw the contributions at any time as well as an extra $10K for a first-time home purchase.  Once you're 2-4 years away from a home purchase, you could cut back on TSP/Roth contributions and start piling up cash in CDs (in a taxable account at a credit union) for a down payment.

Dave Ramsey, to put it politely, knows little about military benefits.  If the GI Bill program is changed, your spouse's GI Bill eligibility will be grandfathered and he'll also have the option of switching over to the new deal.  There are other reasons to not invest in 529 accounts, but if you're having more than one child then the odds of using the 529 are much higher.

Stay open to the possibility of using your GI Bill for you parents.  If you guys use the GI Bill for an advanced degree, your higher earnings will allow you to contribute far more to a 529 account (or a taxable college savings account) than the GI Bill is worth.  In other words you parents may get a higher ROI out of the GI Bill than your kids.

MustachianAccountant

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Re: Military Family-investing for dummies
« Reply #2 on: March 11, 2014, 01:56:56 PM »
Wow, funding your Roth TSP with combat pay is financial hackery of the highest order. Well done!

Nords

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Re: Military Family-investing for dummies
« Reply #3 on: March 11, 2014, 03:57:10 PM »
Wow, funding your Roth TSP with combat pay is financial hackery of the highest order. Well done!
As I understand the conventional TSP and its management, this is about the only way to be able to roll over the tax-free TSP contributions to a Roth IRA without losing the "tax-free tracking". 

The TSP website says that TSP transfers (rollovers or withdrawals) are done on a pro-rata basis between tax-deferred and tax-free contributions.  In other words you can't pull only your tax-free contributions out of the TSP, and you can't pull all of your tax-free contributions out of the conventional TSP unless you pull everything out of the conventional TSP.  Even after a TSP rollover to a conventional IRA, the process of converting that conventional IRA to a Roth IRA is greatly complicated by those tax-free contributions.  I'm not sure IRS Form 8606 can track that particular basis, and I'd hate explaining the difference between the 1099-R and my tax return to an eagle-eyed IRS computer.

However if all tax-free pay from a combat zone is contributed to the Roth TSP, then it can all (someday) be rolled over to a Roth IRA in one step.  The downside to this is that the tax-free combat zone pay annual contribution limit to a Roth TSP is $17,500 instead of the IRS elective deferral limit of $52K.  However if I was "lucky" enough to bump into this limit (hey, you're in a combat zone...) then I'd max out the Roth TSP with tax-free pay first and continue dumping the rest of the tax-free pay into the conventional TSP.

I'm not a CPA or a CFP or even a CFA.  If any of you understand why the rules are this way (or have the experience of a TSP rollover involving tax-free pay from a combat zone) then please share your experience/advice.

inthenavy

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Re: Military Family-investing for dummies
« Reply #4 on: March 11, 2014, 08:13:18 PM »
Thank you so much for your thoughtful response, sir!  At my urging, my husband is reading your book and I will when he returns.  He will be thrilled you like rescue swimmers.
 
He is deployed in a combat zone; and will be for the next 1-2 months.  Am I correct in understanding that TSP contributions can only be made through elective deferrals, so that we canít for instance, use our tax refund to fund the TSP?  In that case, would it be wise for him to put his entire remaining 3 or so paychecks into his roth tsp (approx 6,000)?  We arenít close to maxing it out this early in the year, we were planning to by December but I see now that we need to take better of advantage of his temporary tax free status.  I had money set aside to open a roth ira but we can live on that until he leaves the combat zone. 

Right now our TSP allocation is: 50% S, 25% I, and 25% C.  I will be sure to do more reading on bogleheads and your website to learn more about asset allocation. 

I am intrigued by your idea of using roth ira contributions for a home fund.  We want to buy our home outright in cash since we have so much time to plan ahead, and by my calculations in 15 years (11,000*15 + 10,000) we would have about 175,000 tax free which probably wonít be enough but it would be a great start.  You would suggest CDs instead of a taxable account to make up the 100k or so difference?  I may be confused but thank you for cluing me into the first time homebuyers exemption.  Do you think I can be fairly confident that will be available in 15 years? 

I enjoy my work as a speech therapist so I know I wonít need the GI bill, and my husband plans to stay in for 20 years but we should probably consider the possibility that he could go to trade school or something  if he just canít do 14 more years of active duty.  I think he will though, weíre tough.  (although it is funny, sometimes I worry more about him riding a bike than I do in combat!)

Thank you for your ministry to the troops! We need it.

