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Retirement Planning for Young Military Member
Old 02-06-2008, 02:16 PM   #1
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Retirement Planning for Young Military Member

Hello all, I was hoping to present my personal situation and with any luck, garner some value added input from you readers who are smarter than I.

I'm a 29 year old 10 year Air Force veteran and plan on staying in for at least 10 more years to reap the benefits of the military retirement system. I'm stationed in the Middle East right now and will be until December of 2008.

Living here, I pay no State or Federal taxes and get paid a little bit extra by the nature of the local environment. I invest 25% of my base pay (comes to about $1266/mo) in the TSP (spread between the C, S, and I Funds) and I also invest in a Roth IRA (PRSGX: Spectrum Growth) maxing it out at $416.66/mo.

The current value of my TSP is about $28,000 and my IRA is about $10,000. I have $10,000 sitting in a savings account that earns 10%APY while I'm here and the rest of my savings is in a high yield savings account with EmigrantDirect. I plan to continue to invest heavily in stocks clear through my 30's. Yes, I'm aware of diversification, and I am diversified...in small, mid, large, emerging, equity, international, etc...stocks. I'm not so interested in bonds and other "lower risk" options at this point in my life. I could lose it all today and still be just fine as far as I'm concerned.

I have no debt whatsoever and already have my MBA that was paid for by the military.

With all that being said...I want to retire early, and would like to know if I'm saving too little, too much or just enough AND is there anything else I should consider (non retirement vehicles)?

I will be eligible for military retirement when I am 38 yrs old and potentially will make about $55,000 per year on military retirement alone. That figure comes from looking at a Lt Col's pay (rank I will potentially retire at) today at 20 yrs of service and applying a 3% increase per year over the next 10 years to estimate the amount (at 50%) when I am due to retire.

Being so young retiring from the military, I will most likely get another job for a few years just to keep me busy but would like to have financial freedom earlier than the "typical" 59 1/2.

Your thoughts?
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Old 02-06-2008, 04:03 PM   #2
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LeBlanc,

Welcome to the board. There are quite a few current and retired military folks here and no shortage of opinions.

First question: I'm a little confused by your career info. If you came in at 18 YO, I'm assuming you were enlisted. Are you now an officer? As you probably know, making O-5 by the 20 year point is a long shot unless you got a commission a few years ago.

Reminder: Retirement pay is based on the average of the last 36 months of pay. So, even if you've been wearing O-5 rank for 3 years when you reach 20, you'd get the average of 12 mos of 0-5 with 16 years service ($7013 per month) and 24 months of O-5 with 18 years ($7212). Average pay = $7145 x 50% is $3573 per month (= $42,870 per year). If you won't make O-5 by the 17 year point, factor in some months as an O-4. If you intend to take the SBP, subtract a few hundred dollars per month. Remember that you'll be taxed on all of the rest.

Observation: You are right about the inflation adjustment, but remember that amount means almost nothing as you try to visualize how much your nest egg must cover. I find it easier to just use the monthly check you'd get if you were an O-5 retiring TODAY and look at the expenses you'd have if you retired TODAY. Then, take that dollar amount, adjust for inflation between now and your intended retirement date, and see if your savings rate (along with the expected growth) will get you where you need to be.

PRSGX: It wouldn't be my first choice for a Roth IRA (higher expenses than you need to pay, and why a concentration in large growth stocks? Does this fill some type of hole in your TSP allocation, or did you see an advertisement that sold you on it?)

More to follow. Welcome again!

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Old 02-06-2008, 04:34 PM   #3
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Thanks for the response Sam.

I am an O-3E. I was enlisted for 5 yrs and gave up my SSgt stripes to become an officer. I've been an officer for 5 years now and given the way my career and promotions have been going, I'm quite confident I will make O-5.

Good reminder about the top 3 retirement pay system and observation regarding the inflation.

PRSGX: as far as I know, this is a no fee, no load fund. Am I mistaken? It invests in 9 other TRowe products with about 37% large, 18% med, 17% international, 13% equity, 12% small and 3% emerging. I couldn't offer much rhyme or reason as to why I chose this fund except for it's low costs. Please fill me in if I'm missing something.

