Second Opinion Needed On Strange Idea

[DyNess]

Good Evening All,

I have been a lurker on this forum for a year and change now and finally had an idea I needed to vet and I think this would be the most appropriate place.

Ok, a little about me and my situation. Sorry for the long read.
Age: 27
Active Duty US Marine Corps

Financial Situation:
TSP: $50,000 (L-2050)

Vanguard:
-Roth IRA: $10,000 (Wellington)
-Taxable: $48,000 (Managed Payout Growth + Distribution, all distributions are re-invested automatically.)

Growing up I knew you had to work until you were 60-65 before you could retire. It wasnt until a few years ago I found MMM and then found this forum and bogleheads.org and learned that it was possible to retire early without winning the lottery.

I became a dividend investor and have been working to build up a passive inflow to supplement and to hopefully replace my income, especially considering I am looking at retiring from the military.

The problem: I cannot touch my TSP until I am 60, and I would like to retire before 45 (Adjustable, but an aggressive goal gives me something to strive for). This goal fits and I am on track to make it happen, assuming inflation and the markets want to work with me.

Crazy Idea that needs an outside opinion:
-The TSP offers General Purpose loans at a ridiculous interest rate (1.5%).
-The full loan comes from the account and all the money and interest get paid back into the account over 1-5 years. Early repayment is possible.
-The loan amount does not count as income for tax purposes, and the repayment is not tax deductible.
-The loan repayment is mandatory and comes with a forced payroll deduction.
-It is better to get money into the markets early to get it working for you.

I am looking at taking a $10,000 loan from my TSP, repayable over 3 years, total expense to me in the end is $10,243 + $50 ($284.56/mo). I will then invest this into the taxable market, without costing me very much every month to repay the loan. The low cost of repayment means I can keep pumping a large amount of cash into my taxable investments. Then rinse and repeat, as long as the market appears to be up. (Not market timing, but not going to pull money out after a large dip... at least not until a minimum level is restored.)

Notes:
-I understand this will hurt the growth of my TSP, but it will increase the growth of my taxable.
-If the market takes off, my TSP looses value, but my taxable gains even more value. If the market crashes, my TSP gains value, as my repayments are worth more, and I still shifted a portion to my taxable to help out there.
-I understand my taxable investments will not grow as fast as my TSP due to taxes owed, but I can use it for an income stream before the age of 60.
-I have not contributed to my TSP in over a year as all of my excess money flows to my taxable with a little here and there to the Roth.
-For the rinse and repeat, the $10,000 was replaced. $40,000 was left to grow as I do not want to cripple its possibilities. It is possible to take a loan up to 50% of the vested value or $50,000 whichever is smaller ($25,000 for me). Maybe if it gets larger, I will consider a larger amount (Other than what is listed below).
-Random Idea Addition: If it is a workable idea, maybe increase the loan to $15,000 and put $5,000 into the Roth for the year... and call it a forced Roth contribution... $5,000 into the Roth now and re-payed over 3 years. At the least I am considering the idea (for the $5,000 to Roth loan) as a possible way to benefit myself, as I did not max my Roth last year due to similar reasons for not contributing to the TSP. Max the year for me now, payable over a 2 year time frame... or 3 with the other plan. So I still have access to the initial money if needed (Last Resort Emergency Fund) but it grows tax free.

From what I can see, the plan relies on my investments to produce and my self control, to not spend the massive pile of cash on something stupid before retirement. I am a spender by nature. And I am spending my money buying "income" for the future. As long as I make it my goal track the income and not the total value, my mindset is comfortable. Hell, I have made it a game to see just how much I can manage to "spend" on my future, hence the crazy idea...

I should be able to add another $20,000 to my taxable investments this year and with the additional $10,000 from the loan I can make that $30,000...

I would like some feed back to see if my idea sounds reasonable, or did I just lose another screw? Thank you.

~Dy'Ness

PS: I understand the Managed Payout Funds are not very popular due to how they operate, but they fit my bill of incorporating indexing with a set amount payed out every month (Adjusted every year based on the rolling 3 year average price). Maybe one day, now that I have signed up for an account, I will list out why I choose this fund along with why I believe it is a good one, for me at least.

[MichaelB]

Hi DyNess, welcome aboard. Borrow money to invest? That's risky. Many of us here see debt as an impediment or something to use only when there is no alternative. Debt limits your options. Why not just step up your taxable investing? Why the urgency to invest that lump sum now instead of over three years?