Nords

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Re: Military Family-investing for dummies
« Reply #5 on: March 12, 2014, 06:30:43 PM »
He is deployed in a combat zone; and will be for the next 1-2 months.  Am I correct in understanding that TSP contributions can only be made through elective deferrals, so that we canít for instance, use our tax refund to fund the TSP?  In that case, would it be wise for him to put his entire remaining 3 or so paychecks into his roth tsp (approx 6,000)?  We arenít close to maxing it out this early in the year, we were planning to by December but I see now that we need to take better of advantage of his temporary tax free status.  I had money set aside to open a roth ira but we can live on that until he leaves the combat zone. 
Payroll deductions to the TSP are the best way to contribute.  And, yes, he should try to put as much of his remaining paychecks into the Roth TSP as possible.  I think MyPay will let him set the deduction at 92% (the other 7.45% is reserved for FICA).  If you overshoot the contribution limits via MyPay then the TSP will not accept the excess and will return it via DFAS on the next Leave & Earnings Statement.

For example, our daughter will be commissioned in a couple of months and she's scoring some pretty hefty cash graduation gifts.  She's going to try to max her 2014 Roth TSP contributions by setting her MyPay deduction at 92% while she lives off the cash gifts.  (Her two-week paychecks for the rest of 2014 will be something like $120 plus BAS.)  This way she can effectively put most of her gifts into a tax-sheltered account without being tempted to buy a 2015 Tesla.

It's possible to roll a conventional IRA (deductible contributions) over to the TSP, although that may not be a good idea.  I don't know whether it's possible yet to roll a Roth IRA over to the Roth TSP, and that type of transfer may have tax-code issues. 

You can't contribute to the TSP from a tax refund, but you can divert your tax refund to the TreasuryDirect.gov website to buy I bonds.  Of course if you're getting a tax refund in the first place then you might want to consider adjusting your withholding.  But if the refund is caused by an event like a deployment then you may not need to adjust anything.

Unlike TSP deductions (which have to be done from that month's pay or not at all) you have until 15 April 2015 to make a 2014 Roth IRA contribution.

I'm pretty sure that your spouse can also contribute his sea pay, rescue diver pay, and any other specialty "pay" into the TSP.  I believe that he can also contribute any re-enlistment bonus directly into the TSP in a lump sum, but he'd have to check with a military CFP on that one.  You can probably find one at your base's family support center or Navy-Marine Corps Relief Society.

Right now our TSP allocation is: 50% S, 25% I, and 25% C.  I will be sure to do more reading on bogleheads and your website to learn more about asset allocation. 
If you're comfortable with that asset allocation then you're good to go.  The Bogleheads wiki may improve your vocabulary but it might not change your mind.  You can be heavy in equities (and light in bonds) because you're receiving a military paycheck.  One advantage of being heavy in the S & I funds is that their financial-industry equivalents tend to have much higher expense ratios.  The C fund expense ratio is still cheaper than the financial industry, but not by such a wide margin.

Here's some blog posts:
http://the-military-guide.com/2010/12/30/tailor-your-investments-to-your-military-pay-and-your-pension/
http://the-military-guide.com/2012/04/25/how-much-will-military-veterans-leave-on-the-table/
http://the-military-guide.com/2013/08/15/maximizing-tsp-contributions-from-a-combat-zone/
http://the-military-guide.com/2011/03/21/asset-allocation-considerations-for-a-military-pension/

I am intrigued by your idea of using roth ira contributions for a home fund.  We want to buy our home outright in cash since we have so much time to plan ahead, and by my calculations in 15 years (11,000*15 + 10,000) we would have about 175,000 tax free which probably wonít be enough but it would be a great start.  You would suggest CDs instead of a taxable account to make up the 100k or so difference?  I may be confused but thank you for cluing me into the first time homebuyers exemption.  Do you think I can be fairly confident that will be available in 15 years? 
The Roth IRA is a great place to save up for a home purchase (or for any situation where you think you'll be withdrawing contributions later) because those contributions are working full-time to compound your tax-free investments.  However you can only put $11K/year per couple in Roth IRAs, so you need to save more in taxable accounts. 

Aside from the accounts, you need to keep an eye on the asset allocation.  Investing in equities is great when you don't need the money for at least 10 years.  Money that you need during the next 5-10 years is perhaps better invested in short-term bonds, although you could squeeze the volatility envelope by investing in higher-yielding (riskier) bonds or delay cashing in the equities for a year or two.  Once you're inside five years then you should be moving to CDs-- and if you try to squeeze a little extra performance inside the three-year window then you're just taking too much risk.

I can't predict whether the first-time homebuyer exemption will still be around in 15 years.  However that's "only" $10K, and you'll have plenty of warning if it goes on the chopping block.  I think even Congress is smart enough to not mess with it.

captainawesome

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Re: Military Family-investing for dummies
« Reply #6 on: March 13, 2014, 11:33:23 AM »
Nords - not mean to detract from the great points above, but I'm curious why for military members the recommendation is default to roth.  I get why when in a combat zone, but wouldn't military members looking to retire at 20 years (or earlier) benefit from the strategy of investing in traditional TSP and IRAs, and converting them later when theoretically in a lower tax bracket (living off pension?)  As a single JO I always put money in roth, but now that I am married, like the OP we are trying to maximize our retirement investments between the two of us so that I can retire at 40 comfortably. 