The $27,000 I have in my TSP is divided 25%-C, 25%-S, 50%-I.
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Old 02-06-2008, 07:30 PM   #4
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LeBlanc,
PRSGX: T Row Price is regarded as one of the lower-cost fund families, and you could certainly do a lot worse. The yearly expense ratio for the fund is .81 , and Morningstar projects that $10,000 kept in the fund for 10 years would cost you approx $1002 in expenses. There are many funds (especially in Vanguard, but some others as well) that would charge you about 1/4th as much. For example, Vanguard Mid Cap Index (VIMSX) has an annual expense ratio of .21, and Morningstar projects that $10k invested for 10 years would cost you $280. This fund also gives you a little broader exposure to value stocks than you are getting right now in PRSGX and in your TSP selections.

But, don't get me wrong. A few hundred bucks in fees is nothing in the big scheme of things. You've established a strong savings habit and you've made good investment choices.

As to whether you'll have enough: Play around in FIRECalc and also figure out how much you'll really need (in addition to the military retirement check) to have the kind of retirement you want.

Oh, and regarding bonds: You've made the same decision I've made (though I own some I-Bonds that we bought at the right time). Quite a few military retirees elect to go light on bonds figuring that their retirement check can cover the bare essentials if the market takes a hit. Just be sure you can really do it, and that having a high % in equities prompt you to sell when the market goes down. Because it will.
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Old 02-06-2008, 08:08 PM   #5
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Sam,
I am perplexed, because when I look at websites like TRowe.com, smartmoney.com, morningstar.com, etc...none of them list fees of any sort to include an expense ratio...BUT, I did see in Morningstar's report that the "net expense ratio prospectus" is .81. Where does that come from if everything is listed as 0?

Thanks for the inputs. Back to my original question as well, is there anything else I should be looking at in terms of other types of investing other than retirement only vehicles?
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Old 02-06-2008, 08:30 PM   #6
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Welcome to the board, LeBlanc. I went to USNA with a LeBlanc-- you have a cousin or an auntie in the Navy?

Quote:
Originally Posted by LeBlanc View Post
Living here, I pay no State or Federal taxes and get paid a little bit extra by the nature of the local environment. I invest 25% of my base pay (comes to about $1266/mo) in the TSP (spread between the C, S, and I Funds) and I also invest in a Roth IRA (PRSGX: Spectrum Growth) maxing it out at $416.66/mo.
The current value of my TSP is about $28,000 and my IRA is about $10,000. I have $10,000 sitting in a savings account that earns 10%APY while I'm here and the rest of my savings is in a high yield savings account with EmigrantDirect.
Sounds like you're going to max the $15,500 TSP and you'll hit this year's $5000 in your IRA. The savings program visibility has improved a lot since they added a link to the MyPay website, too. You're one of the first veterans on this board to be hitting all three from the beginning.

Keep an ear out for more changes-- there are persistent rumors about being able to put bonus/special pay in the TSP (up to the IRS limit of $45K/year) and the Army has started matching TSP contributions in some MOSs. The Navy has noted that the only positive effect on retention has been throwing money at the problem, and the other services will surely follow.

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Originally Posted by LeBlanc View Post
I plan to continue to invest heavily in stocks clear through my 30's. Yes, I'm aware of diversification, and I am diversified...in small, mid, large, emerging, equity, international, etc...stocks. I'm not so interested in bonds and other "lower risk" options at this point in my life. I could lose it all today and still be just fine as far as I'm concerned.
I have no debt whatsoever and already have my MBA that was paid for by the military.
Sounds like you have the knowledge to remain confident in a high-equity portfolio despite its volatility. Your "human capital" is pretty high, as is your probability of future employment, so you have every reason to go 100% equity.

And when you retire to a federal pension with a COLA, the equivalent of Treasuries or I bonds, you have every reason to stay 100% equity.

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Originally Posted by LeBlanc View Post
With all that being said...I want to retire early, and would like to know if I'm saving too little, too much or just enough AND is there anything else I should consider (non retirement vehicles)?
As others have mentioned, that depends. You need to be able to plug your spending into FIRECalc and play around with the numbers to set the limits on your ER portfolio. You definitely want the High Three pension (not Redux or CSB) to be calculated in the same dollars as your spending-- which is usually easiest in today's dollars. DoD also has a pension calculator on their website that does the High-Three math for us.

