Investment Guidance Requested : Army Officer

[Snidely Whiplash]

My son is currently a 24 year old 1st Lieutenant (O2) in the Army, single and with no debt. I have been encouraging him to invest as much as possible but still be able to have money to do things with friends and live comfortably. He doesn't drink and hates the smell of smoke so his fun activities are centered around outdoor activities and local attractions and not the "bar scene" (I guess that's contributing to him still being single, but that's a whole other story, LOL). He currently earns about $48k per year in base pay and another $14k in housing allowance (rent is only $750 per month).

I'm somewhat out of touch with todays economic environment (caring for a sick wife means my knowledge of the economy and market conditions centers only on grocery and medical care costs) and I'd appreciate some advice as to how others think he's doing. I don't want to push him to increase his contributions to higher levels if he's already doing great but want to keep him well ahead of the curve.

Current position:

No debt and an emergency fund of $8k (CD's and cash in checking account)

Roth TSP with a balance of approx. $30k (C Fund / S&P 500)

Vanguard taxable account with a balance of approx. $35k primarily in large cap blue chip stocks (KO, XOM, KHC, DIS, BRK-B, V, and SPY in nearly equal amounts)

Going forward:

He is comfortable with the amount of his emergency fund and will maintain that level.

His Roth TSP will continue to go to the C Fund and is set at 30% of his base pay (about $15k per year).

He is opening a Roth IRA at Fidelity and will be contributing $300 per month there until July when he will receive a raise and then will up his contribution to $450 per month. The Roth IRA will be investing fully in the S&P 500 index fund.

His Army branch deploys regularly and he spends very little during deployments. His last deployment one year ago resulted in a cash balance when he returned home of about $30k of which he invested $15k to the Vanguard account and used the balance for his emergency fund. The next deployment (probably mid-2018) will more than likely result in similar cash balance of which he will probably invest half (again in the taxable at Vanguard) and use the rest to fund vehicle replacement and continuing his education via an online Masters degree course.

Given the low tax bracket he is in a traditional IRA or TSP account seems to make little sense. I have also spoken with him at length about the 100% equity portfolio and he assures me he is comfortable without a position in bonds and is comfortable on the stock path he is on.

I'd appreciate any suggestions or advice anyone might have that I can pass along to him. I'm very proud of how he is doing (both personally and financially) and want to make sure I'm not missing an obvious avenue that he should be availing himself of to put him in the best position possible. I have forwarded him the Bogleheads Military Investing information as well as the Jack Bogle's little red book on investing. I don't make his decisions for him, but he does look to me for financial advice and I want to make sure I'm giving him the best advice I can.

[REWahoo]

Nords is probably the best person on the forum to respond to your post. I think he looks for mentions of his name so he should see this post and hopefully chime in.

[Ginny]

I have a 26 yo DS LTJG in the Navy. He is doing exactly what your son is doing. One additional item--He has decided that every time he gets a raise, he will bank it. A 100% stock portfolio for these youngsters is excellent.

He is getting married next year so things may change.

[Snidely Whiplash]

Quote:

Originally Posted by REWahoo Nords is probably the best person on the forum to respond to your post.

Nords is pretty knowledgeable on all things military. Not to discount his opinion at all, I was more interested in the successful people here and their opinions about his savings rate and the manner in which he was investing. I'm hopeful it's enough to put him in a good position over the course of his life.

Quote:

Originally Posted by Ginny I have a 26 yo DS LTJG in the Navy. He is doing exactly what your son is doing. One additional item--He has decided that every time he gets a raise, he will bank it. A 100% stock portfolio for these youngsters is excellent.

Thank you for your affirmation that we are on the right path (and thanks to your son for his service!). Banking his raises makes a lot of sense and is one of the reasons I haven't pushed for a greater savings rate at this point. As he increases in rank I hope he opts to increase his investing rate. Its probably something I should confirm and discuss with him this weekend while he is visiting with us for Christmas.

[Sunset]

It sounds like he is doing fantastically great !
Seriously, he is probably doing better than 99.9% of all 24 yr olds.