[Htown Harry]

Quote:

Originally Posted by DyNess I should be able to add another $20,000 to my taxable investments this year and with the additional $10,000 from the loan I can make that $30,000...

Or you could also add the $3400 you would otherwise be devoting to the TSP loan payments and add a total of $23,400 this year?

While understand your objective is to grow the taxable accounts, I'm having a hard time keeping all of the variables straight while reading your post. Maybe if I studied it a bit more...

FWIW, I would not put the growth of one flavor of investments ahead of growth of the overall portfolio. So in looking at this proposal, the bottom line of my spreadsheet would be the change my net worth for each alternative investment scenario and each +/- market scenario. Including tax impacts, which you have noted.

Also, you say you can't touch your TSP until 60. I can't say much about that since I'm not in the plan, but I do know there are various exceptions available for earlier no-penalty, taxable withdrawals from tax-deferred accounts. One can take SEPP (aka 72(t)) withdrawals from an IRA. Some 401 (k) accounts allow withdrawals beginning at 55 with separation of service. 457 (b)'s allow withdrawals anytime after separation of service.

[DyNess]

Greetings!

I hope this helps clarify the idea.

-For TSP think 401K, with no matching for me at least.
-I carry 0 Debt. The only debt I have is the rotational, cell phone, internet, insurance etc... my vehicle is paid for and I try to keep my expenses low.
-While this puts me "in debt", the debt is to my self.
-The money is already invested with the TSP. Which I cannot touch until I am 60.
-My taxable investing is already at my max. I am an E-6 with soon to be 10 years in. Sending $24,000 a year to investments is not exactly easy.
-The goal was to shift the money which was already invested in the TSP, to a taxable investment to support my goal. It would hinder the growth of the tax deferred money available when I turn 60, but would increase the income of the money I can touch when 45.
-All said and done, I lose the growth of the money in a tax deferred account but gain it in a taxable. And the money gets repaid to my tax deferred account with a small amount of interest. The only money I lose through this process is the $50 charge for the loan, which played into me choosing a longer repayment time.

-Why am I in a rush to invest it now? I am and I am not.
The idea was based around shifting what was already invested, basically re-paying myself minus the $50 charge, to shift it from tax deferred which I can touch at 60 to taxable which I can touch now... To something which can grow in the taxable and assist with an early retirement instead of having as much tied up until later.
-Almost everything I hear and have read revolves around getting started early. The idea was based on this. I shift 10k from my tax deferred (loan + loss of growth) to a taxable and get it into the market early. Where it can grow and increase my ability to hit my goal of early retirement.
-The amount I chose was 20% of my TSP, which should not drastically hinder my future performance as there is at least 32 years for it to "recover". In which I will not be contributing to it, except for repayments.
-By drastically I mean with it re-invested from tax differed to taxable, without effecting my current tax rate, the growth will be lower. But who knows what taxes are in store for 2045?

Semper Fi,
~Dy'Ness

[donheff]

I don't quite get it. If the idea is to convert TSP to taxable how is this advantageous. You pay 1.2% for the priviledge of also increasing savings to pay back the TSP at some future point. How is that better than just investing the payback amounts plus 1.2% in taxable in the first place. As to waiting until age 60 to pull your TSP funds that would apply if you stay in the military until 60. If you ER earlier you can convert the TSP to an IRA and take 72T equal payments if you want access to the funds without penalty. You could also take the TSP as an annuity under 72T without penalty.

[utrecht]

The 1.5% interest rate you are paying on the loan gets paid back to yourself, correct? If that's the case then personally I don't see a problem with your plan.

[growing_older]

What happens to TSP loans if you leave your job? Do they need to be repaid within a short window or else they are converted to withdrawals, with taxes and penalties? That is what usually happens to 401k loans.

Money in the TSP is sheltered and will grow without being taxed until you (eventually) pull it out. If you are successful at being a very early ER, then you will have many years to 72t or even to Roth convert whatever you have in there. When I ran similar examples (with my 401k) I always came out ahead with putting as much as possible into the 401k and only making taxable investments with anything beyond the limits.

[Htown Harry]

Quote:

Originally Posted by DyNess Greetings! I hope this helps clarify the idea... -The money is already invested with the TSP. Which I cannot touch until I am 60.

