Active Duty Army officer looking for advice

[av8er]

I have really enjoyed lurking in this forum over the last few months and reading all of the great advice posted here. I have certainly benefited from the collective wisdom of this forum’s members and I hope to get some advice on my own situation. I am a 35-year-old active duty Army officer (O-4/just went over 12 years of service). My wife and I have three small children under the age of six and my income is the sole source of income for the family. My ultimate goal is to fully retire as soon as possible, but with kids at home I do not figure that it will happen before 55 or so. My income and asset allocation are as follows:

Income: currently ~ $115,000/yr…housing allowance varies by assignment
401K/TSP: ~$75,000 (evenly split between the L2030 and the L2040 funds)
My Roth IRA: ~$25,000 (Vanguard Target Retirement 2035 Fund)
DW Roth IRA: ~$15,000 (Vanguard Target Retirement 2040 Fund)
Taxable Accounts: ~$20,000 (Vanguard Windsor II…any suggestions for a better fund?)
Cash: ~$35,000 (savings account)

We have no debt and live comfortably on our budget. We contribute what we feel is a sufficient amount to 529s for all three children (we also plan to utilize the transferability option with the new GI Bill). We currently max out the TSP/401K and both of our Roth IRAs and put back an additional $15,000/yr as savings for a future home purchase. As you can probably tell by the abundance of targeted retirement funds above, I am not a very sophisticated investor. My logic is that by putting my money into these types of accounts I can ensure that I have the proper asset allocation. Is there a better method for me to use?

My wife and I also hope to be able to buy a house outright when I retire from the service in about 10 years or so. Whether or not this is a realistic goal, of course, depends upon where we decide to settle down/where I get a job (low cost vs high cost area) and how much we’re able to save by then. I’d like to get some advice on what we should do with the money that we are saving for this purpose. As stated above, we currently put back $15,000/yr (which I hope to increase with each longevity raise as well as with tax savings/combat pay from each deployment). I have considered putting this money into a CD ladder or into one of the tax efficient funds at Vanguard (Tax Managed Balanced VTMFX or Tax Managed Growth and Income VTGIX?). We currently have no plans to purchase a home prior to retirement in 8-10 years…we move too often to make it worthwhile from our perspective and neither of us have any interest in being long distance landlords. Any advice on where this money should go or general comments on how we might better prepare to FIRE someday?


I apologize for the long post, but your insights are greatly appreciated.

[Nords]

Welcome to the board!

You're already well on your way. Keep maxing the TSP and the Roths and keep an eye on the eventual implementation of the military's version of the Roth TSP, which is still in the rumor-mill stage. Being able to dump extra money into the TSP at such low expense ratios is the nation's best mutual-fund deal, perhaps even better than Vanguard.

You probably already know to save your longevity/promotion raises. And if you can hold down expenses now, then when you make O-5 the savings are going to start pouring in.

You don't mention whether your spouse has her own income, but with three kids I'm guessing that SGLI may leave you a tad underinsured. It's been quite a while since I had to look at life insurance but you may want to read up on that in Milevsky's "Are You A Stock Or A Bond?" (He'll give you some thoughts on asset allocation and retirement income, too.) And when you plug your pension numbers into FIRECalc you'll probably take the maximum SBP.

You may already be at or beyond this level of knowledge, but you might want to review "The Armed Forces Guide to Personal Financial Planning" and Military.com's "Your Military Advantage". They're the best military benefits guides around and they'll help you plug any gaps in your planning. West Point alumni handed out free copies of the Armed Forces Guide to my nephew's 2007 class.

Quote:

Originally Posted by av8er I am a 35-year-old active duty Army officer (O-4/just went over 12 years of service).

You probably know already not to take the REDUX Career Status Bonus. But share your thoughts if you're eager to get your hands on the money.

Quote:

Originally Posted by av8er We have no debt and live comfortably on our budget. We contribute what we feel is a sufficient amount to 529s for all three children (we also plan to utilize the transferability option with the new GI Bill).