Investing in just stocks or stock etf's right now, and no bonds is fine as long as he plans to not withdraw for at least 10 years.

Using a ROTH and skipping the IRA is probably a good idea, as his tax rate will probably be higher later in life.

[HawkeyeNFO]

With no further info, I'd say that the emergency fund is unnecessary, although if it's just $8k and that includes his checking account, then no worries. No mortgage to pay and his job won't go away if he gets sick or injured. Health care is taken care of already.

Deploying soon? The savings deposit program gives a guaranteed 10% interest on up to $10k. His admin / adjutant can set it up once deployed.

Many tax free zones exist today, and if he doesn't need the money while he's there, he can put all of his monthly pay into the TSP, up to $48k per year or something like that.

Everything else looks good to me. TSP allocation is same as mine. Doing great!

[pb4uski]

Quote:

Originally Posted by Sunset It sounds like he is doing fantastically great ! Seriously, he is probably doing better than 99.9% of all 24 yr olds. Investing in just stocks or stock etf's right now, and no bonds is fine as long as he plans to not withdraw for at least 10 years. Using a ROTH and skipping the IRA is probably a good idea, as his tax rate will probably be higher later in life.

+1 I agree Roth or taxable is preferable at this stage and 100% stocks is a-ok.

[davismills]

As a former O2 USAF guy, he's doing miles better than I did at his age.

I would keep hitting the TSP generously. If he makes a career of the USA, I would (once making O3) never spend above that lifestyle. If he makes it to O6 and possibly beyond, he'll be set for life.

In the military, keeping up with the "Jones" is hard to resist so I would concentrate on LBYM. The TSP, be it Roth or regular IRA, are excellent investment vehicles with very small investment expenses.

[Red Badger]

If he keeps up with his investment ratio, he'll do fine. I wouldn't worry too much about his AA. More important that he stays in when the going gets rough and not try to time the market.

Also, whether he's under the "old" or blended retirement system (if he makes a career out of his service), that will be some serious juice in his FIRE MRE.

Retired E8 (15 active + 15 reserve)

[DrRoy]

I wouldn't go 100% equities but his age is the the to do it. Looks good to me.

[nash031]

I'm just over 18 years of service now, and I did the same thing he did to start out. Specifically,

- I started a Roth IRA right after graduation, and eventually maxed it out.
- I opened Traditional TSP (Roth was not an option at the time) and eventually maxed it out.
- I started saving in taxable accounts once the first two were maxed every year, which happened at about 4 years of service.

Seems like he's doing really well. He'll want to look into diversifying his holdings, even in the TSP. I was 100% stocks until I was about 35, and almost all of that US. Now, I'm (we're) closer to 85/15 with roughly 30% of stock holdings spread overseas via the I fund in TSP and VTIAX.

One major question: What are his intentions with blended retirement? That may depend on what he thinks he's going to do long term, but it's critically important to make a smart choice with the best information you have now.

[OldShooter]

@Sindely, you're getting some good support here. I won't echo much of that but one thing struck me about your son's investments:

You mention that your son is investing in an S&P 500 fund. This is a really popular thing and many people confuse it with passive investing. Passive investing is, according to all the data and all the researchers, the smartest strategy. BUT: Passive investing iis a strategy where one is trying to follow Eugene Fama's recommendation: "... we have to hold the market portfolio." At a minimum this involves holding the entire US market but more generally it involves trying to (passively) hold the entire world stock market. Against this, holding the S&P 500 is really making a sector bet on large cap US stocks. A large sector, to be sure, but still only about 40% of the world. Worse, that sector has been hot lately, so regression to the mean tells us that (if we're making sector bets) we should be diversifying away from it rather than towards it.

