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Parallel Investment Plan
Old 12-02-2013, 07:12 PM   #1
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Parallel Investment Plan

Hello all. Looking for some insight…

27 yo married to a DW
Retirement Investment sum $30K
Emergency Savings established
Military Income at roughly $84K (will promote Christmas Eve)
Only Debt is a car payment at $349 per month for 36 mo. (Honda Accord)

My plan is to serve at least 20 yrs in the military--desire is to serve at least 24 years, but the decision will depend on family's status. I invest heavily in the TSP Roth option. This year has been a phenomenal year as far as return go. Off the top of my head, I am somewhere in the neighborhood of 16-17% for the year. My dilemma is a secondary investment strategy. I am projected to have earned $1.9M (8% avg return) - $11.8M (15% avg return) by the time I hit the magic 59 1/2 age in order to retrieve my nest egg. This is where the dilemma is stemming. If I do 20-24 yrs of service I'll be 43-47 yo and I'll have a retirement pension at $72K-$83K annually. I'm trying to figure out a good investment strategy to supplement our income for perhaps a big purchase such as a house and pay cash for it in between the day I retire from the military upon aging to 59 1/2. I'm considering buying Vanguard's S&P fund and a couple others and continue to invest into those monthly. However, I believe I will get dinged (taxed) when I go to pull the $$ out.

Any thoughts or advice will greatly be appreciated.
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Old 12-02-2013, 07:35 PM   #2
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Unrealistic.

The real return of good quality short to intermediate term bonds = ZERO or negative. Large cap stocks = 4%. Mid-small caps and Emerging Market stocks = 5%.

From 1930-2010 the real return of a 60/40 stock/bonds port = 5%. In this economy, I feel safe to project 3%.

Then subtract your expense ratio and tax ratio from that to get your net real return.
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AA = 60/35/5. Expected CAGR = 5.7%. GSD (5y) = 7.8%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.7%. Term = 36 yr. FI Duration = 4.9 yr. Portfolio survival probability = 86%.
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Old 12-02-2013, 09:46 PM   #3
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Yeah, I think 8% is possible, but 15% is 90's thinking. Anyway, a taxable Vanguard account would be nice for those pre 59.5 years. Use the simple index funds, just hold, and taxes won't be too bad. I'd start with a minimum amount that gets you a basic AA with Vanguard funds. Then probably let it sit for a few years until you are maxing out your TSP. That will give you a little experience at it. If you find you are maxing out your TSP, the overflow goes into the taxable account. If you run out of years first, then reduce your TSP contribution and start funding your taxable account. The main idea is to keep the TSP investment period long and max contributions if possible, and the taxable investment period short and minimized contributions to just meet your requirements. Then just pay the taxes as needed. Not much you can do about that.
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Old 12-03-2013, 08:19 AM   #4
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Hi, we have a lot in common so I'll tell you what I'm thinking. The basic penalty-free options for tapping your savings prior to 59 1/2 are: (1) selling funds in a taxable account, (2) withdrawing Roth IRA contributions, (3) borrowing up to $50k from the TSP, and (4) setting up a 72t to begin regularly scheduled withdrawals from the TSP. I'm putting as much as possible into all three vehicles (TSP, Roth IRA, and taxable account) for now, and I'll figure out the best withdrawal strategy when the time comes.

I do have some concerns about the numbers you gave. First, you are talking in nominal (not inflation-adjusted) terms. The pension for a retired O-5 or O-6 with 20-24 years is not $72k-83k in 2013 dollars. You are looking at probably $50k instead. That's still good money, but I worry that it might be much less than you are expecting and currently spending. In February of 2011 you wrote that you had $10k in your retirement accounts and now you have $30k. Maybe the rest went toward your emergency savings(?), but saving about $7k per year tells me that you've been spending something like $50k-70k.

As others pointed out, counting on an 8-15% return is dangerous. That's above the historical norm even with a 100% stock portfolio. Stocks (EDIT: in the US market) this year are up 30%. If you've seen a 16-17% return, that tells me you aren't invested in 100% stocks (EDIT: unless you are heavy in emerging markets... I just looked and didn't realize how much they've lagged this year). For a 50% stock portfolio, I expect annual returns of about 3% real (maybe 5% with inflation).

Tim
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Old 12-03-2013, 02:32 PM   #5
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Thank you all for you responses!

