Retirement Nearing - Input wanted!

[virginia]

Could use your advice – I am finally within site of retirement! At least military retirement anyway. I’ll lay out my situation, and will welcome your thoughts.

Currently at 2 ½ years away from retirement. Expected retirement pay will be around $3550. I currently live on around half my income (I net around $5806 after taxes, pay a total of around $1200/mo in taxes), which includes $1100/mo rent. In retirement, I expect to be able to live on around $1300-$1800/mo (assuming no mortgage) plus will need to put away around $1000 (or reserve that amount) per month to pay things like propertytaxes, have money for vacations, save for a new car, etc.

I plan to buy some property in an ideal location. Currently I own a home that could probably sell for around $120k (paid for) – I will live in that home for about a year while searching for my ideal home. Own two other homes, one in Colorado and one in Georgia – both have lost around $20-30k in value due to current housing market. Colorado house (financed at 4.625%) – bought for $146k and could probably sell for around $118k. Georgia home (financed for 6.5%) bought for $136k and could probably also sell for around $118. Owe $43k on the Colorado house, $103k on the GA house. I plan to sell all three at some point and put the money towards my dream home and property, which I plan to spend no more than $250-$300k for. All homes are currently rented thru July of 2014. I would like to sell the CO and GA properties, one in 2014, and one in 2015. I figure it would help decrease taxes during what will likely be my two highest earning years. I would likely still be selling at a loss, and there’s a chance that both of these properties could further lose value since they are both in areas where divisions are closing a brigade each.
So…total net home assets is approx. $210k as of right now.

So here is what I currently have in investments (approximates):

$66k TSP
$68k Roth IRA
$25k (REIT’s) – at the rate it’s going will probably be retirement before I can pull out that money
$8k (mutual fund savings for education, niece and nephews)
$10k cash (emergency fund, which I plan to beef up to about $25k before I retire)

I have been paying approximately an extra $3k per month on the Colorado house. I have not been saving more than 1% in TSP recently, because I’ve been following the Dave Ramsey plan and trying to pay down the lowest balance house as fast as possible. I also plan to not work at all the first year, and after that try some home based businesses which I don’t want to count on an income for a while, and may never earn much money again, but think I’ll be happy doing them, and they should have generally low startup costs). Here are my questions.

Do I increase my TSP and/or Roth IRA savings to 15% of my salary and lower my current taxable income? This would lower my ability to pay extra on the house or save by approximately $2k per month, but would lower my current taxes and give me the ability to save more for later whereas in the future, I’m not sure how much extra income I’ll have to save for retirement.

Am I foolish to sell the properties off in the next two years? I really don’t want the hassle of having these rental homes in other states after I retire? I would much rather use them to buy a new home in cash rather than have them fund a mortgage.

Should I start stockpiling cash now (the extra 2-3k I have per month), or should I continue to pay on these mortgages?

There is an 80% chance I’ll be out in 2 ½ years. The only way I’d stay in longer is if I receive an assignment of choice closer to where I plan to retire. Finally, I am currently not married, no children, and 40 y/o. Thanks for the input!

[chasesfish]

What are the gross rents on the rental properties?


I would also increase your TSP contributions to 10%

[virginia]

The rents are $2350 combined. The house I'll live in after retirement brings in $550.

[haloFIRE]

Hey Virginia!

Thanks for your service! Couple of thoughts going from the info you provided:

As a lead in, I'm in the Military too. I own a rental property and have been using a property management company to rent and care for it since 1998. I've never had a problem, or missed a month of rent. So even though I 've moved many times, I've never ever had to worry. Reccommend you consider reputable property management companies for all three houses and treat them as investments once you find your dream house.

With that in mind, consider stop paying down your mortgages, let your renters do that for you. If you still want to pay, pay the highest interest rate off first.

So..with all 3 properties as investments, you'll need money for a down payment for your dream home. Use +/- 2k per month of your free cash to save for a down payment. With your 2.5 year horizon, you will amass 60k for your down payment.
That will cover 20-25%, and get you out of paying PMI. Use the money from your rentals to cover your mortgage. If not close, may consider selling your current home, allowing you to have a much smaller mortgage on your dream home

Guess my point is do a good analysis on your two rentals...they may be your long term income teams...and appreciate in value over time.

This from a guy that wishes he had bought and kept a house as a rental at every pcs. Hind sight....

The other 1k, I'd put half in your tsp, and the remainder I'd use to build up savings/emergency accounts. Easier to access this than a tsp...