So, IMO the right long-range strategy is to hold a US Total Market fund and an International (non-US) Total Market fund in some proportion. 50/50 basically gives you the cap-weighted world because the US is about 50% of the world. Many others here hold something more like 60-70% US and 30-40% international. According to Vanguard research, this is the sweet spot for minimizing volatility as sectors wax and wane. Their report (https://www.vanguard.com/pdf/ISGGEB.pdf) is a worthwhile read. This 8-minute interview with guru Kenneth French is also worthwhile: https://famafrench.dimensional.com/v...home-bias.aspx

[pb4uski]

+1 I prefer a 70/30 mix of total stock market/total international stock market to 100% S&P 500. If he is apprehensive about investing in international stock then either lower the % or at least go with total stock over S&P 500. total stock pick up a lot of extended market stocks (mid and small caps).

[king smoothie]

The Blended Retirement System decision is a big one. He is early in his career, which means statistically he is more likely to leave service without a pension than with one. He should strongly consider switching to BRS and getting matching with his TSP investments. It puts him in a lower pension plan, but if decides to leave before he is eligible for a pension, at least he will have the extra TSP money. And if he does stick around, then with BRS he can have loads more money in TSP and still a really good pension.

[Snidely Whiplash]

Quote:

Originally Posted by Sunset It sounds like he is doing fantastically great ! Seriously, he is probably doing better than 99.9% of all 24 yr olds. Investing in just stocks or stock etf's right now, and no bonds is fine as long as he plans to not withdraw for at least 10 years. Using a ROTH and skipping the IRA is probably a good idea, as his tax rate will probably be higher later in life.

Thanks Sunset. Our thoughts were the same with regard to the tax rate. We are hoping to put him in a better position in the future where a higher tax bracket would be a legitimate concern.
Holding for 10 years is a given. The taxable account he views with an eye towards never selling shares, only availing himself of the dividends.
Your point about the other 24 year olds is good for me to hear as a father but kinda saddens me; I'm amazed at how few of the others in his unit contribute to the TSP. The percentage is miniscule.

Quote:

Originally Posted by HawkeyeNFO With no further info, I'd say that the emergency fund is unnecessary, although if it's just $8k and that includes his checking account, then no worries. No mortgage to pay and his job won't go away if he gets sick or injured. Health care is taken care of already. Deploying soon? The savings deposit program gives a guaranteed 10% interest on up to $10k. His admin / adjutant can set it up once deployed.

Agree 100% about the emergency fund, but he sleeps better knowing its there so I didn't suggest he do otherwise. Thanks for the suggestion about the SDP! That's a great opportunity for him to look into! He spends very little during the deployments, getting 10% would be a huge home-run rather than letting it sit for months in a checking account getting (near) 0%.

Quote:

Originally Posted by pb4uski +1 I agree Roth or taxable is preferable at this stage and 100% stocks is a-ok.

Thanks Pb4uski, the confirmation really does give me some comfort that I'm making good suggestions to him.

Quote:

Originally Posted by davismills I would keep hitting the TSP generously. If he makes a career of the USA, I would (once making O3) never spend above that lifestyle. If he makes it to O6 and possibly beyond, he'll be set for life.

Thank you for your service and I keep encouraging him to adjust (higher) his deposit amounts with promotions and his annual anniversary increases.

Quote:

Originally Posted by Red Badger If he keeps up with his investment ratio, he'll do fine. I wouldn't worry too much about his AA. More important that he stays in when the going gets rough and not try to time the market. Also, whether he's under the "old" or blended retirement system (if he makes a career out of his service), that will be some serious juice in his FIRE MRE. Retired E8 (15 active + 15 reserve)

And a thank you too you also! I'll comment on the new BRS below. Staying in the market is something we have discussed at length. He understands that when things are low he's buying cheaper. I was pretty heavily invested in real estate when he was growing up so "making your money when you buy low" is pretty well ingrained into him.

Quote:

Originally Posted by DrRoy I wouldn't go 100% equities but his age is the the to do it. Looks good to me.

Thank you DrRoy.

