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Hypothetical plan for FIRE at 38 please critique
Old 10-11-2015, 10:48 AM   #1
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Hypothetical plan for FIRE at 38 please critique

I'm 32 years old and planning for FIRE at 38. This is a hypothetical plan with what I think my life situation will be like at that time. Please provide feedback on whether I'm on the right road or not.

Information as of now
32 years old
Married/wife is AF reserve/self employed
Active duty E7 14 years service
Debt free
Renting a home
Emergency fund is padded
Saving around 40-45K a year right at 80% of my AF pay.
$280K invested in Vanguard Index funds and TSP 84/16 Stocks/Bonds
Will continue to add 40-45K yearly for the next 6 years till I retire from the AF. This will put total invested to $550,000 on retirement date not counting whatever interest it my draw from now till then.

We live comfortably now (she takes care of food and groceries), I take care of everything else with what's left of my AF pay after savings, my Ebay Business, and my side mechanic business.

We spend around 30-40K annually including rent, utilities, everything else.

Hypothetical information in 6 years
38 years old
(Retired E8 w/20 yrs) COLA adjusted, Tricare
Debt free (besides new mortgage possibly)
Married with possibly 1 kid (post 911 GI bill for college)
Wife is AF reserve/self employed
SBP if something happens to me (still unsure on this one)
Nice emergency fund
Will rent shortly after retirement until we find a home to settle for good probably in TN
$550K invested in Index funds not counting interest for past 6 years hopefully more
Still contributing to Index funds just considerably less. Maybe 5-10K year.

Money coming in (in today's dollars)
AF retirement/disability $25,000 (No tax in TN)
Wifes Reserve/self employment $10,000 and retirement pay at 60. $12K yr
Ebay business $10,000 estimated but not taking into account
Mechanic side business $10,000 estimated but not taking into account

Average yearly expenditures $40-50K depending if we try and pay the mortgage off sooner. We'll want to do some traveling as well but overall we live modestly.

The plan in a nutshell, is to retire from the Air Force and live off the retirement, my ebay, my mechanic business both of which I really enjoy doing plus income the wife brings in. We will need to purchase a house probably within a few years from retirement probably in Tennessee.

What do you think about the plan with the information provided, would it work?

There is quite the gap from 38-59.5 almost 22 years when I can start reaping the benefits of the money I worked so hard to put away now SS, TSP, Roth, and some taxable.

How do you guys bridge the gap between ER at 38 yrs old and drawing from investments, TSP, Roth IRA , SS if you can't technically touch if till you're 59.5?

I'll be on a fixed COLA adjusted income from the AF, but the Ebay, and side business will bring as much as I put into it so I'm really thinking of that as gravy on the top and would like to see if my plan would work with just AF retirement.

For you that have ER'd do you see any kinks in my plan something that I'm not thinking of?

Thanks in advance!
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Old 10-11-2015, 11:11 AM   #2
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I'm a little confused. You say:
Quote:
Debt free besides new mortgage
Renting a home
Do you have a mortgage, or not? If not (yet) do you have money set aside for down payment and closing costs - or is that part of savings listed?

How long have you been doing the side businesses? Are you sure about the income?
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Old 10-11-2015, 11:33 AM   #3
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Sorry about that, I edited the post to make more sense. I do not have a mortgage now and will not have one until after I retire 6 years from now. We may rent for a year or so after retirement while looking for a permanent home.

I have $20K or so saved for the down payment/closing. I'll have more saved when the time comes. Thought of trying to save enough to pay cash but I guess that's down a totally different rabbit hole.

I've been doing the Ebay/side business since 2010. I'm almost certain I can bring home $15-20K a year between the both.
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Old 10-11-2015, 12:30 PM   #4
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Forget the future mortgage. Once you only have a limited income, you will no longer qualify for any decent amount. Buy a home now, or just continue to rent.

Any income not reported does not count for a mortgage. Even investable assets do not count for much.
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Old 10-11-2015, 01:07 PM   #5
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Our experience has been that investable assets may count for a mortgage, at least at our local credit unions. One CU would just look at assets alone and one wanted to see "income" - a movement of money from savings or a 401K to a checking account for at least 3 months prior to the application.

