@Nords do your thing!
Thanks for the tag, MrThatsDifferent! By now some of you may enjoy watching this thing get done...
Welcome, Artemis! That’s a very appropriate poster name.
I am a 28 year-old single Army officer living in Washington (no state income tax). I am planning to stay in the army for roughly 3-4 additional years and have currently maxed the GI Bill and VA loan benefits. Following the Army, I intend to graduate school at some point.
I agree with staying on active duty while it’s challenging & fulfilling, and taking it one active-duty obligation at a time. If you reach FI before you’re eligible for military retirement then it might not make much sense to gut it out to 20, either.
If you haven’t already considered the Reserves or the National Guard, then I’d suggest learning more about those options. If you can integrate the drill weekends into your work/life balance for a couple of years then it’s a good way to enjoy some of the military’s camaraderie and shared values without so much of the sucky parts. You’d have to decide whether you’re willing to stay around long enough for a possible mobilization (let alone retirement eligibility), or else you’d transfer to the Individual Ready Reserves and eventually separate.
I mention this because active-duty servicemembers don’t always see the benefit to a Reserve/Guard career, yet many of my readers in their 50s and 60s regret not making the time to figure it out and possibly enjoy the pension & benefits.
It’s a highly individual decision. I personally regret gutting out to 20, and when my spouse left her active duty for the Reserves our lives immediately got awesome. This month our daughter is on terminal leave and starts drills with her new Reserve unit next month, while our son-in-law chose to stick around for another active-duty obligation. Unlike me, those three all learned enough about the Reserves to make the right choices for their situations.
Saving Rate: 72%
If you aren’t already following Justin at Saving-Sherpa.com, you might enjoy swapping tips with another servicemember who’s saving >70% of their gross income. He’s very creative, especially with credit card hacking.
By the way, as I finished answering your five questions I sensed a theme of squeezing the maximum benefit out of every accepted technique for achieving FI. Yet your 72% savings rate already beats every other one of the ideas you’re analyzing below, and you don’t get much additional benefit from tweaks like 529s or HSAs. You might not even care about using your GI Bill or your VA loan benefits.
Specific Questions:
1. Should I attend graduate school immediately after leaving the military at 31/32 or wait 3-5 years. My goal is to reach 1,000,000 by 40 at the latest with 35 as an ambitious goal. Although this is more than I need to achieve FIRE given current annual expenses, those expenses will likely increase. I am considering if it makes sense to go to Grad school, for a 3-year degree, immediately when I leave the Military (age 31-32) or delay that a few years in order to work and continue building capital at the earliest age possible and to take advantage of additional years of compounding interest. I will likely be able to attend grad school for free and live without dipping into savings due to a mix of the GI bill and yellow ribbon funds, but will probably not be able to increase my savings substantially over that period. For the type of work I plan on doing I do not think that graduate school would substantially increase my earnings potentially but would be important resume/networking wise to certain longer term goals.
The first question: what would you do with a graduate degree?
You’d earn a good sum from the GI Bill’s housing allowance, but you could do many other programs with that 36 months of benefits. (The GI Bill can be used a month at a time, not necessarily over a three-year period.) At the very least you’d be able to get a trade certification or a license in a field that personally interests you— and that would come in very handy for rehabbing your real-estate investments.
If you decide to pursue a civilian bridge career (with or without the Reserve/Guard option) then your employer might have specific degree or certification requirements. A traditional corporation might offer promotions for obtaining your MBA, but they might only be interested in a specific niche like finance. Go for the job/career first, and then see what degree you want. If an employer won’t talk to a military vet without an MBA then you don’t want to work there anyway.
You could also pursue a learn-while-you-earn career like Accredited Financial Counselor, where the employer hires you as long as you earn the AFC within the first two years on the job... and by two years you’d have more than enough of the experience hours. I mention AFCs because many military vets gravitate toward financial careers, and AFCs are employed by the contractors who teach financial literacy on base to military families.
2. Should I increase my retirement contributions when I deploy? When I deploy I can increase my retirement account contributions to over 50000 with the Roth still capped at 19000 per year (for 2019) and excess in the TSP traditional 401K account. Given that my taxable income is relatively low and that deployment income is untaxed, I’m not sure the benefit of increased tax sheltered contributions outweighs the benefit of being able to access that money whenever I wish if I throw it into VTSAX.
Sure. The TSP no longer has the advantage of its very low expense ratio, but it still offers tax-free and tax-deferred compounding. VTSAX is about as tax-efficient as you can get in a mutual fund, but you’ll still pay income taxes on the annual distributions.
Better yet, after you leave the military you can still access your TSP accounts whenever you wish before age 59.5— penalty-free and possibly tax-free.
https://the-military-guide.com/early-withdrawals-from-your-tsp-and-ira-after-the-military/This is especially compelling if your earned income drops after the military (or after you reach FI) and gives you the opportunity to convert the traditional balance of your TSP to a Roth IRA with little or no income tax.
