The Roth TSP seems like a good move but I'm still not sure on some of the details. For instance when it says "You pay taxes on your contributions as you make them..", does this mean all contributions are taxed separate from my income or does it mean contributions simply aren't tax-deductible? If I put in $100, all $100 stays in the account, right?
Even if this is the case, I'm wondering how much tax-free withdrawing will really matter in my situation. It seems like if I carefully planned it out then I could withdraw from my taxable accounts tax-free as well, unless the 0% capital gains is removed. Either way, I can't stop thinking about the significance of the 2/3 reduction in expense ratio.
When you contribute $100 to the TSP, all $100 goes to the TSP. (The annual expense ratio is taken out sometime during the subsequent year, but it's done by adjusting the share prices of the individual funds. You don't see an actual deduction from your account for expenses.) The contributions to the Roth TSP are not tax-deductible.
Contributions to the traditional TSP are deducted before DFAS calculates your taxable income, and your income tax withholding is taken from the remaining amount. Contributions to the Roth TSP are not deductible so they're taken from your pay after DFAS calculates your taxable income, and your income tax withholding should be a little higher.
When you're in a combat zone, all of your pay is tax-free so DFAS just doesn't include it in their calculations. But even though the total TSP contribution limit from a combat zone is $53K, the Roth TSP still has a contribution limit of $18K. You have to put the other $35K in the traditional TSP, where the tax-free contributions are tracked for the rest of the time that your TSP account is open.
You could carefully manage your taxable accounts to stay within the 0% capital gains limit. The political risk is that you don't know when the laws might change. You also don't know what your income will look like when you reach FI. If you have a pension or significant rental income then you may blow right through the 0% cap gains bracket.
You can avoid the political risk with the TSP while enjoying the world's lowest expense ratios. You can also incrementally convert everything to a Roth IRA during years when your taxable income is low, and after that is finished then you don't have to worry about managing anything.
In other news, I ran some numbers (mostly using http://www.firecalc.com/index.php) and I think retiring in 10 years probably isn't possible for me. That's annoying because if I want to stay in the air force after that it would mean another 6 years and, after 16 years of service, I may as well do the last 4 for retirement. Retiring at 42 isn't very early. I guess if that's the way things pan out, I'll at least be megarich with the military pension in addition to my savings.
Well, there's no sense engaging in deprivation now in pursuit of FI later. The military has already given you plenty of deprivation experience.
http://the-military-guide.com/2010/12/22/frugal-living-is-not-deprivation/You do the best you can while still enjoying your life. Tracking your expenses helps you identify the wasted spending, and that alone will probably boost your savings rate over 50%. You'll align your spending with your values, and if something has enough value for you then you'll be willing to work the extra years to pay for it. You're the guy who gets to determine "value"-- whether that's bicycling around town or paying up to do the same errands in an Escalade-- because you're the one who's willing to pay the price for it.
Here's an alternative to your financial forecast: take it one tour at a time and stay on active duty as long as you're having fun. When the fun stops, consider giving it one more tour or just leave active duty then. Take a drilling billet with the Reserves or Guard and do that as long as you're having fun. It's a lot easier to get to 20 good years in the Reserve/Guard than it is to do 20 years of active duty. If you're not having fun on active duty then you will definitely adversely impact your mental, physical, and emotional health. I hear that all the time from my readers, and one of my high-school classmates just got the grim news about what the military's stress has done to his health. 100% disability ain't much help for his remaining life expectancy.
"One tour at a time" is the same advice I give my daughter. She appreciates it a lot more now that she's on sea duty than she did when she was thinking about joining the service.
Leaving active duty before 20 means that you won't retire to an immediate COLA'd pension. However staying in the Guard/Reserve to reach a total of 20 good years means that your COLA pension will kick in at age 60 (possibly a little earlier if you deploy to a combat zone), at the pay tables in effect when you turn age 60, and at the longevity of your rank as though you'd been on active duty the entire time until reaching age 60.
That's such a big freakin' deal, and I didn't understand it when I first learned of it in 1993, that I'm going to say it again. When you "retire awaiting pay" from the Reserve/Guard, your longevity in your retirement rank continues to accumulate. If you're 42 years old when you reach 20 good years, and you retire then as an E-7>20, when you're 60 years old you'll be considered to be an E-7>38. Not only that, but instead of using the pay tables in effect in 2031 (when you reach 20 good years and retire awaiting pay) your pension will be calculated from the pay tables in effect in 2049 (when you reach age 60).
Play around with the pay tables. You can use today's pay tables to estimate your Reserve/Guard pension by assuming that military pay will keep up with the CPI (or at least with your personal inflation rate) and using the maximum pay for your potential retirement rank. The significance of this pension is that your savings (both tax-deferred and taxable accounts) might only have to last until you reach age 60. If that's not enough to cover the gap, then you start a bridge career of traditional civilian employment or part-time work or entrepreneurial freelancing.
That's what my spouse did when she left active duty. By then I already had 17+ years of my active duty and had been extended at my duty station (a training command) until retirement at 20. When the fun stopped in her career she left active duty for the Reserves. When I retired in 2002 my pension wasn't enough to cover all the bills, but it looked like our savings would cover the 20 years until her Reserve pension started. (Her Plan B was getting a part-time job.) 13 years later my pension has grown by 28% from COLAs, our expenses have dropped by over 40% (mostly through mortgage refinancings and our daughter leaving the nest), and our investments have grown faster than inflation. We retired on a three-legged stool that we won't even have to sit on.
Here's a simplified example of how you'd forecast your Reserve/Guard retirement:
http://the-military-guide.com/2010/12/15/retiring-on-multiple-streams-of-income/Here are the gory details on the Reserve/Guard finances and the pension:
http://the-military-guide.com/2010/12/06/retiring-from-the-reserves-and-national-guard/http://the-military-guide.com/2012/02/27/calculating-a-reserve-retirement/They're the most popular posts on the blog... especially on Sunday evenings.