Nords

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Re: Military Family-investing for dummies
« Reply #7 on: March 13, 2014, 09:47:38 PM »
Nords - not mean to detract from the great points above, but I'm curious why for military members the recommendation is default to roth.  I get why when in a combat zone, but wouldn't military members looking to retire at 20 years (or earlier) benefit from the strategy of investing in traditional TSP and IRAs, and converting them later when theoretically in a lower tax bracket (living off pension?)  As a single JO I always put money in roth, but now that I am married, like the OP we are trying to maximize our retirement investments between the two of us so that I can retire at 40 comfortably.
My answers above focused on the Roth TSP because of the combat zone tax-free pay, and mostly because it's a lot easier to roll over the tax-free contributions when they're in the Roth TSP.  And as you note, taxes aren't an issue when the pay is coming from a combat zone.

The theory behind a Roth TSP contribution is that most servicemembers are in a low tax bracket now, so they'll get their lowest/best tax impact right now by contributing to a Roth TSP.  (An added bonus of that tactic is avoiding the political risk on what tax brackets may be 20 years from now when they try to do a rollover and a Roth conversion.)  But this theory is founded on the (flawed) logic that most veterans will keep working until their mid 60s.

Depending on your expenses, as an officer you may quickly lose the deduction for contributing to a conventional IRA-- so you might as well contribute to a Roth IRA in the first place.  And if your spouse is earning a healthy income too then the two of you may be locked out of Roth IRA contributions, so now you're jumping through the hoops of backdoor Roth IRA conversions.  Good problems to have.

If you retire from the military in your 40s to an active-duty pension and start a bridge career-- most especially as an officer but even as a mid-grade enlisted-- then you're probably starting in the 25% tax bracket.  You're not going to be able to take advantage of converting your TSP to a Roth IRA until you get rid of that pesky paycheck.

If you no-foolin' retire in your 40s on a military pension and don't start a bridge career, then the tax advantage of the "conventional TSP --> conventional IRA --> Roth IRA conversion" may still not last very long.  My spouse and I were in the 25% bracket during our working years, and then we dropped into the 15% bracket when I retired on my pension.  I started converting our IRAs to Roths whenever I could-- up to the top of the 15% bracket.  I wanted to let the TSP balances grow (at the world's lowest expense ratios, particularly for the S & I funds) while I fiddled with the conventional IRA conversions.

My military pension's COLA has added 27% during the last 12 years.  But a funny thing has started happening during the last few years:  our rental property income and our interest/dividend income have taken off.  When I get going on our 2013 tax returns, I'm probably going to find out that we're already at the top of the 15% bracket-- and that might be after itemizing deductions, too.  My spouse's Reserve pension starts in just seven more years, and I still have a little of my conventional IRA to convert before I even get started on rolling over her TSP.  It's worth converting in the 25% bracket anyway, because if this keeps up then in seven years we're going to be nudging the 28% bracket.  Again-- good problems to have.

However if you retire in your 40s and you're doing it only on your investments (no military pension) then you're absolutely right:  you have a 20-30-year window to roll over your TSP and convert it to a Roth IRA.  You may even be able to do it below the 15% bracket.  I happen to have a post coming up on 20 March which will address that exact topic, and it's a honkin' 3200 words on early withdrawals + the Roth IRA conversion ladder.

Here's the irony of the behavioral psychology phenomenon of loss aversion:  we plan to avoid failure and we're not so ready to handle success.  When a retirement calculator gives us a 95% success rate, we immediately start to fret about eliminating the 5% failure possibility.  I think that's appropriate but we should also make sure we have a plan for what happens when the 95% results in more money than we need. 

For the few of you dual-military couples out there who are heading for at least one military pension:  don't worry about the 5%.  If you save aggressively for financial independence on two military paychecks then your success rate is much more likely to be about 99.5%.  Not only is that my personal experience, but it's the experience of a dozen other dual-military couples who have shared their stories.

Chris86

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Re: Military Family-investing for dummies
« Reply #8 on: March 14, 2014, 09:10:51 AM »
Hello,

I am a military spouse looking for some wisdom as my husband I learn how best to invest his hard earned money.  Forgive me if these questions have been posed before- I have a newborn baby and a deployed husband living away from friends and family (=exhausted!). 

