Author Topic: Military FIRE questions-9 yrs from Retirement  (Read 703 times)

dschnaak

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Military FIRE questions-9 yrs from Retirement
« on: May 21, 2018, 10:05:35 PM »
I am a recent convert to Mustachianism and want to make sure that I’m maximizing my opportunities for my family’s future.  I’d love some military specific advice on how best to proceed. 

Background:
I am 33, married, and have two kids (1.5 y.o. twins).  I am an Active Duty officer in the US Army, 9 years from being able to retire and collect a pension at age 42.  My wife works full time as a Registered Nurse.  We currently live in California where my wife is making substantially more than she ever has, and likely ever will again, but will be moving back to Colorado next summer.  Her pay will be roughly half of what she currently makes when we move back to CO and we are trying to make the most of our current income to set ourselves up for success.  We are also considering having another kid once we move back to CO, so her income might drop to $0 for a while.  We have no debts other than the mortgage on our rental home and we want to be FI and free to do what we want at the time of my retirement in 9 years.  I enjoy my job and am happy to continue working for another 9 years.

Income:
$7350 monthly pretax salary (~$6100 take home)* No State tax
$3975 monthly basic allowance for housing which we do not see (automatic allotment for military privatized housing)
$9200 wife’s monthly pretax salary (~$6500 take home)* CA State tax
$1695 monthly rental income

Monthly Expenses:
~$5200- Mortgage, Childcare, Utilities and Groceries, are >85% of this. we’ve cut out most luxuries but are still working to chip away at this.

Current assets:
$20k in my TSP/Roth TSP (CSI 40/40/20).
$16k in my Roth IRA
$36k in wife’s IRA
$32k in wife’s Roth IRA
$10k in house down payment account

We also have a rental home in Colorado that appraised for $280k last year, we owe $210k on a 15yr fixed mortgage at 2.85% interest rate. We net $1695/month after property management fees.

For the next 10 months we’ll have ~$8500 each month to invest/save.  We enjoy owning rental properties and see ourselves retiring to Colorado in 9 years.  We intend to purchase another home when we move back to CO next summer, where we will live for 2-3 years, and then keep the property as a rental.  With this in mind, we are working to save ~$70k for a down payment, and we have the ability to use a VA loan if we so choose.  Our biggest hesitation is buying another home in an area that has appreciated quite a bit since we last purchased in 2013, and don’t love the idea of buying high if there is a market drop looming in the not too distant future.  That being said, Colorado Springs is a military town with a constant flow of families moving through for 2-3 year assignments, which creates a demand for quality housing for families who need more space than an apartment offers, but don’t want to buy a home. 

My biggest question is trying to figure out how much we should be investing in my TSP/IRA versus how much we should save for the down payment over the next year?  We’re in a higher tax bracket this year than we will be once we move back to CO, so should we max out the TSP to reduce our taxable income? 

My biggest hang up with investing in the TSP is not being able to access that money until 59.5 years old, versus putting the majority of our savings toward a down payment over the next year, and subsequent savings to be used for acquiring additional properties, paying off mortgages prior to retirement, or investing in taxable index fund accounts.  The advantage being that we’ll have access to these funds/passive income from age 42-60 versus the funds being tied up in the retirement accounts.

Am I overthinking things? What am I not taking into consideration?  Please tear into this and let me know if there is anything that I’m missing or have an incorrect understanding of.  Thanks!

Dave

Lkxe

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Re: Military FIRE questions-9 yrs from Retirement
« Reply #1 on: May 21, 2018, 10:54:29 PM »
I am a recent convert to Mustachianism and want to make sure that I’m maximizing my opportunities for my family’s future.  I’d love some military specific advice on how best to proceed. 

Background:
I am 33, married, and have two kids (1.5 y.o. twins).  I am an Active Duty officer in the US Army, 9 years from being able to retire and collect a pension at age 42.  My wife works full time as a Registered Nurse.  We currently live in California where my wife is making substantially more than she ever has, and likely ever will again, but will be moving back to Colorado next summer.  Her pay will be roughly half of what she currently makes when we move back to CO and we are trying to make the most of our current income to set ourselves up for success.  We are also considering having another kid once we move back to CO, so her income might drop to $0 for a while.  We have no debts other than the mortgage on our rental home and we want to be FI and free to do what we want at the time of my retirement in 9 years.  I enjoy my job and am happy to continue working for another 9 years.