Once you max out the TSP & IRA, keep on going in taxable accounts with low-cost funds. Index, managed, aggressive, target, lifestyle, commodities, REITs, whatever you like-- it doesn't really matter as much as minimizing expenses. If you want to make it complicated, you could even make large purchases of individual stocks and get your expense ratio down near zero.

Save as much as you feel comfortable saving. When in doubt, no ER has ever been disappointed by saving enough to feel frugal but not so much to feel deprived. You haven't mentioned a spouse or kids, yet, either, and that can certainly slow down an ER plan (but for all the right reasons).

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Originally Posted by LeBlanc View Post
I will be eligible for military retirement when I am 38 yrs old and potentially will make about $55,000 per year on military retirement alone. That figure comes from looking at a Lt Col's pay (rank I will potentially retire at) today at 20 yrs of service and applying a 3% increase per year over the next 10 years to estimate the amount (at 50%) when I am due to retire.
I was commissioned in 1982 with the "Evil Empire", six-month deployments that lasted for 9-10 months, and the 600-ship Navy. No one ever envisioned that peace would break out and that automation would cut so deeply into manpower. Today the military's biggest expense, by far, is manpower. When the cutting starts (and it starts all over again every decade) it won't matter how much of a hot-shot we were you are or what community you're in-- a lot of future flag officers are going to get forced out.

It wouldn't hurt for you to see if your plan still works under the assumption that you retire as an O-4>20. The advantage of a more conservative approach is that you won't feel the pressure to promote or to stay for time in rank or to take "just one more unaccompanied tour" to make your numbers. Not, of course, that anything like that has ever happened to the rest of us...

Assignment officers are keenly aware of what they can do to you when you reach the 16-year point. The worst case would be that you flip off your assignment officer, join the Reserves, and work part-time for a few more years. That alternative is far better than risking burnout on active duty. And yes, spouse and I have gone through both sides of this problem with our respective careers. She's done far better with the Reserve option than I did with the active-duty one.

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Being so young retiring from the military, I will most likely get another job for a few years just to keep me busy but would like to have financial freedom earlier than the "typical" 59 1/2.
Your thoughts?
The beauty of financial independence is having the assets to choose the option you like the best, not the one dictated by the size of your ER portfolio.

Hopefully it's an individual choice. I've been ER'd almost six years, life is at least as busy as it was when I was active duty-- and I don't miss commuting, uniforms, or deadlines one little bit.

In the vein of part-time work, however, you might want to read Bob Clyatt's "Work Less, Live More" and crunch the spreadsheets on the CD in the workbook.
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Old 02-06-2008, 09:13 PM   #7
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Where does that come from if everything is listed as 0?
It comes out of the big pot of money that they use t invest in stocks for you. You'll never see a "bill" or fee against your account, but the value of the shares under your control will be less by exactly the amount of the expense ratio every year. Kinda tricky, and a lot of investors don't know about it (but it is in the prospectus and year-end reports they send you--in a font much smaller than the NO FEE, NO LOAD! claims).

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Back to my original question as well, is there anything else I should be looking at in terms of other types of investing other than retirement only vehicles?
That depends on how big your nest egg needs to be at the time you retire. For example, if your military retirement check will meet al your needs and you are happy that it will never be reduced, then you don't need to save another dime.

If you ever want to, there are ways to withdraw from your retirement accounts before you reach the "normal" age. Search under "72t" to find more about this online or right here on this forum. I didn't have the TSP available for most of my career, so we used IRAs and taxable accounts.

Regarding the amount you'll need every month in retirement: The general consensus here is that the oft-quoted rules of thumb based on your present income (e.g. "you'll need 80% of your pre-retirement income once your retire") are worthless. Figure out what what you'll really need each month/year based on the spending you expect to have. Then, apply inflation (be pessimistic--IMO, 3% is likely not what we'll see going forward).
From this "desired spending" amount for the year of your retirement, subtract the expected amount of your military retirement (for good measure, i would assume that your pay will grow at 1% less per year than the "spending inflation" you used in your calculations above. Stick around this board for awhile and you'll come to view the official govt inflation numbers with suspicion, too). Also, don't forget to subtract any expected SBP premium and the taxes from your retirement pay.
Okay, the diifference between your desired spending and your retirement checkj is the amount you'll need t withdraw from your nest egg every month/year. The "safe withdrawal rate" and safe withdrawal method is subject to a lot of debate on this forum, but I think it's safe to say that most people here use 4% per year as the bogey (this is intended to leave enough in the account to grow to keep up with inflation and to replace what you took out over many decades.) So, for example if you've decided that you need to withdraw $10,000 the first year you are fully retired, then you'll need a nest egg of $250,000 to support that withdrawal amount.