Donheff and I are making the same point in different ways: the assumption above is incorrect.

This article says as much but doesn't give details
What Should You Do with your TSP When You Leave the Service?

Quote:

[Option]Roll your TSP assets into an IRA Rolling your Thrift Savings Plan assets into a Traditional IRA will help you avoid the 10% early withdrawal penalty. You will also control your IRA and have unlimited investment options. If you enjoy hands on investments, then rolling your TSP into an IRA may be for you.

Further research will show there are several penalty-free options, both within the TSP rules and if you roll the account over to a TIRA.

That said, your idea isn't crazy. As you say, if the interest payments on the loan flow back to your account, you're trading the opportunity for market returns on $10,000 in the L2015 for a 1.5% fixed return on the loan balance. It may not be optimal, however, and even modest leveraging introduces a new risk to your portfolio that doesn't exist today.

The good news is your financial position and disciplined savings are quite commendable. Clearly you have goals and the will power to reach them. And your net worth will improve year by year no matter which way you go. Just be careful to really understand the risks in reaching for just a bit more return or "balancing" of the taxable vs. tax-deferred accounts.

Oh and this - welcome to the forum and thank you for your service!

[brewer12345]

DyNess, I would not take the risk to do what you are proposing. So what is the risk? Chief among the risks that I see iss that you separate from the service either voluntarily or involuntarily and as I understand the typical structure of these loans you would have to pay the entire balance back in short order. Yes, you will have been saving the money from the loan in your investment portfolio, but you might be forced to liquidate the investment at an inopportune time (early 2009, for example).

As others have pointed out, there are ways to get money out of the TSP/IRA long before traditional retirement ages. Study up especially on 72T withdrawals.

What you are proposing is really a timing play. You can either:

- borrow the money, make a lump sum investment in your chosen vehicle(s), and then pay back the loan over a period of time, or

- skip the borrowing and just make contributions to your taxable account in the amount of what your loan repayments would be if you had take the loan.

In the first case, you are making a bet that now is the best time to invest and upping your risk of bad things happening should you leave the service in the next 5 years. In the second case, you are taking no liquidity/forced repayment risk and you are spreading your bet on when the best time to invest might be over the next 5 years. I like what is behind door #2 much, much better.

If you have not already stumbled across it, I think you will find Nords' blog to be very helpful: Military Retirement & Financial Independence

[heeyy_joe]

Instead of your plan, why not just use a margin brokerage account and use leverage the way most others do. That way, if you get zapped by a soft market, you can use the TSP borrowing to bail yourself out of trouble. Leverage is great if you use it wisely.

[DyNess]

Good Evening,

Thank you all for the feedback.

@Htown Harry and donheff:
-I missed the 72T rule when I did my research on it earlier. Thank you for pointing it out. Sorry I missed it in your first post. It was a late night for me.

@Htown Harry:
-True, it does introduce a new element of risk to my current portfolio.

@growing_older and brewer12345:
-I had not really thought about having to leave the service in the next 3 years, which would be the duration of the loan. Should I die, the remaining balance would be considered a taxable distribution and the additional taxes would be owed from my estate.
-If I am forced out within the next 3 years... oh boy did I really, REALLY mess something up and I think the additional taxes on the remainder are going to be the least of my problems...

@brewer12345:
-I also am not going to go so far as to say now would be a great time to invest, as the market is near its all time high. But because it is near its all time high, I was thinking it may be a great time to shift some things around. I mean, it beats asking for advice on shifting it at the bottom of a dip in my opinion. And no, I do not have any idea which way the market will go.
-My thinking is, if it goes down, my repayments to myself are more valuable. If it goes up, my taxable benefits from having the money into it to compound growth for the next few years.

@heeyy_joe:
-The only reason I am considering the leverage/loan is because it would be borrowing from and repaying myself. I looked into options and leverage sometime last year and decided it wasnt for me.

I think I will mull it over for a few days. At the latest, I will have to make my decision of to do it or not at the beginning of next month. At least for this year.

I am going to have to run a couple of scenarios with the 72T withdrawals over the weekend to see how they play out. Although just reading the rules of equal payments coming out until I hit at least 59.5, figuring for 15 years, doesnt sound very appealing to me, as it would hurt the growth of the 15 years my ignorant self had calculated into my situation. Although if my ER is extremely successful, knowing I have that option, I would probably use it to increase the level of success. But at this point, I do not think I would consider using the money as a source of income for spending without having successfully hit ER first.

