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Old 10-18-2015, 02:07 PM   #21
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Nords, thanks for taking the time to type all that out, it's very helpful. I read your book and it was great too. I'm passing it around my workcenter.

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I'm not sure what emergencies you're padding for. You two are unlikely to encounter layoffs, you don't own a home, and you're largely insured against everything else. With an 80% savings rate you could whip out a credit card for just about any expense and pay it off the following month.

You could also consider the emergency fund a home down payment fund. If you wanted to chase some yield with no risk then you could put it into 3-5 year CDs, a TIPS fund, or even I bonds.
I'm not sure either, I guess I just call it an emergency fund. It's my house savings fund too but right now I feel like it barely keeps up with inflation. Only drawing about .5%. I've got about half in the SDP right now until May. Once it's out of there I will look into the options you mentioned. I'm familiar with CD's but not the other two. Do you consider 20% a good goal to shoot for or the more down payment the better?

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You don't mention how you chose your asset allocation but this looks a lot like the TSP's L2050 fund. Considering your inflation-adjusted military pensions and your side-hustle income, you could leave your asset allocation at least this aggressive for the rest of your life. Your pensions are the rough equivalent of the income from a pile of I bonds or TIPS, so from a financial perspective you could even go 100% equities with your investments.
I chose 80/20 asset allocation just by reading and trying to figure what I was comfortable with. It's just shifted to 84/16 the past couple of years. I've been thinking of bumping it to 90/10, it makes sense to after you put it that way.

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When my spouse and I retired, we declined SBP on each other. We also decided that we had enough assets to self-insure, so we didn't even bother converting our SGLIs to VGLI or purchasing term insurance.
I know it's a few years off but I've been thinking about this and whether it's actually worth the extra money or not. I have my SGLI at $50K now just because with no debt and no kids I feel like I have enough put back to take care of things if something were to happen.

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If you need more funds before age 59.5 then you can also withdraw the contributions from both of your Roth IRAs, tax-free and penalty-free, at any time for any reason. This is in addition to the $10K you withdrew as first-time home buyers.
Is this through the 72-T route?

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Start with your spouse's Reserve pension. Because she'll "retire awaiting pay", then when her pension begins (age 60 unless she deployed to a combat zone after 27 Jan 08) her seniority in her retired rank will be calculated as though she was on active duty all the way up to age 60. This means that her pay column for her Reserve pension will effectively be the >30 column for her retired rank. It'll also be calculated at the pay tables in effect during the year she turns age 60, so her Reserve pension will be approximately adjusted for inflation in today's dollars.
She just went into the reserves last year after 8 years of active. I had no idea that the retirement worked that way. I always thought she would get the >20 pay. So just so I got this right, if she stays till she has 20 years total active and reserve time, retires as say an E-7, once she turns 60 she'll get 50% of $4996 which is >30 E-7 in today's dollars? That sounds good.

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But for the two decades after you retire (before her Reserve pension starts up), you'll probably be in the 10% income-tax bracket
Yes that's correct, we are in the 15% bracket now. I've always put into the traditional TSP until this year when I've maxed the Roth out with CZTE pay. I guess it would be best to just keep putting into the Roth vs traditional since we may be in a higher tax bracket once she starts to receive her pension.

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We've covered a lot of ground here. You can find more details on the blog (search for keywords or check the titles in the archives) or you can probably find the book in your local public/base library.
You sure did and I appreciate it. I just found your blog and I'll be checking it out and passing it on to my guys also.
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Old 10-20-2015, 02:40 AM   #22
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Originally Posted by Hardatit View Post
Nords, thanks for taking the time to type all that out, it's very helpful. I read your book and it was great too. I'm passing it around my workcenter.
You're welcome. And thanks for sharing the book! Believe it or not, it actually boosts sales (and sends more royalties to military charities) because readers decide to buy their own copy.

I'm going to link to some of my blog posts here, but after five years and 500+ posts the best way for you to browse the blog is by reading the archive titles:
Post titles by month - Military Guide
The first six months of the blog is mostly excerpts from the book. When you read a post, at the bottom you'll find text links to related posts. I do those manually, so you'll be able to explore a topic more thoroughly through those links... and it might even be faster than a keyword search.
If you really get into it then once a week you could scan a month of post titles and read what's pertinent to your situation. Within 9-12 months you'll have caught up on every post.

