The forum expert on US military retirement planning is Nords, so I'd ask for his input and use the search feature to check out some of his posts. Good luck!
@Nords
Have you also looked into the military FIRE guys? There's Doug Nordman........and definitely some others.
Nords is the mil guru!
Thanks for the tags,
@Sun Hat and
@A Fella from Stella, and I appreciate everyone's kind words!
Mgn, you may have seen a lot of this before in military Facebook groups and other forums. I'm not trying to beat dead horses into the ground, but I want to give a complete commentary for other readers who might not have your background.
Current Situation: Active Duty O4 with 11 years of service; mid-30’s
(NOTE: I am deployed in a CZTE area so July 2018 – July 2020 pay is tax-exempt)
2020 Goals:
BRS mid-career bonus decision, tax implications, obligated service etc
I don’t want to put any additional retention pressure on you here, especially not while you’re in a combat zone, but...
https://militarypay.defense.gov/Portals/3/Documents/Blended%20Retirement/Combined%20BRS%20Policy%20Document.pdf?ver=2018-09-19-094018-610 ... if you decide to take the Continuation Pay contract, you have to sign it *before* you reach 12 years of service. (Paragraph 8.b of that link.)
As you know, you’d be getting at least 2.5 months of base pay at the O-4>10 scale. You could wait until the exact 12-year day to sign the contract (with about 10 minutes as an O-4>12), but you’d be out of luck if anyone in the chain of command (or the finance office) sat on the paperwork. However if you decide to stay on active duty for the additional years then it makes sense to see what the FY20 multiples might be for your community. Watch for your service’s FY20 memo at this link:
https://militarypay.defense.gov/Portals/3/Documents/BlendedRetirementDocuments/2019-01-07.pdf?ver=2019-01-16-092802-143 In addition, if you sign that CP contract in the combat zone, then the entire CP payment is tax-free. You could dump it all into the traditional TSP at once, or (if it makes sense) take it as four annual tax-free payments. (Paragraph 8.e.)
Even if you’re no longer in the combat zone for those subsequent payments, they’re still tax-free because you signed the contract in the combat zone.
https://militarypay.defense.gov/Pay/Tax-Information/CZTE/ (currently a break-even rental in Oahu)
RE the Hawaii house - so far it has worked out well as a rental and increased in value.
I see way too many servicemembers using qualitative real-estate phrases like this.
What’s your plan for this property, and what’s your exit strategy?
When people use terms like “break-even” or "worked out well", it’s hard to tell whether the property is worth keeping. Phrases like "increased in value" overlook the opportunity cost of investing in other assets (like a total stock market index fund)... especially when the long-term appreciation of even Hawaii real estate rises with the rate of inflation.
My understanding is that if you have lived in it for 2 of the 5 years prior to sale, a single filer has a $250,000 exclusion from capital gains on sale.
If you know that you’ll return to Oahu (to live in it for at least a few more years) then it’s possibly worth keeping. As you wrote, returning to make it a primary residence means that you’d eventually be able to sell and defer some of the capital gains.
https://www.katehorrell.com/capital-gains-rules-for-military-families/ But if “break-even” means “the rent equals the mortgage” then you’re losing money to property taxes, property management, maintenance, repairs, turnovers, vacancies... you get the idea.
Even though you deduct depreciation on your income-tax return, you’re really getting hurt by the tax code because you have very little taxable income to deduct while you’re in a combat zone. To add insult to injury, someday when you get rid the place (other than via probate) you’ll still have to pay depreciation recapture tax.
https://www.katehorrell.com/understanding-depreciation-recapture-taxes-on-rental-property/ If you use real-estate investor phrases like “1% thumbrule”, “50% thumbrule”, or “capitalization rate of 6.9%” then we know you’ve done your analysis.
If you’re not already reading BiggerPockets then it’s worth your time to learn the vocabulary definitions and analyze the property’s return. Very few properties on Oahu meet the 1% thumbrule, and way too many of them are higher than the 50% thumbrule (in a bad way). If your cap rate is less than 6% then you’re losing out to the opportunity cost of investing your equity in the stock market or anything else with a long-term APY of at least 6%... like a good investment property in the southeast U.S.
2019 Goals:
Max Roth TSP – on track
2020 Goals:
Max Roth TSP
Agree that I need to take a look adjusting my TSP contributions from Roth to Traditional to get down into the 12% tax bracket. I also have a lot of contributions in TSP flagged as CTZE contributions :)
You might already know all about this, but for other readers I’ll mention that you could not only maximize your Roth TSP contributions to the elective deferral limit ($19K for 2019) but also maximize your traditional TSP contributions up to the combined TSP total annual addition limit ($56K for 2019).
This gets horribly complicated with BRS agency/matching contributions being included in the AAL, as well as annual pay raises and your O-4>12 raise. However if you’re trying to maximize your tax-deferred compounding (and your prospective Roth IRA conversions after leaving the military) then it’s worth digging into the spreadsheets behind these two posts:
https://the-military-guide.com/maximizing-your-thrift-savings-plan-contributions-in-a-combat-zone/ https://keepinvestingsimplestupid.com/2019/02/01/maximizing-tsp-contributions-for-the-entire-year-when-you-deploy-to-a-combat-zone/ The spreadsheet in the first post comes directly from a CPA on the TSP staff, and the spreadsheet in the second post is a much more detailed guide to planning your contributions.
Long Term Decision: Remain Active Duty in the military for 20 years (retire in 2028)
No specific questions - looking for gut checks or recommendations for adjustments in saving/investing/planning.
If I do take the mid-career bonus, my goal will be to complete 20 years of service.
Speaking of gut checks.
You might have read this before, and about half of the forum’s military readers are already nodding along with this, but I’ll write it again for the newer readers:
You have nearly nine years left to get to 20. You know how much you and your priorities have changed in the last nine years, and the next nine years are highly likely to be at least as evolutionary.
Take it one service obligation at a time (even if you sign the CP contract). Stay on active duty as long as you’re feeling challenged & fulfilled. But when the fun stops, it’s time to consider leaving active duty for the Reserves or the National Guard.
At least monthly, I get e-mails from senior enlisted and field-grade officers who've reached 14-17 years of active duty: "I'm already FI without an active-duty pension. The career was fun but now my assignment officer is playing payback hardball and my family is annoyed with the idea of moving again. If I'm FI without the pension, then why am I staying on active duty?!?"
Don’t gut it out to 20, especially when you’re already on track for financial independence. It’s possible that you’ll reach FI even without the military pension or Tricare, and you’ll certainly reach FI when you’re backstopped by the Reserve pension (and Tricare).
Staying on active duty just for the active-duty pension will probably overshoot the FI goal line by hundreds of thousands of dollars. After 17 years of active-duty retirement I can affirm that my overshoot has grown to over a million dollars.
https://the-military-guide.com/dont-gut-20-leave-active-duty-reserves-national-guard/If there is anything else I can add to enhance the feedback, please let me know - Thank you so much!
I realize you’re listing the details in a format, but what are your total expenses? That number will help other readers look at the gap between where you are and what you’d need for the 4% SWR.