I'm coming up on 25 years of service, and will hang it up about the same time you do. Never planned on doing mor than 3 years...funny how that happens.

My counsel is vague at best - I don't have all your numbers. I do reccommend looking at keeping your rentals as investments based on the data available. If you haven't done a detailed analysis, it may be worthwhile to do so.

Best of luck!

[chasesfish]

I really like Halo's advice and was going down the same route. The price points of those houses should make really good rentals. After 30% for expenses, you should get $1645 per month before your mortgage payments on the houses, it looks like Colorado will be paid off soon, then that is free cash flow. Rent rates also slowly go up and can protect against inflation.

I appreciate your service and I think you'll be well off with whatever choices you make.

[virginia]

Thanks to you both for your advice. I have thought about this over and over and had not thought about it that way. Having more cash would give me generally more options anyway....
Would you put the savings for house in a cash account or an investment account? We're only talking about 3 1/2 years or so - so I'm thinking a cash account?

[haloFIRE]

Good question. I think you've got to look at your risk comfort level.

Before I go any further, please understand I have no formal investment training, and I'm not a professional investment adviser. Ok, with that disclaimer out of the way....

Cash account: Your cash will be there, along with some level of interest. Think you can find .84% money markets on line. That is the good part. Bad part is inflation will nip away at the principal, so even after the interest you may have more money but less spending power

Investment account. Maybe buy an index fund, not sure of a specific fund, but hear great things about the Vanguard family - low expenses - believe they have an S&P dividend fund, that returns +/- 2% dividends plus mirrors the S&P500. So, more risk of loss if the market tanks, but a chance to beat inflation.

I know I am telling you things you already know. Maybe a split between the two?

Another option is a reliable, consistent out performing stock. Some will argue that there is no such thing. I have a few I really like, I've held them for the past 10 years or so and they've proven very reliable and paid excellent dividends.

So, maybe 1/3 cash/money market, 1/3 Vanguard SP500 div index fund, and your other 1/3 in a choice stock.

Comes down to how you feel about risk. If you aren't comfortable picking stocks, the 50% money market, 50% SP500 may be a good option.

Recommend you ask folks their perspective on risk when you take their counsel. I consider myself VERY risk tolerant. I can live off of just my pension when I retire, so if my investments tank, I'm fine - not worried a bit.

No doubt some folks here will give you advice that is counter to mine...because they are more risk adverse. So who is right? All depends on your individual situation and how you see things. I highly value the advice of folks here that disagree with me...they make me check my 6.

Hope this is helpful
haloFIRE

[virginia]

Thanks - I am pretty risk averse too - I'll probably end up choosing a mutual fund for most of it! Thanks again - very helpful!

[chasesfish]

I would recommend consolidating the investments into two mutual funds, the Vanguard Wellington Fund and the Vanguard Wellesley Income Fund, then keep a years worth of living expenses in cash.

Do you think you'll look to do something part time to bring in income after military retirement?

[virginia]

Chases - I will check into them. I've heard about the Wellington fund specifically on these boards before.

I am sure I'll eventually do something to bring in more money. I'd like to actually have a very small farm and do something with that, but that will very much depend on how much I like doing it. It's sort of a hair brained scheme at this point....

[DJRR]

Seems to me that you do not have enough liquidity. Dave Ramsey plan would be to have 3-6 months of expenses in the bank. I would also have 3-6 mortgage payments for each rental in cash for potential vacancies. I think $25k is probably a lot closer than $10k so I would add the $3k to your cash until you build it up.

Next, Dave says you should be putting 15% of your income into retirement before paying mortgages, so I would look at maxing your retirement plans instead of putting 1% in if you are following his plan.

Need to decide if you want to be a landlord. If yes I would look at refinancing the 3 properties to get the best rate while rates are low. I personally would look to end up about 50% LTV on each property to get some leverage, but not too much risk. Not sure how committed you are to being totally debt free, but prudent leverage is an advantage in real estate investing. If not, I would look at selling all the properties ASAP. At the values, the potential appreciation is not going to be that much in the near term and I would rather be out of the business. Might be easier to sell them as investment properties with a tenant, so no reason to wait on that if you want out

[virginia]

These mortgages are rentals though, so Dave wouldn't count them as a home mortgage. The "home" is fully paid for, so really I only have debt. I have enough cash, without the rental income to pay the mortgages, right now, so I hadn't been too focused on 3-6 months, but you are right and I'll need to have it before I retire. I am going to go ahead and put that 15% into retirement though, as I won't be able to invest into the TSP for much longer.
I don't want to be a landlord