The board has different schools of thought on saving for college, but conventional wisdom claims not to defer your retirement for the little darlings' college savings. It's probably more than enough to save for a state university and let them figure out how to fund a private school-- or a military academy/ROTC. But you're starting plenty early and the new GI Bill gives you a lot of help. Is your spouse interested in using any of that now?

Quote:

Originally Posted by av8er … and put back an additional $15,000/yr as savings for a future home purchase. My wife and I also hope to be able to buy a house outright when I retire from the service in about 10 years or so. Whether or not this is a realistic goal, of course, depends upon where we decide to settle down/where I get a job (low cost vs high cost area) and how much we’re able to save by then. I’d like to get some advice on what we should do with the money that we are saving for this purpose.

If you know that you're at least 10 years from buying the home then hypothetically you could even put the money in stocks. But I would have hated to have told you that in 1999.

You're correct in thinking that since you're on active duty then you probably don't need much of an emergency cash stash. (If you needed a quick few thousand dollars then you'd just draw advance pay or use a credit card and wait for the paychecks to catch up.) If you wanted to get more aggressive then you could put half of your house savings into one of your Vanguard funds and the other half in seven-year PenFed/NFCU CDs. Since you absolutely positively want all of the cash in 10 years, then that's probably the most risk/reward you want to take.

The psychological trap to avoid here is "chasing yield". By saving a large down payment you're going to be in a very strong home-buying negotiating position, able to make a lowball cash offer or at least get lower mortgage rates with no PMI. You'll be giving up 1-2%/year in returns for the comfort factor and low risk, but you'll probably make up for it by being able to buy a great home at a fantastic price. Focus on the payoff instead of sweating out the extra tenth of a percent and ending up in something too volatile for your tastes.

Quote:

Originally Posted by av8er As you can probably tell by the abundance of targeted retirement funds above, I am not a very sophisticated investor. My logic is that by putting my money into these types of accounts I can ensure that I have the proper asset allocation. Is there a better method for me to use?

Depends on how much time you have and how much you want to do on your own. What you have is more than "good enough" and you may not be able to do much better. But you could read "The Bogleheads Guide To Investing", which you're already doing most of, or Bernstein's "Four Pillars". Your advantage is that you can put your current system on allotment autopilot and go live in the desert for 15 months without worrying about it.

If you were going to change anything then you could probably go for a higher stock asset allocation. (That decision involves comfort factor as well as asset-allocation math.) You're probably planning to stick around for your pension, which is the equivalent of gold-plated TIPS or I bonds and slews your asset allocation to something like 80% bonds/10% stocks. If you don't mind the additional volatility then you could put more of your IRAs and taxable savings in Vanguard large-cap blue-chip stock funds. You could split your TSP between the "S" and "I" funds, which are way cheaper than anything anyone else can offer. But your time and effort may be better spent with your family and on your occupation than on learning how to pick next year's hot stocks/mutual funds.

[samclem]

Welcome to the board. For what it is worth, I think you're doing a great job of saving and of choosing good investment vehicles. I don't have much to add to the good advice/suggestions offered by Nords.

Quote:

Originally Posted by av8er My ultimate goal is to fully retire as soon as possible, but with kids at home I do not figure that it will happen before 55 or so.

You might be surprised. A lot hinges on your anticipated spending after retirement. I'm sure you've probably built a "strawman" budget, but keep refining it as time goes by and as you become more familiar with the life you actually want to live after retirement.

Don't forget that you can withdraw all your contributions to a Roth IRA (not the gains) without tax penalty. So, that money will be available for use to purchase a home. By having it a Roth when you retire you've got more options when you are considering the home purchase--it's possible you'll look at interest rates and expected inflation and decide that you would prefer to have a mortgage than to pay cash. Or, you might decide to rent for a few years after you hang up the uniform and take a short-term contractor position somewhere other than your intended final retirement spot. If the $$ is in a Roth the'll be earning money tax-free, whereas if the funds are in a taxable account you'll be paying tax on the money every year (possibly at a high rate--the money to pay for the current USG spending has got to come from somewhere, and you'll be on the cusp of "richness" by the definiton we'll be using at that time). So, definitley keep saving at the present rate, but consider contributing to the Roth to the max before funding the taxable accounts.