Next you need to decide if the amount you've saved and the amount you continue to invest will get you to your target amount by the time you retire. That's a calculation for another day.

All the above are rough WAGs: FIRECalc and some other tools can help you refine the numbers and have confidence in them.

BTW, Nords is too modest to bring it up (and likely afraid of raising the wrath of the trolls), but he's working on a book for military folks like you who are anxious to REALLY fully retire at the end of your military service. He's got a day job (surfing), so don't hold your breath.

samclem

PS: Hey, you're deployed! Get off this board and help somebody drop a bomb on somebody that really deserves it!
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Old 02-07-2008, 01:01 AM   #8
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Hey LeBlanc,

I am 29 and an O3 too. I am in the Army but it sounds like we have some of the same goals.

As far as are you saving enough, who knows, but I don't think you can save to much. What I do is make sure I keep a good budget, to try and make sure I am saving as much as possible. Then everytime I get a raise I take at least half of that and put it in retirement/savings, the other half I can do whatever I want with. But I never decrease my savings/investments, doing this I think forces you to save enough(or at least a lot)

I have some spreadsheets to that help me estimate where I will be when I get out. But that is all they are, estimates no one knows what the market will do, if your lifestyle will change, what inflation will do, or how high taxes will get(that is why Roth is so good), etc,etc.
It looks like you are doing well. Maxing out the IRA is most important. And after coming to this board I started to see the benefits of the TSP, so it is good you are almost maxing that out already.

As far as the rumor about TSP letting you put $45,000 in on Bonuses. It was not the case for me. The Army gave me a $25,000 bonus and I went to TSP and selected the 100% contribution, however TSP automatically kicked out anything above $15,500. So I am not saying it isn't possible, however it didn't work for me.

Have fun in the desert, come back safe.
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Old 02-07-2008, 11:51 AM   #9
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Welcome to the board, LeBlanc. I went to USNA with a LeBlanc-- you have a cousin or an auntie in the Navy?.
My grandfather was a Master Chief, so I'm fairly certain he did not go to the USNA.

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Sounds like you're going to max the $15,500 TSP and you'll hit this year's $5000 in your IRA.
Yes, I will slightly go over the $15,500 max but just got off the phone with TSP and apparently because I am in a combat zone, I can contribute the extra pay up $45,000 I believe.


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You haven't mentioned a spouse or kids, yet, either, and that can certainly slow down an ER plan (but for all the right reasons).
Most definitely a substantial variable, but at this moment, I am not married and have no children.

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Today the military's biggest expense, by far, is manpower. When the cutting starts (and it starts all over again every decade) it won't matter how much of a hot-shot we were you are or what community you're in-- a lot of future flag officers are going to get forced out.
You couldn't be more right. We cut over 40,000 Airmen over the past couple of years, a great percentage of them officers. They are looking to cut another 35,000 over the next couple of years.

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It wouldn't hurt for you to see if your plan still works under the assumption that you retire as an O-4>20. The advantage of a more conservative approach is that you won't feel the pressure to promote or to stay for time in rank or to take "just one more unaccompanied tour" to make your numbers. Not, of course, that anything like that has ever happened to the rest of us...
I've seen that a time or two and you're right, when the time comes you need to be ready to make that decision.

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That alternative is far better than risking burnout on active duty.
Are you suggesting that it would be better to go Reserve rather than finish out a few more years on active duty?


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In the vein of part-time work, however, you might want to read Bob Clyatt's "Work Less, Live More" and crunch the spreadsheets on the CD in the workbook.
I'll take a look. Thanks for the inputs.
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Old 02-07-2008, 12:03 PM   #10
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Kinda tricky, and a lot of investors don't know about it (but it is in the prospectus and year-end reports they send you--in a font much smaller than the NO FEE, NO LOAD! claims).
Thanks for the info, I love learning something new.