I think the CU we went with just needed to see that we had at least three years of living expenses saved up.

Anyway, back to the OPs original questions - downshifting to a low cost of living area with a pension and hobby income - I think it is a great plan. I with we had thought to do something similar years ago.
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Old 10-11-2015, 01:39 PM   #6
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Quote:
Originally Posted by Senator View Post
Forget the future mortgage. Once you only have a limited income, you will no longer qualify for any decent amount. Buy a home now, or just continue to rent.

Any income not reported does not count for a mortgage. Even investable assets do not count for much.
I was able to get a pretty hefty HELOC, after I retired. (No mortgage, just the HELOC). It was based on DH's SS income and our rental income. The OP will have a military pension and some self employment income, so, depending on the size of the mortgage, might qualify.
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Old 10-11-2015, 05:30 PM   #7
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If my math is right you have roughly 40-80k in hypothetical income which is pretty well aligned with your expected cost of living. Housing seems like it'll be the big wildcard but if your flexible (sounds like it) you'll probably be ok.

I also think the fact that you're being conservative with income is a good sign. I think it's unlikely a conservative, disciplined, young, exmilitary person can somehow make 0$/yr for an extended period... So I'd go for it myself .

Other wildcard is family. Once youre married and have kids other things matter that didn't. Eg. How close are you to family? Do you care about school quality (some people are obsessed with the school ratings, other people think they don't matter). Healthcare for kids can be either cheap or expensive (think... Born with medical condition ). So kids change your life in unpredictable ways. Then again sounds like you'll know that before you execute the plan.

Overall as a 40yo with 2 kids and FI but not RE I think your mentality is correct and your trajectory seems good. Spend your life doing what you enjoy, marry the right person, keep plans flexible and expenses low. The rest is out of our control

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Old 10-12-2015, 04:39 AM   #8
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Originally Posted by Senator View Post
Forget the future mortgage. Once you only have a limited income, you will no longer qualify for any decent amount. Buy a home now, or just continue to rent.

Any income not reported does not count for a mortgage. Even investable assets do not count for much.
I'm glad you brought up the mortgage, that is something I'll have to think about possibly getting the mortgage and a house before actually retiring.

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Originally Posted by petershk View Post
If my math is right you have roughly 40-80k in hypothetical income which is pretty well aligned with your expected cost of living. Housing seems like it'll be the big wildcard but if your flexible (sounds like it) you'll probably be ok.

I also think the fact that you're being conservative with income is a good sign. I think it's unlikely a conservative, disciplined, young, exmilitary person can somehow make 0$/yr for an extended period... So I'd go for it myself .

Other wildcard is family. Once youre married and have kids other things matter that didn't. Eg. How close are you to family? Do you care about school quality (some people are obsessed with the school ratings, other people think they don't matter). Healthcare for kids can be either cheap or expensive (think... Born with medical condition ). So kids change your life in unpredictable ways. Then again sounds like you'll know that before you execute the plan.

Overall as a 40yo with 2 kids and FI but not RE I think your mentality is correct and your trajectory seems good. Spend your life doing what you enjoy, marry the right person, keep plans flexible and expenses low. The rest is out of our control

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Thanks for you input! There is a lot to think about and a few wildcards like you said. I'll definitely keep all that in mind.

Just a general question for everyone since this is an early retirement forum.

How do you guys bridge the big gap between ER at 38 yrs old and drawing from investments, TSP, Roth IRA , SS if you can't technically touch if till you're 59.5?
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Old 10-12-2015, 07:22 AM   #9
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My bridge need is only from 55 to 59.5 and I'm using taxable account assets heavy in dividend paying stocks to make the bridge. At 38 I didn't have enough saved to make such a bridge.