Income:
$7350 monthly pretax salary (~$6100 take home)* No State tax
$3975 monthly basic allowance for housing which we do not see (automatic allotment for military privatized housing)
$9200 wife’s monthly pretax salary (~$6500 take home)* CA State tax
$1695 monthly rental income

Monthly Expenses:
~$5200- Mortgage, Childcare, Utilities and Groceries, are >85% of this. we’ve cut out most luxuries but are still working to chip away at this.

Current assets:
$20k in my TSP/Roth TSP (CSI 40/40/20).
$16k in my Roth IRA
$36k in wife’s IRA
$32k in wife’s Roth IRA
$10k in house down payment account

We also have a rental home in Colorado that appraised for $280k last year, we owe $210k on a 15yr fixed mortgage at 2.85% interest rate. We net $1695/month after property management fees.

For the next 10 months we’ll have ~$8500 each month to invest/save.  We enjoy owning rental properties and see ourselves retiring to Colorado in 9 years.  We intend to purchase another home when we move back to CO next summer, where we will live for 2-3 years, and then keep the property as a rental.  With this in mind, we are working to save ~$70k for a down payment, and we have the ability to use a VA loan if we so choose.  Our biggest hesitation is buying another home in an area that has appreciated quite a bit since we last purchased in 2013, and don’t love the idea of buying high if there is a market drop looming in the not too distant future.  That being said, Colorado Springs is a military town with a constant flow of families moving through for 2-3 year assignments, which creates a demand for quality housing for families who need more space than an apartment offers, but don’t want to buy a home. 

My biggest question is trying to figure out how much we should be investing in my TSP/IRA versus how much we should save for the down payment over the next year?  We’re in a higher tax bracket this year than we will be once we move back to CO, so should we max out the TSP to reduce our taxable income? 

My biggest hang up with investing in the TSP is not being able to access that money until 59.5 years old, versus putting the majority of our savings toward a down payment over the next year, and subsequent savings to be used for acquiring additional properties, paying off mortgages prior to retirement, or investing in taxable index fund accounts.  The advantage being that we’ll have access to these funds/passive income from age 42-60 versus the funds being tied up in the retirement accounts.

Am I overthinking things? What am I not taking into consideration?  Please tear into this and let me know if there is anything that I’m missing or have an incorrect understanding of.  Thanks!

Dave

It late in Colorado to be answering this but we retired 2 years ago  O-5 at 25 from the Navy. If you plan on making O-6 in the next nine years your retirement pay will cover your current 5200 expenses. You should max the TSP to lower your tax liability.  We are living off the pension and letting the rest ride. I should be just fine should the worst happen to my spouse. The rental only needs about 800 a month in principal to be free and clear in nine years. The new house will require more math but you have ten months to figure that out. Sorry if this is rambling it’s past my bedtime.


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Lkxe

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Re: Military FIRE questions-9 yrs from Retirement
« Reply #2 on: May 21, 2018, 11:02:07 PM »
I am a recent convert to Mustachianism and want to make sure that I’m maximizing my opportunities for my family’s future.  I’d love some military specific advice on how best to proceed. 

Background:
I am 33, married, and have two kids (1.5 y.o. twins).  I am an Active Duty officer in the US Army, 9 years from being able to retire and collect a pension at age 42.  My wife works full time as a Registered Nurse.  We currently live in California where my wife is making substantially more than she ever has, and likely ever will again, but will be moving back to Colorado next summer.  Her pay will be roughly half of what she currently makes when we move back to CO and we are trying to make the most of our current income to set ourselves up for success.  We are also considering having another kid once we move back to CO, so her income might drop to $0 for a while.  We have no debts other than the mortgage on our rental home and we want to be FI and free to do what we want at the time of my retirement in 9 years.  I enjoy my job and am happy to continue working for another 9 years.

Income:
$7350 monthly pretax salary (~$6100 take home)* No State tax
$3975 monthly basic allowance for housing which we do not see (automatic allotment for military privatized housing)
$9200 wife’s monthly pretax salary (~$6500 take home)* CA State tax
$1695 monthly rental income

Monthly Expenses:
~$5200- Mortgage, Childcare, Utilities and Groceries, are >85% of this. we’ve cut out most luxuries but are still working to chip away at this.