Quote:

Originally Posted by nash031 I'm just over 18 years of service now, and I did the same thing he did to start out. Specifically, - I started a Roth IRA right after graduation, and eventually maxed it out. - I opened Traditional TSP (Roth was not an option at the time) and eventually maxed it out. - I started saving in taxable accounts once the first two were maxed every year, which happened at about 4 years of service. Seems like he's doing really well. He'll want to look into diversifying his holdings, even in the TSP. I was 100% stocks until I was about 35, and almost all of that US. Now, I'm (we're) closer to 85/15 with roughly 30% of stock holdings spread overseas via the I fund in TSP and VTIAX. One major question: What are his intentions with blended retirement? That may depend on what he thinks he's going to do long term, but it's critically important to make a smart choice with the best information you have now.

Thanks for your comments nash031, and for your service too. Sounds like you're setting yourself up very well also. I'll talk about the BRS below.

Quote:

Originally Posted by OldShooter @Sindely, you're getting some good support here. I won't echo much of that but one thing struck me about your son's investments: You mention that your son is investing in an S&P 500 fund. This is a really popular thing and many people confuse it with passive investing. Passive investing is, according to all the data and all the researchers, the smartest strategy. BUT: Passive investing iis a strategy where one is trying to follow Eugene Fama's recommendation: "... we have to hold the market portfolio." At a minimum this involves holding the entire US market but more generally it involves trying to (passively) hold the entire world stock market. Against this, holding the S&P 500 is really making a sector bet on large cap US stocks. A large sector, to be sure, but still only about 40% of the world. Worse, that sector has been hot lately, so regression to the mean tells us that (if we're making sector bets) we should be diversifying away from it rather than towards it. So, IMO the right long-range strategy is to hold a US Total Market fund and an International (non-US) Total Market fund in some proportion. 50/50 basically gives you the cap-weighted world because the US is about 50% of the world. Many others here hold something more like 60-70% US and 30-40% international. According to Vanguard research, this is the sweet spot for minimizing volatility as sectors wax and wane. Their report (https://www.vanguard.com/pdf/ISGGEB.pdf) is a worthwhile read. This 8-minute interview with guru Kenneth French is also worthwhile: https://famafrench.dimensional.com/v...home-bias.aspx

Thank you for the links and suggestions! I will take a look at those links. I hadn't really thought much about the large-cap weighting of the S&P 500. maybe some diversification into a total market fund and an international fund makes some sense. Will research and discuss with him further. Is the international fund of the TSP a decent option?

Quote:

Originally Posted by pb4uski +1 I prefer a 70/30 mix of total stock market/total international stock market to 100% S&P 500. If he is apprehensive about investing in international stock then either lower the % or at least go with total stock over S&P 500. total stock pick up a lot of extended market stocks (mid and small caps).

You suggestions makes sense. These are some good suggestion and I'll have to think of an easy way for him to accomplish this. I really try to encourage him to "set and forget" his investments so that there isn't a temptation to lower his investment amounts or "tinker" with his allocation. The S&P 500 seemed to be a good all-in-one stock investment fund for him. I never considered it might be better to consider a broader range of equities.

Quote:

Originally Posted by king smoothie The Blended Retirement System decision is a big one. He is early in his career, which means statistically he is more likely to leave service without a pension than with one. He should strongly consider switching to BRS and getting matching with his TSP investments. It puts him in a lower pension plan, but if decides to leave before he is eligible for a pension, at least he will have the extra TSP money. And if he does stick around, then with BRS he can have loads more money in TSP and still a really good pension.

I think he will opt into the BRS. I didn't think that was a good idea at first, and if he stays for 20 he would receive a much larger guaranteed inflation adjusted retirement in the current system, but so many people that I respect (Nords) have suggested the BRS is the way to go I think it makes sense for him to do so. A lot can happen in 20 years, he could be hurt and have to leave the Army, he could decide he hates it and leave, or Army changes could force him to leave whether he wants to or not. I guess the hope in the new BRS is that market returns can achieve (or come pretty close to achieving) making up the biggest part of the difference between what he's giving up and what he can make by investing the government match.

[OldShooter]

Wow! Very detailed response. I think we are flattered.

Re TSP I just Googled and found the "I" fund. This is an international large cap where I would prefer a total international market fund like VGTSX, but the "I" fund fees are unbelievably cheap at 3.9bps and it still gets him solid international coverage. So if there's a big convenience advantage I don't think he'll regret going with it vs VGTSX Total International or some other similar fund.