Insurance: As Nords mentioned, look into this. Term insurance is cheap (I got mine at USAA) and will cover your extra needs above SGLI.

I think you are smart not to buy a house. If your career is typical, you'll be moving even more frequently as you progress.

Banking a big chunk of your longevity and promotion pay increases is key to building your nest egg and keeping a lid on your cost of living. You guys are comfortable now, right? This will get tougher as the kids get older--you probably already know about the materialistic pressure kids face as they get older. Counter this with constant messaging that helps them resist the pressure and you'll be setting them up for success and doing your family harmony (and your finances) a world of good. Don't count on success--it's you and DW against the world on this. Be sure to live your life and do enjoy the time that your kids are kids--take that vacation, do the fun stuff. It doesn't need to cost a lot of money and you'll never regret it.

Quote:

Originally Posted by av8er As you can probably tell by the abundance of targeted retirement funds above, I am not a very sophisticated investor. My logic is that by putting my money into these types of accounts I can ensure that I have the proper asset allocation. Is there a better method for me to use?

As you already know, it's important to not confuse a "sophisticated" plan with a "good" plan. Your investments reflect the same philosophy as mine--low-cost and well diversified index-based choices. Like you I also have a dose of Windsor II (actively managed, but low expenses. I bought it when there were no other god "vale alternatives at Vanguard and just have not gotten around to reinvestigating my current choices). You've got a career and a family, you don't need to be trying to beat the market by chosing the next hot stock or sector--especially when the pros can't reliably do it. History shows your apraoch will do better than the large majority of active investors.

Welcome to the board!

[av8er]

Quote:

Originally Posted by Nords Keep maxing the TSP and the Roths and keep an eye on the eventual implementation of the military's version of the Roth TSP, which is still in the rumor-mill stage.

I’m looking forward to the TSP's new Roth option. I saw that it finally got signed into law a couple of weeks ago (it was part of the bill that gave the FDA oversight over tobacco companies). Unfortunately, the TSP board has indicated that the Roth option won’t be in place for another year or two. I'm hoping that there’ll be some way to pay taxes on our current balance and transfer it onto the Roth side once it is in place…if I can do it while I’m deployed for a year or so then my tax bill likely wouldn’t change that much from a regular tax year.

Quote:

Originally Posted by Nords I'm guessing that SGLI may leave you a tad underinsured.

Quote:

Originally Posted by samclem Insurance: As Nords mentioned, look into this. Term insurance is cheap (I got mine at USAA) and will cover your extra needs above SGLI.

That is a great point and one that I’ve been planning on resolving for a few months now…I need to get off of my rump and get it done. I’m currently looking at AAFMAA, but I’ll give USAA a look as well.

Quote:

Originally Posted by Nords you might want to review "The Armed Forces Guide to Personal Financial Planning" and Military.com's "Your Military Advantage". They're the best military benefits guides around and they'll help you plug any gaps in your planning. West Point alumni handed out free copies of the Armed Forces Guide to my nephew's 2007 class.

I also got a copy of the “Armed Forces Guide to Personal Financial Planning” at the Academy back in the 90s…I really wish I hadn’t let it sit on my shelf for so many years before actually reading it. There really is a lot of good advice in there. I’ll have to give “Your Military Advantage” a look as well.

Quote:

Originally Posted by Nords It's probably more than enough to save for a state university and let them figure out how to fund a private school-- or a military academy/ROTC.

We’re definitely planning for state schools. And we do not plan to pay for everything either…tuition/books/fees is our goal. We’re hoping that the little darlings will pursue and get scholarships/attend a service academy…then they can use the money that we have saved for them for grad school (or it could be handed off to their children one day).

Quote:

Originally Posted by Nords Is your spouse interested in using any of that now?

No, DW has no interest in graduate school and since I suckered the Army into paying for mine a few years ago , all of the new GI Bill can go towards the kiddos.

Quote:

Originally Posted by samclem You guys are comfortable now, right? This will get tougher as the kids get older--you probably already know about the materialistic pressure kids face as they get older.

That is a very good point and we’re already actively working now on expectation management with the kids. It’s relatively easy now that they’re young, but I know that it will get more difficult as they get older.