Semper Fi,
~Dy'Ness

[2B]

As a general comment on investing, the more complicated the plan the less likely it is to work out in your favor. Any form of borrowing always increases risk and we humans tend to underestimate that until it slaps us in the face.

If you are still in the Marines at 27, I will guess you are planning on making it to at least 20 years for the retirement package. There's a frequent poster here (Nords) that has a significant amount of advice for military personnel. Search for some of his posts on the subject. My FIL retired from the military and his retirement benefits saved them from an otherwise disastrous personal financial behavior of him and my MIL.

[heeyy_joe]

Quote:

Originally Posted by 2B As a general comment on investing, the more complicated the plan the less likely it is to work out in your favor. Any form of borrowing always increases risk and we humans tend to underestimate that until it slaps us in the face. If you are still in the Marines at 27, I will guess you are planning on making it to at least 20 years for the retirement package. There's a frequent poster here (Nords) that has a significant amount of advice for military personnel. Search for some of his posts on the subject. My FIL retired from the military and his retirement benefits saved them from an otherwise disastrous personal financial behavior of him and my MIL.

+1

[jclarksnakes]

I do not know about TSPs but if what DonHeff and Htown are saying is correct (and it probably is because these guys usually know what they are talking about) there is not really much of a compelling reason to do what you are talking about. It does seem like an okay plan as long as you accept the risk (IMO risk is not such a terrible thing for a hard working LBYM 27 year old) but IMO the complication and hassle versus the small upside potential just do not warrant the effort. I admire your thinking about this sort of plan and even more so that at your age you are doing very well. One more thought for you. Your career does look pretty secure but you never know what might happen in respect to your health or family situation or even politics that could end your career early. I had more than a few friends who were good soldiers and just got caught up in being in the wrong place at the wrong time or made small mistakes and still got canned. THANKS FOR YOUR SERVICE! Being in the Marine Corps today must be especially demanding and interesting.

[DyNess]

Good Evening All,

I have thought about the issue and about the 72(t) withdrawals, as well as worked the math for the estimated values. I have decided to go with the loan. The supporting math is below. I have tried to keep everything in today's dollars. I understand and accept all of the risks which have brought up.

Assumptions on TSP Growth:
-For TSP growth, I used TSP's growth calculator with the assumption of 10% total growth - 3% inflation leaving 7% real which is why it shows @ 7%.
-The +3400 is the rounded down repayments from the loan. Actual amount repaid each year would be $3414.72.
-Reason for the change from 48K to 50K is rounding. It was at 48 and change now it is just over 50. And I figured I would use that number instead.
-I have included the estimated balance at age 45, which is when I would consider taking 72(t) withdrawals.
-Although the loan gets repaid monthly, I just included the entire balance as if it was added at the end of the year.
-Assuming the same 1.5% interest on future loans. (Which is repaid to my account...)

50000 @ 7% for 32 years: $466,619 (Age: 60)
50000 @ 7% for 17 years: $163,786 (Age: 45)

Year 1: 40K @ 7% = $42,891 + 3400 = 46291
Year 2: 46291 @ 7% = $49,637 + 3400 = 53037
Year 3: 53037 @ 7% = $56,871 + 3400 = 60271
60271 @ 7% for 29 years: $456,209 (Age: 60)
60271 @ 7% for 14 years: $160,132 (Age: 45)

Year 4: 50271 = $53,905 + 3400 = 57305
Year 5: 57305 = $61,447 + 3400 = 64847
Year 6: 64847 = $69,534 + 3400 = 72934
72934 for 26 years: $447,764 (Age: 60)
72934 for 11 years: $157,168 (Age: 45)

Year 7: 62934 = $67,483 + 3400 = 70883
Year 8: 70883 = $76,007 + 3400 = 79407
Year 9: 79407 = $85,147 + 3400 = 88547
88547 for 23 years: $440,916 (Age: 60)
88547 for 8 years: $154,764 (Age: 45)

3 runs covers 9 years and until retirement from active duty, adding a total of $30,000 to my taxable investment account.
The difference between the total value of taking 3 separate loans over a 9 year period vice not taking a loan period are:
At age 60: $25,703
At age 45: $9,022