(Looking at the TSP brochure I am surprised that there is such a lousy range of US equities: just an S&P 500 fund and a small cap fund though again with attractively low fees. Despite the fees, I would go with VTSMX Total US Market or something similar rather than bet on just those two sectors.)

VTWSX might be an attractive alternative. Total World in one fund, but of course then you aren't overweighting the US as @pb4uski and many others prefer. It is a "set and forget" option though and would probably serve well.

Back to dissing the S&P 500 briefly: There are tenable arguments out there that the stocks in the index are in a sort of mini-bubble due to all the naive money going into S&P 500 funds. I'm not sure what a passive investor can do about this because we can hardly ignore 40% of the worldwide stock market, but IMO it certainly should discourage tilting towards those stocks by joining the herd.

[nash031]

Quote:

Originally Posted by Snidely Whiplash I think he will opt into the BRS. I didn't think that was a good idea at first, and if he stays for 20 he would receive a much larger guaranteed inflation adjusted retirement in the current system, but so many people that I respect (Nords) have suggested the BRS is the way to go I think it makes sense for him to do so. A lot can happen in 20 years, he could be hurt and have to leave the Army, he could decide he hates it and leave, or Army changes could force him to leave whether he wants to or not. I guess the hope in the new BRS is that market returns can achieve (or come pretty close to achieving) making up the biggest part of the difference between what he's giving up and what he can make by investing the government match.

I'm not allowed to advise anyone at work about whether or not to take the BRS, but I can here! I would've taken it in a heartbeat if it were available to me 18 years ago... and at some point I might've opted out of the service before 20 if it were available, too. I think BRS is a great deal for those for whom the military is not their life's dream to serve for 30 years. Most folks don't serve 20, and of those that do, not many of them serve 20 or more because it remains an avocation for them. Many of us become mercenaries at some point, often because of other priorities in life taking precedence over the desire to live the military life. I think BRS is a great way to keep your options open while still securing your financial future, and I would encourage most (but not all!) to opt in. Now, those who opt in and are opted in need to understand how to take advantage of BRS to make it really work for them, and that's something I hope to help my Sailors understand over the course of the next two years.

[nash031]

Quote:

Originally Posted by OldShooter Re TSP I just Googled and found the "I" fund. This is an international large cap where I would prefer a total international market fund like VGTSX, but the "I" fund fees are unbelievably cheap at 3.9bps and it still gets him solid international coverage. So if there's a big convenience advantage I don't think he'll regret going with it vs VGTSX Total International or some other similar fund. (Looking at the TSP brochure I am surprised that there is such a lousy range of US equities: just an S&P 500 fund and a small cap fund though again with attractively low fees. Despite the fees, I would go with VTSMX Total US Market or something similar rather than bet on just those two sectors.)

TSP is great for a lot of reasons, most notably the "free lunch" G fund.

But, to your points, the I Fund, while not totally complete, is complete enough. Coupled with the exceedingly low fees, it's great.

If you want to build a 70/30 TSM/World portfolio in TSP you can get really close, all with the low fees. I choose to view my portfolio as an overall allocation, so much of my international allocation resides in TSP's I fund. That said, the portion of TSP that I want to closely match the VTSAX/TSM funds I split 80/20 between C and S funds. That roughly matches the layout of VTSAX relative to the S&P 500 and Russell small cap index. It's certainly close enough for government work.

For those of us that use VTSAX/VTIAX (or similar) the construct of C/S/I funds as your equity allocation and then the G fund as your bond allocation is a strong, exceedingly low fee way to make the TSP a powerful part of your retirement assets. Roughly 25% of my invested assets are in TSP.

[Nords]

Quote:

Originally Posted by REWahoo Nords is probably the best person on the forum to respond to your post. I think he looks for mentions of his name so he should see this post and hopefully chime in.

Thanks, REWahoo!