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Originally Posted by Hardatit View Post
I'm not sure either, I guess I just call it an emergency fund. It's my house savings fund too but right now I feel like it barely keeps up with inflation. Only drawing about .5%. I've got about half in the SDP right now until May. Once it's out of there I will look into the options you mentioned. I'm familiar with CD's but not the other two. Do you consider 20% a good goal to shoot for or the more down payment the better?
"Chasing yield" is a killer temptation of saving for a goal. However when the goal is less than 10 years away (a stock-market cycle) then your principal is at risk of loss if it's invested in equities-- and possibly even in corporate bonds. The most you should do for a shorter goal is strive to keep up with inflation.

The real gain (or "bargain") of having a cash fund (for whatever purchase) is negotiating a discount. When you show up with a 20% down payment then the lender feels that they have less risk (and they offer a lower interest rate). If you have a conventional mortgage then a 20% down payment means that you don't have to pay a separate premium for mortgage insurance. (VA loans provide this as part of your veteran's benefits, which is why you can get a 0% down VA loan... but at a slightly higher interest rate than having a 20% down payment.) You can also negotiate with the home seller because they can feel a little more confident that your 20% down payment will make you more likely to qualify for a mortgage and close the sale. This is especially useful when the seller is rushed or the property is "distressed".

When you buy your home, a 10% discount on the seller's price makes up for a whole lot of years of 0.5% APY savings. 3-5 year CDs pay a little more without exposing you to too much inflation risk from "going long" when interest rates start to rise.

I bonds are indexed to inflation and can only be redeemed penalty-free when you hold them for at least five years. You'd have to set up an account at Treasury Direct and you're limited in how much you can purchase each year (or with the refund on your tax return). But they're a great forced-savings tool.

TIPS are also govt securities with an inflation-protection component. They work a little different than I bonds and most investors buy them through a financial institution. You can probably buy your TIPS fund in about 90 seconds through Vanguard's website, and it's very easy to redeem.

Since you qualify for a VA loan, a 20% down payment is a nice-to-have option. Depending on mortgage rates when you're ready to buy, you could decide to go for 0% down or 20% down or anything in between. It's a function of the term of the loan, the interest rate you'll pay, and the monthly payment which lets you sleep most comfortably at night.

Your other powerful asset is your pension. In retirement, my spouse and I are carrying two mortgages (home and rental property) because we're borrowing for 30 years at very low fixed rates and making payments with an inflation-boosted pension. After 30 years, your mortgage dollars are eroded to half of their starting value-- but your inflation-adjusted pension is still worth a dollar.

From a financial perspective, I'd put down 0%-20% with a VA loan. If a mortgage broker finds you a better deal on a conventional loan (no VA guarantee) then you'll probably have to put down 20%. Any down payment above 20% would be for sleep-at-night emotional comfort... but you should already be sleeping soundly at night because of your pension.

Quote:
Originally Posted by Hardatit View Post
I chose 80/20 asset allocation just by reading and trying to figure what I was comfortable with. It's just shifted to 84/16 the past couple of years. I've been thinking of bumping it to 90/10, it makes sense to after you put it that way.
Sounds good. Again, the steady annuity income of the military pension lets you invest aggressively. The key is the asset allocation plan-- when you've already thought through your asset allocation then you're able to tolerate market volatility and stay the course. An asset allocation plan is also a powerful tool for preserving marital harmony during a bear market.

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Originally Posted by Hardatit View Post
Is this through the 72-T route?
It's in IRS Pub 590B:
https://www.irs.gov/pub/irs-pdf/p590b.pdf
Page 30 discusses exceptions to qualified distributions (among them, $10K for first home).

Also on that page, in the section "Are Distributions Taxable?", it says "You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)." In other words you can withdraw your contributions anytime. Of course once you've withdrawn a contribution you can't put it back (other than as part of that year's regular contribution) and it's no longer compounding in your IRA.

Speaking of 72(t)s, don't do a 72(t). Instead, a traditional TSP account can be rolled over to a traditional IRA and then gradually converted to a Roth IRA over years or even decades. After five tax years, the amount of a conversion (the principal, not its gains) can be withdrawn without taxes or penalties. You'll do this after you retire from active duty, and you'll probably try to finish the conversion before your spouse's Reserve pension starts.
Early Withdrawals From Your TSP and IRA After The Military - Military Guide
CFP Michael Kitces has the best explanation of the conversion process (and the two holding periods of five years) that I've ever read.