For my taxable vehicle of choice, a few assumptions were made on the math below.
-Almost all math was rounded down.
-Payments/re investments are made monthly, I only compounded it annually.
-I did not deduct taxes required from the payments, as that would come out of my own earnings and not withdrawn from the fund.
-That the fund only matches the growth of inflation. It never exceeds or falls behind...
-270 Price/Payout ratio. For all of the data I have on the full years, from 2009 to current, 270 is fair and below what is current. Including the 52 week high is, which is 265.9 at a price of $18.72. Thus adding additional hindrance to the growth projections...
-For the most part, this fund will change what it pays out as the market changes, but the payout ratio remains relatively stable...

The columns below are labeled as such. Year, Monthly Payout, 12 months in a year, Total for the year, Payout ratio, Growth in monthly payout for the next year. The math used in each row is self explanatory.

1) $37.00 * 12 = 444yr /270 = 1.64 (The 37 is the +37 from influx from loan)
2) 38.64 * 12 = 463.68 /270 = 1.71
3) 40.35 * 12 = 484.20 /270 = 1.79
4) 79.14 * 12 = 949.68 /270 = 3.51 (The 79.14 accounts for the +37.00 from influx from loan)
5) 82.65 * 12 = 991.80 /270 = 3.67
6) 86.32 * 12 = 1035.84 /270 = 3.83
7) 127.15 * 12 = 1525.80 /270 = 5.65 (The 127.15 accounts for the +37.00 from influx from loan)
8) 132.80 * 12 = 1593.60 /270 = 5.90
9) 138.70 * 12 = 1664.40 /270 = 6.16
10) 144.86 * 12 = 1738.32 /270 = 6.43
11) 151.29 * 12 = 1815.48 /270 = 6.72
12) 158.01 * 12 = 1896.12 /270 = 7.02
13) 165.03 * 12 = 1980.36 /270 = 7.33
14) 172.36 * 12 = 2068.32 /270 = 7.66
15) 180.02 * 12 = 2160.24 /270 = 8.00
16) 188.02 * 12 = 2256.24 /270 = 8.35
17) 196.37 * 12 = 2356.44 /270 = 8.72
== $205.09 per month at age 45.

Value of $205 per month at payout ratio of 270: $55,350
Value of $205 per month at payout ratio of 200: $41,000 (Would only happen if the market crashed etc... The 52 week low is 232.198 at a price of $16.37)

So from what I can see, at the age of 45, I will be looking at a $10,000 hit in my tax differed account while looking at a gain of $41,000 in my taxable...

Additional Information:
-TSP growth for the last 12 months ending April 1st is 12.5%
-TSP annual report for 2012 estimates it could provide me a lifetime monthly payout of $208...
-TSP growth for 2012 was 13.5%
-As soon as L2060 is available, I plan on moving at least 50% of the current balance over to it, for more equity exposure and growth potential.
-The last 2 loans were calculated in, but are not guaranteed to take place... It is my choice at that point in time if it happens. I just did not feel like posting three different 17 year charts...
For the Managed Payouts:
-Current 3 year average is $16.89. ($16.07 for 2010, $17.21 for 2011 and $17.37 for 2012)
-Current year average is $18.25.
-Assuming current year average holds, next years 3 year average would be $17.61 boosting payouts 4.3%
-Current year inflation average is 1.68% as of the end of March.
-Although it will increase the amount I owe in taxes, which will in turn decrease the amount I can invest, my own investments will do this anyway. Also, should I get married and start a family at anytime during this process, the entire situation can be reviewed in the light of new expenses.
-As I am single and would like to have a family in the future, I figure this is the best way to provide an early growth of money to support early retirement for the family. I take the hit in taxes and shovel away the money while I can. As I may not be able to put away as much in the future.

If you see something wrong with my math or my calculations, please let me know.

Thank you all for your advice and insight.

Semper Fi,
~Dy'Ness

[padlin00]

Sounds like a good idea when the market is doing great. I remember folks taking out loans against their homes in the late 90's to invest it in the Nasdaq which was going gang busters. Didn't work out too well come 2000 or was it 2001?. Or maybe it was the folks doing the same to invest it in condos in Fl. or Az. just a few years ago, didn't work out too well then either.
Be careful out there and thanks for your service.