Current assets:
$20k in my TSP/Roth TSP (CSI 40/40/20).
$16k in my Roth IRA
$36k in wife’s IRA
$32k in wife’s Roth IRA
$10k in house down payment account

We also have a rental home in Colorado that appraised for $280k last year, we owe $210k on a 15yr fixed mortgage at 2.85% interest rate. We net $1695/month after property management fees.

For the next 10 months we’ll have ~$8500 each month to invest/save.  We enjoy owning rental properties and see ourselves retiring to Colorado in 9 years.  We intend to purchase another home when we move back to CO next summer, where we will live for 2-3 years, and then keep the property as a rental.  With this in mind, we are working to save ~$70k for a down payment, and we have the ability to use a VA loan if we so choose.  Our biggest hesitation is buying another home in an area that has appreciated quite a bit since we last purchased in 2013, and don’t love the idea of buying high if there is a market drop looming in the not too distant future.  That being said, Colorado Springs is a military town with a constant flow of families moving through for 2-3 year assignments, which creates a demand for quality housing for families who need more space than an apartment offers, but don’t want to buy a home. 

My biggest question is trying to figure out how much we should be investing in my TSP/IRA versus how much we should save for the down payment over the next year?  We’re in a higher tax bracket this year than we will be once we move back to CO, so should we max out the TSP to reduce our taxable income? 

My biggest hang up with investing in the TSP is not being able to access that money until 59.5 years old, versus putting the majority of our savings toward a down payment over the next year, and subsequent savings to be used for acquiring additional properties, paying off mortgages prior to retirement, or investing in taxable index fund accounts.  The advantage being that we’ll have access to these funds/passive income from age 42-60 versus the funds being tied up in the retirement accounts.

Am I overthinking things? What am I not taking into consideration?  Please tear into this and let me know if there is anything that I’m missing or have an incorrect understanding of.  Thanks!

Dave

It late in Colorado to be answering this but we retired 2 years ago  O-5 at 25 from the Navy. If you plan on making O-6 in the next nine years your retirement pay will cover your current 5200 expenses. You should max the TSP to lower your tax liability.  We are living off the pension and letting the rest ride. I should be just fine should the worst happen to my spouse. The rental only needs about 800 a month in principal to be free and clear in nine years. The new house will require more math but you have ten months to figure that out. Sorry if this is rambling it’s past my bedtime.


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See I told you it was late  O-5 retirement will be a little less than required but close


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jlcnuke

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Re: Military FIRE questions-9 yrs from Retirement
« Reply #3 on: May 22, 2018, 07:49:00 AM »
While it's great to expect your military retirement to cover your expenses, keep in mind that may not actually happen. In the next 9 years, many things could happen that could prevent that, not all of them would be your fault either. At 12 years of service I was medically discharged - no retirement at all, just some VA benefits (much less than I was expecting to get when I was going to retire 8 years later). I can tell you from experience that planning on a military retirement as your primary nest egg can be disastrous to your financial picture if it doesn't come to pass for whatever reason.

As such, I highly recommend against using it as your only (or practically only) source of getting to FI.

Nords

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Re: Military FIRE questions-9 yrs from Retirement
« Reply #4 on: May 26, 2018, 09:23:39 AM »
Welcome, Dave. 

Is it possible that your cashflow is burning a hole in your pocket?

For the next 10 months we’ll have ~$8500 each month to invest/save.  We enjoy owning rental properties and see ourselves retiring to Colorado in 9 years.  We intend to purchase another home when we move back to CO next summer, where we will live for 2-3 years, and then keep the property as a rental.  With this in mind, we are working to save ~$70k for a down payment, and we have the ability to use a VA loan if we so choose.  Our biggest hesitation is buying another home in an area that has appreciated quite a bit since we last purchased in 2013, and don’t love the idea of buying high if there is a market drop looming in the not too distant future.  That being said, Colorado Springs is a military town with a constant flow of families moving through for 2-3 year assignments, which creates a demand for quality housing for families who need more space than an apartment offers, but don’t want to buy a home. 
Here's the military problem:  you're thinking of buying a home instead of analyzing your next investment property.  Military families want to use a VA loan to buy a home, which they'll then rent out as they leave the area for their next tour.  (Even when the VA loan is a worse deal than other lenders or mortgage brokers.)  Now that the tax laws have raised the standard deduction to $24K for married couples filing jointly, you're going to take that deduction instead of getting any benefit from deducting mortgage interest.