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Originally Posted by samclem View Post
Search under "72t" to find more about this online or right here on this forum.
I'll read up on this.


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PS: Hey, you're deployed! Get off this board and help somebody drop a bomb on somebody that really deserves it!
Have no doubts, we're doing good things out here.


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Hey LeBlanc,
I am 29 and an O3 too. I am in the Army but it sounds like we have some of the same goals.

I never decrease my savings/investments, doing this I think forces you to save enough(or at least a lot)
Greetings RLTW, I can relate. With every promotion and annual raise, savings increase.

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As far as the rumor about TSP letting you put $45,000 in on Bonuses. It was not the case for me. The Army gave me a $25,000 bonus and I went to TSP and selected the 100% contribution, however TSP automatically kicked out anything above $15,500. So I am not saying it isn't possible, however it didn't work for me.
That's just about as good a battle to fight as any. May want to re-address because I was told that it's okay do do that.

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Have fun in the desert, come back safe.
Thanks, will do. Only 298 days left. Geeze, I have to stop counting.
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Old 02-07-2008, 03:56 PM   #11
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My grandfather was a Master Chief, so I'm fairly certain he did not go to the USNA.
Nah, she graduated in '81 and I lost track of her.

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Yes, I will slightly go over the $15,500 max but just got off the phone with TSP and apparently because I am in a combat zone, I can contribute the extra pay up $45,000 I believe.
That's wonderful. For an expense ratio of just 0.03% I'd sign over all of my paychecks to the TSP and pay my living expenses by liquidating taxable accounts.

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Are you suggesting that it would be better to go Reserve rather than finish out a few more years on active duty?
I am. It's only money. One of my career regrets was toughing it out for eight more years past the point where the fun screeched to a halt.

When I was on active duty one ever taught me about the Reserves, except for how to tap into their labor. Even on shore duty I never spent much time with them, certainly not enough to learn how I might be able to follow their example. I'd be extremely surprised if anyone had ever taken you under their wing to explain the AF Reserve system and how you could leverage it for your own goals.

Today I realize that, with my submarine background & security clearance, if I had resigned from active duty then I would've immediately gone back on Reserve duty at a submarine or unified command (in Hawaii). I would've avoided two very expensive "ticket-punching" transfers to San Diego & back to Hawaii, and we would've had a lot more family time, too. Navy Reserve promotions are less competitive and I might even have been mobilized and gone back to active duty on my terms. Or my contacts would have led me to civil service, contractor, or even civilian employment and more money than I was making on active duty.

It's a highly individual decision and it may even change from one duty station to another. As a single guy you'll never face any family or spouse's career-coordination conflicts. But if the assignments start getting nasty around the 14-16 year point, then being educated about the Reserves is a very valuable negotiating tactic with your assignment officer. They believe that most officers are retirement hostages at that point and will do anything, so you'll get their attention when you express your dissatisfaction with them and your expectations of being treated better in the Reserves. As my spouse was able to prove with her assignment officer, it's even better when your resignation letter hits their desk.

I don't know if you're aware of this (I wasn't) but the AF also has a retired/Reserve program. If you retire from active duty you can still join the Reserve and drill (for pay/points while your pension stops). At age 60 your pension is recalculated for the extra points of Reserve service.
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Old 02-07-2008, 05:29 PM   #12
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I'd be extremely surprised if anyone had ever taken you under their wing to explain the AF Reserve system and how you could leverage it for your own goals.
I was fortunate enough to work at Travis AFB in Northern Cali for 4.5 years. It's considered one of the largest composite wings in the Air Force. It's nearly a seamless integration and relationship between the AD and Reserve units. Being able to "retire" from one career at the age of 39 with the lifetime benefits is just too tempting. If I'm missing out on a lucrative job opportunity making a substantial amount more...well, like you said, "it's only money." I love what I do and it's hard to put a value on job satisfaction.

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It's a highly individual decision and it may even change from one duty station to another. As a single guy you'll never face any family or spouse's career-coordination conflicts.
I know these all too well. I was married for over 9 years and endured 4 moves during that time. Not fun for sure.