Quote:
Originally Posted by Hardatit View Post
She just went into the reserves last year after 8 years of active. I had no idea that the retirement worked that way. I always thought she would get the >20 pay. So just so I got this right, if she stays till she has 20 years total active and reserve time, retires as say an E-7, once she turns 60 she'll get 50% of $4996 which is >30 E-7 in today's dollars? That sounds good.
Not quite, but it's still good.
This is widely misunderstood and it's the most popular post on the blog:
Military Retirement Calculator - Reserve Retirement

Example: If she "retires awaiting pay" (not "resigns" or "discharged") as an E-7>20 in 2020 at age 40, then her Reserve pension starts in 2040 at age 60. (Earlier if she deployed to a combat zone after 27 Jan 08, but let's ignore this for now.) Since she's retired awaiting pay (and subject to recall for a total mobilization, which was last seen in WWII) her longevity in the E-7 pay tables continues to accrue until age 60 as if she was on active duty. Hypothetically at age 60 she's an E-7>40, although the pay table columns topped out much sooner than that.

The High Three "pay base" (base amount, not base pay) for her pension will be calculated using the average of the highest 36 months of base pay during her entire career, which includes the "retired awaiting pay" period. For almost every Reservist, those highest 36 months will be from the pay tables in effect in 2037, 2038, 2039, and 2040. The column she'll use in the E-7 row will be the maximum longevity, which goes up to 40 years but probably tops out in pay around 20-24 years. We don't know what the max E-7 longevity pay will be in 2037-40 so you could estimate it from the max E-7 pay in the 2016 table. Over the next 20 years, military pay might keep up with inflation but this is the best estimate available.

Still with me? It gets even more complicated.

Now that you've calculated the High Three "pay base", you apply the Reserve retirement formula:
Monthly pension deposit = Points / 360 x 2.5% x [High Three pay base].
The divisor is 360 instead of 365 because military pension months only have 30 days.

The points determine the actual percentage of her pay base. Even after 20 "good years" in the Reserves, most retirees only have about 4000 points so their pension may only be about 25% of their High Three pay base.

However (and again, here's the important part) it's the pay tables in effect when the Reservist turns age 60, so it's largely adjusted for inflation. If you're building a retirement spreadsheet then you could keep re-calculating your estimate each year when the new pay tables are out.

Just to beat this concept into the ground, the real value of a Reserve pension lies in its COLA and the Tricare benefit. As an active-duty retiree you'll already have this covered, but her pension also means that when she turns age 60 then most of your income will be annuitized (and then a few years later you'll start Social Security for even more annuitized income). It's highly likely that your existing savings/investments only have to cover the "gap years" until her pension income starts.

If I had understood these aspects of Reserve retirement when I had 12 years of active duty (and we'd started a family), I would've immediately resigned and affiliated with the Reserves. But the Reservist I first heard this from didn't understand the inflation-related aspects either, so I didn't pursue the research. My loss. Your gain.

Quote:
Originally Posted by Hardatit View Post
Yes that's correct, we are in the 15% bracket now. I've always put into the traditional TSP until this year when I've maxed the Roth out with CZTE pay. I guess it would be best to just keep putting into the Roth vs traditional since we may be in a higher tax bracket once she starts to receive her pension.
Yes. Pay the taxes now (by contributing to the Roth TSP and your Roth IRAs). Once you retire from active duty then (assuming that your taxable income drops) you can start figuring out how much of your traditional TSP you can convert to a Roth IRA each year. My spouse and I are doing this now:
How (And Why) To Transfer Your TSP To An IRA - Military Guide

In retirement if your side business takes off and your taxable income is even higher than when you were on active duty, well... good problem to have. Keep contributing to your Roth IRA, maybe start a SEP IRA, and just leave the traditional TSP account compounding until you can start RMDs.

If you e-mail me the details of your spouse's Reserve retirement plans then I can help you calculate a more precise estimate of her pension.

If you want a thorough analysis of your retirement plans from a fee-only CFP who's a military retiree, then contact Rob Aeschbach at MilitaryFinancialPlanner.com. He does a lot of work with dual-military retirees and he understands all of the military benefits issues better than I do. He does not earn product commissions or affiliate fees and he won't upsell you. He only gets paid for his time & experience, and you guys decide how much of that you're willing to buy.
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