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Old 10-12-2015, 07:49 AM   #10
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If you're not ready to buy a house before retiring don't buy one just to be sure you can get a mortgage. There are lots of credit unions that specialize in families with military backgrounds and I'm sure they work with people in your situation all the time.
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Old 10-12-2015, 07:52 AM   #11
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Also, if you have a at least a 10% disability rating or more a VA loan will have the fees removed for a home that you live in, which makes the loan a lot more competitive.
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Old 10-12-2015, 10:11 AM   #12
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Also, if you have a at least a 10% disability rating or more a VA loan will have the fees removed for a home that you live in, which makes the loan a lot more competitive.
It's a good possibility I will have 10% disability for my hearing. That's good to know.
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Old 10-12-2015, 12:15 PM   #13
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It's a good possibility I will have 10% disability for my hearing. That's good to know.
You'll want to wait until you know about the hearing or any other disability, I had a family member with a claim in progress when he got a VA loan and it's possible to get the fee rebated back to you, but it's easier if you know when you apply for the loan. I believe the minimum hearing disability is 10%.
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Old 10-12-2015, 01:04 PM   #14
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It's a good possibility I will have 10% disability for my hearing. That's good to know.
Hardatit,

It is good to see a fellow AF member with a similar mindset. Personally, I am an E6 w/ a line number for Master. One less year than you have though. I would say max out your Roth TSP/Conventional Roth and then pour as much as you can into a taxable account. Also, do not neglect getting ANY medical problems documented in your records. If you stub your toe go to the doctor. Under CRDP, if you are rated at 50% or above that income is in addition to your retirement. I would attend a TAPS briefing now just to become familiar with the process. Lots of good information here: Veterans Benefits Network Forums

Even if you dont think financially your ready at 20 years you always have the option to stay and pad the finances a little more. You don't happen to be stationed at Robins, do you?
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Old 10-12-2015, 01:07 PM   #15
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You'll want to wait until you know about the hearing or any other disability, I had a family member with a claim in progress when he got a VA loan and it's possible to get the fee rebated back to you, but it's easier if you know when you apply for the loan. I believe the minimum hearing disability is 10%.
Not to turn this into a VA discussion but hearing is actually really difficult to get rated above 0%. Tinnitus on the other hand is an automatic 10%.
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Old 10-12-2015, 01:17 PM   #16
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Not to turn this into a VA discussion but hearing is actually really difficult to get rated above 0%. Tinnitus on the other hand is an automatic 10%.
Yes, what I meant was if you get a hearing disability rating it will probably be in the 10-20%.I do know a guy who got 30%. I don't know about your use of the words "really difficult' They use standard hearing tests. DAV is a good source of info for these things, I don't want to wander too far off topic here.
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Old 10-12-2015, 01:26 PM   #17
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Yes, what I meant was if you get a hearing disability rating it will probably be in the 10-20%.I do know a guy who got 30%. I don't know about your use of the words "really difficult' They use standard hearing tests. DAV is a good source of info for these things, I don't want to wander too far off topic here.
Difficult was probably the wrong word. What I mean is your hearing has to be really bad. Here is a link to the various VA percentages and associated hearing loss. http://www.militarydisabilitymadeeasy.com/theears.html
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Old 10-12-2015, 01:27 PM   #18
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Hardatit,

It is good to see a fellow AF member with a similar mindset. Personally, I am an E6 w/ a line number for Master. One less year than you have though. I would say max out your Roth TSP/Conventional Roth and then pour as much as you can into a taxable account. Also, do not neglect getting ANY medical problems documented in your records. If you stub your toe go to the doctor. Under CRDP, if you are rated at 50% or above that income is in addition to your retirement. I would attend a TAPS briefing now just to become familiar with the process. Lots of good information here: Veterans Benefits Network Forums

Even if you dont think financially your ready at 20 years you always have the option to stay and pad the finances a little more. You don't happen to be stationed at Robins, do you?
Good to see another AF member on here! Congrats on the line number!! No I'm not stationed at Robins, never been there. Thanks for the link I will check that out. I don't think I'll be at 50% or above unless something happens. I've been pretty good so far at documenting stuff. Had a few problems on a few deployments and got all that in my records.

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Not to turn this into a VA discussion but hearing is actually really difficult to get rated above 0%. Tinnitus on the other hand is an automatic 10%.
Yeah that ringing is the problem I have. Thanks for the helpful link!
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Old 10-18-2015, 02:00 AM   #19
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Welcome to the forum, Hardatit. Dual-military retirees have some interesting financial considerations, and they're a little-known demographic even among veterans-- let alone financial advisors. But it's all good.