My husband and I are 29.  We got serious about our finances when we discovered I was pregnant one year ago, and ended up paying off over 60,000 debt this January.  Things really kicked into high gear in October when I discovered this blog, it changed our lives, thank you all.  Now that I am on unpaid maternity leave, our take home is about 4600 a month.  (I plan on resuming work part time when my daughter is one until she enters kindergarten, then probably work full time, I'm an SLP)  We are putting 1500 a month in a Roth TSP in order to max that out at 17500 this year.  We only have a little more thank 6k for our retirement so far, so we have a lot of catching up to do.  Our goal is to be close enough to FI that my husband can retire from the military in 14 years, he is a rescue swimmer and I just can't have him jumping out of helicopters at 45! 

I am pretty confident that right now our spending is sufficiently mustachian (except our electric but that's another post), but my question is how to invest our leftover money each month, which is about 1400 after deducting 1500 for the Roth TSP.  Our take home pay will decrease to about 4000 when he returns from deployment in a couple months.

So my questions with ~1000-1500 "extra" per month" with 1500/mo already going towards roth tsp:

1) how do we invest for a mid-term goal like 15-20 years?   We want to have enough money to buy a fixer upper and renovate it with cash. (250k in todays dollars?? a guess), Like most military, we move every 2-3 and everything I have read indicates that buying a house in the military is a gamble, so we rent a modest 2 BR for 950.  We have about 5k from our tax refund to open a brokerage account at vanguard but that's where my knowledge ends, any fund suggestions?

2) Should we fund roth IRAs before investing for a house or do both simultaneously?  I feel like we are so behind in retirement savings that we should fully fund our roths first, but I'll do whatever is best.

3)Does anyone have any experience using the GI bill for their children?  My husband already has his BA and doesn't need another degree.  We only plan on having one child, though Im open to the possibliity of having 2.  My husbands GI bill will cover all of the expenses for one child (though my husband thinks he has two GI bills, which I'm still trying to figure out).  Dave ramsey suggests you don't invest in a 529 if you have a GI bill, but instead invest in a taxable mutual fund just in case they change the legislation, so that's another mid-long term goal, approx 19 years.

Thank you for your help and for reading this, now I have to go wash a boatload of dirty fuzzi bunz...

*edited because I didn't estimate the expense of our housing costs. Let me know if I left anything else out

There's a ton of advice on the MMM page for long term investing - Vanguard/Fidelty funds, mainly with low expenses. The TSP funds are not terrible. If he's deployed to a combat zone, consider the SDP (Savings Deposit Program). I used it once and it gives you a 10% return for the year you're deployed, guaranteed. I think the cap was 10k.

Your husband is eligible for a VA home loan and you could look into buying a house with that. The only requirement is that you have to have the intention to live there for one year. When you PCS the VA doesn't have heartburn because the military is making you leave. You could then rent it out while stationed somewhere else. You don't have to rent. I've found BAH covers most mortgages (and then some).

I have used my Post-9/11 and met a friend in college who had hers given by her parents. Off the top of my head, it's good for 10 years from the last day of qualifying active service. So if your husband retires in 14 years - 2028 - it would be good through 2038, provided no legislation changes. Another item that comes to mind is if he transfers it to you (or uses it himself), collects the BAH and saves it for the kid.

He may very well have two GI bills - it can be weird. I was active and also had guard time so here's what happened with me (I easily got the most out of it):

I was eligible for the CH 30 (Montgomery) GI Bill,
I was eligible for the CH 33 (Post 9/11) GI Bill,
I was eligible for the CH 1606 (Reserve) GI Bill.

To get the Post 9/11, you have to give up one of the other GI bills that you are eligible for. For me, I gave up the Reserve (since it was nowhere near as much as CH 30). I also had time that qualified under CH 30. This gave me the full 48 months of benefits (normally it's 36). It was a pain with the VA - I can't tell you how much time I spent with them trying to figure it out...at one point, they told me I was not eligible because my service time was prior to 1960 (I was born in 86...lol). But if you are persistent and know the rules you can get it done.

When you start to look for a job in the future, consider NAF jobs (Non-appropriated funds) since they don't have a lot of visibility/competition.

Hope that helps :)

Chris

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Re: Military Family-investing for dummies
« Reply #9 on: March 14, 2014, 09:57:40 AM »
Your thinking is already quite sound.  I completed a 21 year career, and did like you are regarding housing.  I rented small places, and invested heavily with mutual funds, and retired with about $1.2M. 

Keep your expenses low.  90% of your family's status comes from your husband's rank, so why waste a lot of money on other stuff?  I found living overseas to be a great way to keep costs low, and lived overseas 10.5 of my 21 years.

One thing you will want to work really hard to get right is your eventual transition from military employment to civilian employment.  You really need to know what you want (high pay, easy lifestyle, a certain place to live?), and  then work to make it happen. 

FWIW, 90% of the officers I know who retired from the military work for the DoD, a DoD contractor, or the federal government in general.  It is my experience that, at that age, we just aren't that attractive to other employers.  Keep your thinking realistic, and work it hard.  You will be your own assignment officer.