Tim, we were doing extremely well; however, last winter we ran into a family emergency where we had to take out $30K from our savings/investments for a family member...:face palm:

I just got back from a deployment and was able to invest more money this past year while deployed. I've read that since the inception of the S&P the historical average has been a 12% return?? That is why I projected a 8%-15%(hopeful, but doesn't sound realistic) return.

Thanks again!
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Old 12-03-2013, 05:47 PM   #6
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Sorry to hear about the family emergency. The income/savings numbers make more sense now.

The "average" return of the S&P 500 might be around 12% through this year, but the "annualized" return (which is the number that matters for compounding) is 9-10%. And, again, that is not adjusted for inflation. That's not necessarily wrong, but I find it harder to plan in nominal dollars. The real, annualized return is more like 7%. And then a lot of people will tell you that we should lower our expectations for the future. You can argue against that, but I like to be conservative in my estimates by planning for 5%.

Tim
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Old 12-07-2013, 11:25 AM   #7
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Welcome back, Junior. Good to hear from you again.

Merry Christmas on the promotion, too!

Quote:
Originally Posted by junior3042 View Post
Hello all. Looking for some insight…
My plan is to serve at least 20 yrs in the military--desire is to serve at least 24 years, but the decision will depend on family's status.
I'd suggest treating your military career one obligation at a time. Plan your finances for the long term, but be ready to leave active duty when the fun stops. It could be a clean break to civilian life or you could consider the Reserves/National Guard.

Save & invest for your financial independence as though you won't have a military pension, and that way you won't feel locked in to a 20-year sentence with no time off for good behavior. You can tweak that plan when you get to 15-17 years of service, but before then you never know when personal or family changes will completely realign your priorities. If you're no longer enjoying your career yet you try to clench your jaw and gut it out to 20 then you'll significantly risk your mental, emotional, and physical health. Your family will think you're a joy to live with, too.

Only 17% of military servicemembers stay for 20 years, and that includes Guard/Reserve as well as active duty. Admittedly that number is as high as 30% in the Air Force, but it's down in the single digits for Marines. In other words, you are statistically unlikely to stick around for 20. While your individual career may beat the odds it's still worth planning as though you won't have a pension.

Quote:
Originally Posted by junior3042 View Post
I invest heavily in the TSP Roth option. This year has been a phenomenal year as far as return go. Off the top of my head, I am somewhere in the neighborhood of 16-17% for the year. My dilemma is a secondary investment strategy. I am projected to have earned $1.9M (8% avg return) - $11.8M (15% avg return) by the time I hit the magic 59 1/2 age in order to retrieve my nest egg.
There's few polite ways to say this, so I'll be blunt. Your 8%-15% APY projections are fantasy. Yeah, the S&P returned double-digit numbers in the 20th century, but that's history. Some equity asset classes (like small-cap value stocks) may return 8% APY in the future, but your entire portfolio (equities, bonds, cash, real estate) will not. Even if your TSP is split between the S & I funds, you still won't get more than 8% APY over the next decade.

The good news is that you won't need $1.9M (in today's dollars) when you reach age 59 1/2.

Try more conservative portfolio assumptions like 4-6% total return (the Gordon Equation) or an 80% equity portfolio that will exceed inflation by 3%. You're much more likely to be pleasantly surprised.

Quote:
Originally Posted by junior3042 View Post
I'm trying to figure out a good investment strategy to supplement our income for perhaps a big purchase such as a house and pay cash for it in between the day I retire from the military upon aging to 59 1/2. I'm considering buying Vanguard's S&P fund and a couple others and continue to invest into those monthly. However, I believe I will get dinged (taxed) when I go to pull the $$ out.
Any thoughts or advice will greatly be appreciated.
Your TSP & IRAs are a great way to save for retirement, but they're difficult to tap for that much cash without severe penalties for early withdrawals. It's definitely worth continuing to max out your TSP contributions for the low expenses, and you can later roll that account over to an IRA/convert to a Roth IRA. Maxing your Roth IRAs is also a great idea.

You could withdraw Roth IRA contributions any time, and you can withdraw an additional $10K for a first-time home purchase. But you'll want to use taxable accounts for bigger goals like paying cash for the whole home. A good starter plan would be a 20% down payment by some date (like 10 years from now). You could begin with an equity fund and shift to balanced funds or CDs as you approach your goal date. Vanguard has a number of tax-efficient funds for that. You'll pay some taxes on gains each year, but when you cash in the equities then you'll pay long-term capital gains taxes at a fairly low rate.