I retired from active duty over 13 years ago (at age 41) and my spouse is a retired Reservist. (She starts her pension in 2022.) I've also heard from a couple dozen dual-military retirees over the last 15 years. Based on our experience, here's some thoughts.

First, let's address those discouraging words about mortgages in retirement. It's true that lenders only care about income and they don't give a crap about assets. However you have options.

Your ability to get a mortgage after active duty will be based on your pension, your dividend/interest income from your investments, and your side-hustle income. That side-hustle income has to be documented by several years of tax returns, so make sure you're declaring it now (and paying taxes on it).

It'd be nice if you bought your retirement home a year before you retired, while you still have military income & allowances, but that decision has too many other risky factors which could make it a bad idea. (Besides you'd rather rent for a year or two in TN so that you can hunt down a house with a distressed seller or some other fixer-upper bargain. Or you might hate your chosen location and move somewhere else.) Instead, you're probably going to grow a down-payment fund that will cover your 20% down payment (or even more) and you're going to get a VA loan. It's true that you could put 0% down and borrow the whole price as a VA loan, but lenders will probably want a higher interest rate. The 20% down (and a mortgage broker) will help you get the best interest rate in addition to the VA's guarantee.

You can also tap up to $10K of your Roth IRAs for a first-time home purchase. I believe that's $10K from your Roth IRA and $10K from your spouse's Roth IRA, but I'm not a tax expert-- check that with a CPA or CFP.

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Emergency fund is padded
Saving around 40-45K a year right at 80% of my AF pay.
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.

Once you've bought a home, you may choose to open a home equity line of credit based on your mortgage application. It'll be a small one (because you only have 20% equity) but it'll be another way to tap a short-term loan with a quick payoff from your next pension deposit.

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Originally Posted by Hardatit View Post
$280K invested in Vanguard Index funds and TSP 84/16 Stocks/Bonds
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.

Of course you still have to sleep comfortably at night despite the volatility of a high-equity portfolio, but no matter how badly the stock market melts down you'll still get a pension deposit next month. I've been through two recessions in retirement and the declines can be pretty discouraging, but the pension deposits arrive every month no matter how I feel.

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SBP if something happens to me (still unsure on this one)
You have options here, and they're somewhat controversial for dual-military couples. However you each have plenty of your own assets (plus military pensions, Tricare, and Social Security) and neither of you may care to insure the other.

For example, when your spouse retires awaiting pay ("gray area") from the Reserves then you could take the maximum SBP on her. (As her spouse, it's your decision.) You could choose a payout option that begins immediately upon her death or at the time when her Reserve pension would have started. The way the Reserve SBP is set up now, you'll pay nothing for this coverage while she's gray area. When she starts her pension then you could pay SBP premiums for two years (your obligation for insuring her during gray area) and cancel anytime during the third year. The reason I suggest canceling her SBP after two years of pension deposits is because (1) she's likely to outlive you, (2) there are cheaper ways to insure her income, and (3) by the time she starts her pension you may not want the insurance any more.

When you retire then she could choose maximum SBP on your pension. (It's her choice, not yours.) However you'd be paying 6.5% of your pension until you've paid for 30 years AND reached age 70. (In your case, 32 years of premiums.) Again, you guys have plenty of assets and she'll have her own pension income. You two might prefer to have that 6.5% income to either save/invest (and self-insure) or to spend on your entertainment budget.

A third option would be to buy cheap term policies on each other until you reach age 62 or 67 or 70-- whenever you'd start drawing Social Security benefits. If you have medical or disability issues then you may find it cheaper to convert your SGLI to VGLI rather than go through a civilian insurer's underwriting exams.

In general, when dual-military retirees reach their 60s they have more of a "green waste" problem than an income or asset problem. It's quite possible that by then you'll be living within your pension incomes and using your side-hustle income for fun & luxuries. You might not even be touching your IRA or TSP accounts, and the last thing you'll need is more annuitized income from SBP payouts.

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.

Notable exceptions to this would be if you have a lot of young kids (college funds) or a special-needs child who could be considered a disabled adult (SBP could be paid out to a special-needs trust). PM or e-mail me if you have questions on that.