However nice that home may be, it rarely spreadsheets out to a high capitalization rate.  In addition, you're not spending 6-12 months to learn the area and pick the right locations and then wait for the bargains.  You're essentially throwing money into a home (for a nice place to live) and then hoping that it'll make a good rental property.

You already think CO is overpriced and you're already willing to be a long-distance landlord.  Why not rent in CO (or live on base) and then do a nationwide search for an investment with a high cap rate?

You currently have enough cash flow to hemorrhage money on real estate, but it's at a poor return and a terrible opportunity cost from better investment properties.  You might get lucky and not lose money, even though you're giving up far better returns.  However I get the sad e-mails and FB posts every week from military families who are losing money on real estate, property managers, and poor tenants.  It's because they bought a home and tried to rent it out instead of making a cold-hearted analysis on an investment property:
  http://the-military-guide.com/dont-buy-home-active-duty/

Before you make your asset allocation choice, I strongly recommend reading RichOnMoney.com (another active-duty real-estate investor) and starting your nation-wide research at BiggerPockets.

Since you're already a landlord you can join the FB group "Military Landlords" and read more about these disasters:
https://www.facebook.com/groups/MilitaryLandlords/

My biggest question is trying to figure out how much we should be investing in my TSP/IRA versus how much we should save for the down payment over the next year?  We’re in a higher tax bracket this year than we will be once we move back to CO, so should we max out the TSP to reduce our taxable income? 
You're asking an asset allocation question.  You'll find the best split for you between retirement accounts and real estate, but is there a need to be in a big hurry about investing in the real estate?  You'll have plenty of time after the military (to do your research right), and in the meantime you can reach a high savings rate using the world's largest passively-managed index funds with the world's lowest expense ratios.

I'd suggest trying to maximize your TSP and then your IRAs.  (Then save even more in taxable accounts.)  If you truly expect to be one of the few who reach a military retirement then you'd want to invest in the Roth TSP and Roth IRAs now.  You'll avoid RMDs later in life (when you have a pension and cash flow from rental income and you're in a higher income-tax bracket), so it's quite possible that you're in your lowest income-tax bracket now.  That nudges the decision to a Roth TSP and Roth IRAs.

In addition, you seem to be eligible for the Blended Retirement System.  If you haven't already opted in then you probably should. 

At worst, it's a revenue-neutral choice.  In the favor of BRS is the flexibility (if you don't make it to retirement for reasons beyond your control) and having more money in your TSP for your own use (instead of a larger pension doled out to you monthly). 

When you run the BRS calculator, consider that you're eligible for the Continuation Pay bonus.  The CP obligation can be served concurrently with other obligations (which you're apparently willing to incur) and you can invest even more of that CP money to tip the choice in favor of the BRS.

That's probably a separate thread, but first read this roundup of the in-depth analysis done by a bunch of experienced military bloggers.  We also cover issues that DoD feels are not in their lane, yet the impacts on financial planning and estate planning are very much in favor of BRS:
http://www.katehorrell.com/learn-about-the-militarys-new-blended-retirement-system/

My biggest hang up with investing in the TSP is not being able to access that money until 59.5 years old
Like thousands of other servicemembers, you are misinformed.  I see this error all the time.

You can tap the TSP (after the military) with no penalties and maybe even no taxes.  Here's the info (with links to the tax pubs):
http://the-military-guide.com/early-withdrawals-from-your-tsp-and-ira-after-the-military/

For your plans, as you approach retirement you'll have built up your cash funds for down payments.  You'll also have maximized your contributions to your TSP and your IRAs, and you'll have enjoyed a decade of long-term compounding in the L or C/S/I funds and Vanguard index equity funds.

You can already withdraw Roth IRA contributions at any time (at any age) for any reason with no taxes or penalties.  That (in addition to your taxable account) gets you started on more real estate investments.  (Since you're retired you now have the time to do the due diligence on investment properties instead of just reflexively buying a home at a duty station.)  After you leave the military you can also roll your Roth TSP account over to a Roth IRA, wait the five tax years, and then withdraw the rollover amount (but not the gains) for any reason, at any age, both tax-free and penalty-free.