Plan your asset allocation around your goals, and pay more attention to the risks of "principal loss" and volatility. Don't let taxes drive your strategy-- a tax-efficient fund will take care of that concern.

There's good debt and bad debt. We perpetually debate which category mortgages should go into, but I believe that mortgage debt is much more flexible for taking advantage of opportunities in the real estate market. If you have a 20% down payment then you'll get better mortgage interest rates and lower fees. Buying a home during a depressed market (with a mortgage) will save you far more money in the long run than you'll pay in mortgage interest.

Saving up enough to pay cash for a house could take 10-20 years, and then finding a good home at a good price will take longer. "No mortgage" is only part of the entire financial picture, and it really limits your opportunities.

Here's a couple of links to get you started:
When do you stop contributing to tax-deferred accounts?
How many years does it take to reach financial independence?
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Old 12-10-2013, 08:25 PM   #8
Confused about dryer sheets
 
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Wow, Nords..

I'd suggest treating your military career one obligation at a time. Plan your finances for the long term, but be ready to leave active duty when the fun stops. It could be a clean break to civilian life or you could consider the Reserves/National Guard.

"Save & invest for your financial independence as though you won't have a military pension, and that way you won't feel locked in to a 20-year sentence with no time off for good behavior. You can tweak that plan when you get to 15-17 years of service, but before then you never know when personal or family changes will completely realign your priorities. If you're no longer enjoying your career yet you try to clench your jaw and gut it out to 20 then you'll significantly risk your mental, emotional, and physical health. Your family will think you're a joy to live with, too.

Only 17% of military servicemembers stay for 20 years, and that includes Guard/Reserve as well as active duty. Admittedly that number is as high as 30% in the Air Force, but it's down in the single digits for Marines. In other words, you are statistically unlikely to stick around for 20. While your individual career may beat the odds it's still worth planning as though you won't have a pension."

--that is great advice, thanks for the perspective.

Thanks for the insight and advice. I will certainly incorporate it into my projections/strategy. I hope you're doing well if you're still in Hawaii. Also, hope your daughter or son (can't remember) is doing well in Navy ROTC. Goal is to be like you one today. FIREd, beach bum…
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Old 12-11-2013, 08:01 AM   #9
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Quote:
Originally Posted by Nords View Post
Saving up enough to pay cash for a house could take 10-20 years, and then finding a good home at a good price will take longer. "No mortgage" is only part of the entire financial picture, and it really limits your opportunities.
If the OP does remain in uniform until 20+ years of service, then he has the time required, and saving to buy a home with cash upon retirement sounds good to me. This is essentially my plan. A number of people on this forum convinced me a few years ago there is a very strong case for simply renting while in uniform and making PCS moves every 1-3 years.

Tim
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Old 12-11-2013, 08:21 AM   #10
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Quote:
Originally Posted by junior3042 View Post
Thank you all for you responses!

Tim, we were doing extremely well; however, last winter we ran into a family emergency where we had to take out $30K from our savings/investments for a family member...:face palm:

I just got back from a deployment and was able to invest more money this past year while deployed. I've read that since the inception of the S&P the historical average has been a 12% return?? That is why I projected a 8%-15%(hopeful, but doesn't sound realistic) return.

Thanks again!
Stocks have averaged 10% from 1926 to 2012 (5.5% for bonds). I personally think that returns going forward will be lower than historical averages. If your portfolio is 100% stocks, then 8% is possible, but I would not count on 12% or more. If it happens, then great, you'll be in a position to retire early if you wish to.

So that, plus listening to Nords, is my advice to you. Thank you for your service.

See https://personal.vanguard.com/us/ins...io-allocations
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Old 12-14-2013, 02:39 PM   #11
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Quote:
Originally Posted by junior3042 View Post
Thanks for the insight and advice. I will certainly incorporate it into my projections/strategy. I hope you're doing well if you're still in Hawaii. Also, hope your daughter or son (can't remember) is doing well in Navy ROTC. Goal is to be like you one today. FIREd, beach bum…
Good, let us know how it works out!

Hawaii-- no ka oi.

Our daughter's doing well in NROTC, and she's been selected for surface nuclear power (aircraft carriers). She has her Naval Reactors interview in a couple months but she's looking forward even more to graduation in just 154 days. Her first tour will be a weapons/operations job on a destroyer or cruiser, so she's trying to decide between Yokosuka or Rota...
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