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Will continue to add 40-45K yearly for the next 6 years till I retire from the AF. This will put total invested to $550,000 on retirement date not counting whatever interest it my draw from now till then.
$550K invested in Index funds not counting interest for past 6 years hopefully more
Wifes Reserve/self employment $10,000 and retirement pay at 60. $12K yr

There is quite the gap from 38-59.5 almost 22 years when I can start reaping the benefits of the money I worked so hard to put away now SS, TSP, Roth, and some taxable.

How do you guys bridge the gap between ER at 38 yrs old and drawing from investments, TSP, Roth IRA , SS if you can't technically touch if till you're 59.5?
It's surprisingly easy, but again you may not need to worry about tapping your Roth IRAs or your TSPs.

When you retire, you'll find a home and get a VA loan and start paying your mortgage. Your pension income and your side-hustle income will easily cover your non-discretionary expenses because you'll get a 30-year mortgage (with much lower fixed payments) and then you could choose to pay it off faster as your income (pension + side-hustle earnings) rises. You'll probably be tapping your taxable account, but if you chose to withdraw on the taxable account at a highly sustainable 4%/year then you'd have additional funds for discretionary expenses like extra mortgage payments or entertainment.

The reason you can be comfortable with a 30-year mortgage in retirement is because it's a fixed expense while your military pension is a highly-reliable inflation-adjusted annuity. After 13 years of retirement, and despite three years of 0% CPI inflation adjustments, my military pension has risen by over 27%.

Better still, your spouse's Reserve pension starts at age 60 and you'll both start Social Security during the decade afterward. Your taxable accounts probably only have to last until her pension starts. You could easily withdraw an extra $10K-$20K/year during the 20 years after you retire and never touch the Roth IRAs or TSPs.

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.

If you want to tap still even more funds before 59.5 then you could roll your Roth TSPs over to a Roth IRA, wait five tax years, and then start withdrawing the principal (but not the unrealized gains) of the amount you rolled over.

With your pension income and your investment assets, I doubt that you'll go further than tapping Roth IRA contributions. Frankly you might not even touch that if your side businesses take off.

Instead let's look at a new "problem": you may worry more about RMDs.

If you both have Roth IRAs and Roth TSPs then you don't need to worry about RMDs. But if either of you have a traditional TSP account (with tax-deferred contributions, not just tax-free pay from a combat zone) then let's look at income tax brackets.

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.

Now let's take a look at your income tax bracket when she starts her pension:
calculate her Reserve pension using the >30 column of today's pay tables at her retired rank.
add in your pension (today's dollars)
add in your side hustle income(s)
add in taxable dividend/interest income.
That's your income-tax bracket when she turns age 60.

Compare that to your income-tax bracket on the day you retire, which is probably years before her Reserve pension starts. I suspect that you're in the 15% income-tax bracket now (active duty) and you'll be well into the 15% income-tax bracket when you're both retired (because she's receiving her Reserve pension). This means that when you start taking RMDs from your traditional TSP, you'll be paying taxes in the the 15% income-tax bracket.

But for the two decades after you retire (before her Reserve pension starts up), you'll probably be in the 10% income-tax bracket-- unless your side income really takes off. So you may determine that your income tax bracket will go UP when her pension starts. That's what's happening for my spouse and me. It happens to every other dual-military retiree couple I know, even if one of them has a Reserve pension.

This means that not only will you not be tapping your TSPs or your Roth IRAs before age 59.5, but you'll also have to consider converting your traditional TSP accounts to Roth IRAs before her pension starts. That's what my spouse and I are doing now.

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.
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Old 10-18-2015, 12:43 PM   #20
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Hardatit: regarding bridging the gap.

I'm not ERed yet but acting as if... As much as possible.

At 40 the gap is big for me too. I have the same fears. I think being prepared and planning for worst helps some. Being flexible helps more.

But really the answer is: nothing. Life is risky. For example I keep working despite the fact that people die commuting in accidents, people die if heart disease caused by stress and eating badly, they get freak diseases and so on. I think FIREing seems so much riskier because it's rare and counter-social. Since I can get to 100% in all the retirement calculators with all kinds of scenarios, not really much more certainty I can have.

Now to pull the plug requires more motivation for me but I suspect that life in 5 years will radically different than my plans... It certainly has in the last 5. Sometimes good for me... Sometimes bad.

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