This post goes into the tricky details of how to maximize your TSP contributions when you’re in a combat zone. It also offers other ways to take advantage of the tax-free income, for example signing a Continuation Pay contract (in the combat zone) or resetting the cost basis of taxable investments.
https://the-military-guide.com/maximizing-your-thrift-savings-plan-contributions-in-a-combat-zone/That post includes a spreadsheet from the TSP’s staff, and Dan also has a very helpful spreadsheet for planning your contributions:
http://keepinvestingsimplestupid.com/2019/02/01/maximizing-tsp-contributions-for-the-entire-year-when-you-deploy-to-a-combat-zone/3. Should I utilize a 529 to reduce taxable income? I plan on having kids in the future and I believe (correct me if I’m wrong) that I can open a 529 account with myself as the beneficiary and then change the beneficiary to my future child at a later date. Starting the account now would allow for maximum tax advantages and maximum compounding interest.
No. You’ll have plenty of time for 529 compounding when you start changing diapers, and those little bundles of joy have plenty of other options to pay for college— if indeed they decide to go to college in the first place.
I think people feel a lot of pressure to save for college because the expenses seem to be growing at 10%/year forever. The reality is that many universities are already seeing pressure on their fees (and on their bloated payrolls).
Although you might want to save enough for a couple years at a community college or state university, I don’t think you’ll need $250K— and you certainly won’t need to use a 529 right now.
Instead, continue saving for your FI (where your assets will still compound in a very tax-efficient manner). Once you’re FI then you could take another look at 529 options.
4. Can/should I open a HSA account? I admit I know very little about how these accounts work. Currently my medical expenses are completely covered by the military so opening an HSA would be motivated by the same rationale as #3.
When you’re eligible for Tricare health insurance then you’re not eligible for a HSA. This applies to Reserve/Guard service as well as active duty.
You might choose an HSA when you’re out of the military and not using employer health insurance.
5. Home buying thoughts. I am thinking of utilizing the VA home loan to buy a home at my next duty station. This loan is capped at 484,000 dollars (not that I would take all of that) and allows home purchases with no down payment (thereby reducing the opportunity cost of not being able to invest a down payment in the stock market). In principle, I believe that home purchases are dangerous in nature, but that they can be profitable given specific conditions. I would welcome any thoughts folks have on those factors I am considering (I understand that these are semi vague in nature).
• Search for a foreclosure/short sell
• Buy a house that looks terrible but doesn’t have significant problems (water damage, electrical/plumbing issues)
Home buying and maintenance is not something I understand as much as I would like and I am working to increase my knowledge and skillset. Buying a broken looking place and fixing it up over several years, even if that means living in a worse place for 2-3 years, is somewhat appealing. I am also considering buying a duplex/triplex instead of a single family home.
Real estate is a great idea if you enjoy the work, and you’d certainly do well at it.
I’d suggest that you begin now by reading the BiggerPockets website. If you learn while you’re on active duty then you’ll be ready for the opportunities. Subscribe to their weekly e-mail (for regular small doses of basic info) and join in their webinars & podcasts. (Brandon and David are entertaining.) You can go a long way with their resources for free, and when you’re ready to start investing then a Pro membership is worth the price.
However you might not want a VA loan.
Here are some issues to consider:
1. The VA loan is not always the best financial deal, especially if you’re a real estate investor and not only a homeowner buying a personal residence for a live-in rehab. Instead of focusing on a VA loan, use a mortgage broker to analyze your options (including the VA loan). They understand VA loans better than we ever will.
2. The funding fee on the VA loan can be waived if you’re eligible for disability compensation. For this reason, many servicemembers wait until their VA disability rating has been awarded before applying for a VA loan. There are waivers and refunds in this process, but they’re painful. The best way to skip the VA loan funding fee is to have a VA disability rating.
3. Experienced sellers (and their realtors) will hate you for trying to buy the property with a VA loan. The VA appraisal guide includes “safety and habitability” requirements which are intended to protect disabled vets from getting ripped of during a home purchase. However with a VA loan the appraisers have to call out minor deficiencies which would normally be negotiated during closing, and they can keep you from getting the lender’s approval for the loan. Let’s not get into how I learned this, but it was a very expensive lesson.
If a seller has a choice of buyers, they’ll accept just about any other offer instead of your offer which is tied to a VA loan. And by the way if you decide to use a VA loan then it’s essential to have that “upon approved financing” contingency in your offer.
4. Same issue as #3 if you’re trying to buy a broken-looking place at a huge discount. The VA loan is not worth the effort, even if you could convince the appraiser that it’s “safe and habitable”.
5. The VA loan has an owner-occupancy requirement. The VA doesn’t require you to live in the home for a minimum time (just “intended for use as a primary residence”) but the lender might have additional requirements in their underwriting.
Your residency in a unit of a multi-family property satisfies the VA’s residency requirement, and that’s one reason you might want to borrow $484K. Depending on the location, the rents from a $600K multi-family property might pay all of your mortgage expenses... especially if you can house-hack with a roommate.
I’m happy to answer more questions here, or send me a PM, or e-mail NordsNords at Gmail.