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I don't know if you're aware of this (I wasn't) but the AF also has a retired/Reserve program. If you retire from active duty you can still join the Reserve and drill (for pay/points while your pension stops). At age 60 your pension is recalculated for the extra points of Reserve service.
Yes, I've heard of teh program, but it doesn't seem to line up with my FIRE plans though.
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Old 02-07-2008, 08:00 PM   #13
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* Invest like your plan to make 05 won't work. It doesn't for many and it probably won't for many of your peers for reasons we can't even imagine right now. A little paranoia is good for the spirit.
*Check your paychart. The sweet spot for 05 is at the 22 year mark. You may want to go for it.
*Regardless of when you depart, obtain the highest security clearance you possibly can. $$$$$$!
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Old 02-07-2008, 11:43 PM   #14
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*Check your paychart. The sweet spot for 05 is at the 22 year mark. You may want to go for it.
That was a great deal for us Final Pay geezers, but High Three has flattened out that benefit considerably.

And again the assignment officers can smell that tactic a mile away. In the submarine force it was a sure shot to be the COMSUBGRU SEVEN Detachment OIC in Chinhae...


EDIT: Ah, here's a calculator:
https://staynavytools.bol.navy.mil/RetCalc/Default.aspx
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Old 02-07-2008, 11:55 PM   #15
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That was a great deal for us Final Pay geezers, but High Three has flattened out that benefit considerably.

And again the assignment officers can smell that tactic a mile away. In the submarine force it was a sure shot to be the COMSUBGRU SEVEN Detachment OIC in Chinhae...
Would I be correct in suspecting that this was the same Chinhae at the other end of South Korea?
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Old 02-08-2008, 12:03 AM   #16
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Would I be correct in suspecting that this was the same Chinhae at the other end of South Korea?
Yeah, a real liberty treat.

We were there for a MEDEVAC and one of the topside party wondered how we could tell whether the transfer crew was from North Korea or South Korea. Everyone was bundled up in exposure suits & flotation gear to the point of anonymity. If it wasn't for the USN rep on their small boat I wouldn't have been able to figure it out either...

I'm sure the charms of the place would've become apparent if I'd had more time, but I wasn't willing to hang around long enough to find out.
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Old 02-08-2008, 12:06 AM   #17
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Great place for kimchi. I seem to remember hearing about it but never make it to my top 10 list of places to visit. Cheju-do was nice though.
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Old 02-09-2008, 07:52 PM   #18
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Hello, and welcome! It looks like I'm slow to find this thread but I wanted to chime in. DH is USMC (12 years in so far) and we are planning on 20 and out if we can do it. We've been maxing out Roth IRAs and saving in taxable accounts, and last year started maxing out the TSP thanks to the good advice from this board.

We don't have kids but the above-mentioned savings wouldn't be enough for us to FIRE on in our early 40's. We got lucky (we hope) by buying a house near the coast in San Diego that has appreciated quite a bit. We're renting it out right now and may move back there, but either way it will be key to our plans.

My current method of answering the question of whether we're saving enough is to make some conservative predictions about annual savings and rates of return, then get a range of what our total assets are likely to be at DH's 20 year mark. Very rough, at this point, since we're 8 years away, but it gives me an idea about how much we'd have to live on. As we get closer, and we know better how much we want to spend, we'll be able to see if that's feasible. Neither of us is looking to continue working after that, there are too many other things we want to do.
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Old 02-10-2008, 08:39 AM   #19
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The biggest problem with the reserves is that you have to wait until age 60 to collect your pension and qualify for the health care plan.

That can leave a huge gap in time. I retired from the National Guard last year and have 19 more years to go until I can collect my first paycheck and qualify for health care.

Now, OP may be able to work a good job with his MBA and do the reserve thing simultaneously and come out ahead financially.

But who is to say a civ job working the MBA side is any better than the full time AF gig?
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Old 02-10-2008, 08:51 AM   #20
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The biggest problem with the reserves is that you have to wait until age 60 to collect your pension and qualify for the health care plan.
I think in the 2008 Authorizations Bill there is a provision to reduce Reserve Retirement age 60 by 90 days for every 90 days on AD going forward. Of course the Services will have to write their implementation instructions. It will be interesting to see how this plays out.

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