Quote:

Originally Posted by Snidely Whiplash Nords is pretty knowledgeable on all things military. Not to discount his opinion at all, I was more interested in the successful people here and their opinions about his savings rate and the manner in which he was investing. I'm hopeful it's enough to put him in a good position over the course of his life.

Snidely, your son is doing better than about 99% of my O-2 readers.

I'd suggest that he continue maximizing his contributions to the Roth TSP ($18,500 in 2018) and his Roth IRA. If he can contribute even more to a taxable Vanguard account and achieve a 40% savings rate then he'll be financially independent before he pins on O-5.

When he deploys to combat zones and is eligible to earn combat zone tax-exempt pay, then he can contribute up to $18,500 to his Roth TSP and another $36,500 to his traditional TSP. The order of the contributions can be a little tricky (he has to avoid hitting $18,500 in his Roth TSP before the end of the calendar year) but I'm happy to help him with that if he wants to try it. I'll put a post up on that subject in a few weeks but here's the fine print:
https://www.tsp.gov/PlanParticipatio...ionLimits.html

And yes, as an O-2 maximizing his TSP contributions he will absolutely win out with the Blended Retirement System. He should sign up as early as possible next month.

Everything else about his finances is just tinkering in the margins, and I suspect his time is better spent on military training & qualifications. He's welcome to e-mail NordsNords@Gmail.com if he has more questions.

[nash031]

Quote:

Originally Posted by Nords I'd suggest that he continue maximizing his contributions to the Roth TSP ($18,500 in 2018) and his Roth IRA. If he can contribute even more to a taxable Vanguard account and achieve a 40% savings rate then he'll be financially independent before he pins on O-5.

TLDR, my path:
- Save 50% of your tenure and promotion pay raises.
- Save most of your retention bonuses.

--
This is key, IMO. Many military members believe that their pension and modest contributions to TSP are enough to retire at their 20 or close to it. A good friend of mine who's a bit of a spendthrift matter-of-factly announced to me that my pension wouldn't be enough when I retired, and that I'd have to find another job. His situation led him to believe that - he retired after 22 yrs at O4 with a little over $150,000 saved himself, generally following a save 10% model, even though he was capable of saving much more. A divorce a couple of years after retirement left him with his $40,000/yr pension and that $150K as his ex walked with her mid-six figure 401K. He's now working to figure out how he can retire at his desired country-club-member lifestyle in a coastal area by 65, let alone early. He's better off than a lot of people in their late 40s, for sure, but not close to where he wants to be.

Savings rates: My path was very similar to what Nords outlined: started saving early as I said above, maxing IRA and TSP as soon as able. By the time I was O-3, I was making sizable contributions to a taxable account. By the time I was halfway through my O4 time, wife and I were well over 50% gross savings rate, getting all the way to 59% the year before DD was born. Now, we're down closer to 40% as we had to hire a nanny this past year, but still making great progress.

I got to that savings rate by committing to saving at least half of my pay raises (both tenure and promotion). This allowed for a little bit of expansion of living standard over the course of time, but always driving my savings rate up towards 50%. I hear a lot of young officers talk about how they want to save all their pay raises, and I don't think that's a wise plan because I don't think it's truly sustainable. You have to live your life a little bit, and O-1s don't make much. The "half my pay raise" worked well for me in striking a balance.

Use of Bonuses: Unfortunately, many people view their SRBs/other bonuses as "play money". They don't take seriously saving pay raises. They count on that pension, and then the first time they look at the pension calculator, include taxes and look at how it compares to their expenses, it can be a rude awakening. I allow myself a little bit of "play money". This year, I plan on replacing a few components on my bikes, that will amount to spending roughly 5% of my bonus. I intend to save the rest. Most years, probably 90% of my annual retention bonus (could be nuclear officer incentive pay, or aviation retention bonuses, or similar in the Army, etc.) money goes into taxable savings, and that's nothing to sneeze at. Again, it's how I've struck the balance between living an enjoyable life while still marching on to being FI at my 20.

Nords' guidance certainly helped when I read it the first time about 5 years ago. It taught me some new things and reinforced a lot of what I had been doing since I was an O-1.