Quote:

Originally Posted by samclem Be sure to live your life and do enjoy the time that your kids are kids--take that vacation, do the fun stuff. It doesn't need to cost a lot of money and you'll never regret it.

This has always been our philosophy. Since we move around so frequently we try to make the most of it by exploring the local area as much as possible. It’s kind of like vacationing on the Army’s dime.

Thanks again for the great advice!

[freebird5825]

Welcome to the forum
At your age 35, I am astounded at your planning and savings. Wow!
I didn't get on the ball til about age 37.
Very good call not to buy a house if you PCS frequently. I've seen that become a real albatross to my friends from the past.

[jIMOh]

If you use target funds, I would use one fund, and put all investments (401k-Roths-taxable) into that one fund.

I like Windsor II- part of my kids 529 is in that one fund, and I used to own it in my 401k before my company was bought out by a bigger fish.

You are clearly doing many things right. IMO I think you should focus a little more effort into the investments you choose (have a consistent philosophy throughout all retirement accounts). What that philosophy is could be many things

1) one target date fund
2) a general asset allocation model
3) something more specific to your situation (for example muni bonds in taxable account)

We have 401k for wife, another 401k for me, a rollover for wife, another rollover for me, a Roth for wife, and a Roth for me, plus a taxable account too. Our logic is this- we have an asset allocation we follow (30% large cap-15% mid-15% small-15% foreign large-10% foreign small-15% bonds) and most accounts have this allocation shown in them. This way when wife leaves her job, or a bigger fish buys my company (again), we do not need to rebalance all accounts, just make sure the money in each account is allocated properly. Keep in mind over last 12 years I have had 4 401k providers and wife has had 3 or 4... so I do not want to constantly be picking new funds, new investments or selling my Roth and buying something else because the 401k choices suggest a certain asset class is bad or worse than something else.

Only exception to above is that with wife's Roth we use sector funds to achieve the allocation (it is still 55-25 domestic-foreign), and it is still 15% small cap, but to get this allocation we overweight some sectors (like tech and emerging markets) relative to other sectors.

My point is we have a system, that system accounts for all new money being contributed, and its flexible to allow a job change or other investment change without disrupting a 6 figure portfolio which is spread across at least 7 accounts.

Know your situation
pick funds consistently (my impression from reading first post was this is not being done as well as it could be)
keep saving (you are doing well setting aside so much money, this above and beyond anything else is going to make you retire successfully IMO).

[av8er]

Quote:

Originally Posted by freebird5825 Very good call not to buy a house if you PCS frequently. I've seen that become a real albatross to my friends from the past.

I’ve had similar experiences. In fact, since I’ve been in the military I’ve only met a handful of service members that actually made any money from buying homes at their various duty stations and a whole lot more that either barely broke even or ended up losing money. I’ve PCSed seven times in the last 12 years…there’s just no way to build enough equity to make home buying worthwhile IMO when the moves happen so frequently (unless you’re comfortable being a long distance landlord, I guess).

Quote:

Originally Posted by jIMOh If you use target funds, I would use one fund, and put all investments (401k-Roths-taxable) into that one fund.

There is some method to my madness with regard to fund picking. For the most part, I’ve tried to stick with targeted retirement funds to ensure proper AA and to ensure that those accounts will become most conservative in the year that my wife and I will turn 59.5. I know it may not be the best solution, but I chose these types of funds because I'm not confident that I know enough to balance/rebalance my investments properly.

The reason that my taxable (non savings) account is in a non-targeted retirement fund (Windsor II) is because I hope to use that money for a future home purchase in 8-10 years or so…it was actually about $30,000 when I first put it into that account. After the 33% loss from the market downturn, though, I sort of wished that I’d put a part of that into CDs instead . Hopefully that account will look better over the next few years. I like Nord's idea of splitting the house savings between CDs and equity funds. Since most equity type funds are kind of on sale now compared to about this time last year I might even feel like a bargain shopper .

Thanks again.

[av8er]

It’s been 10 years since my first post so I thought I’d provide an update. Although I don’t post often, I do lurk frequently and have continued to enjoy learning from the group and seeing folks move along the path to ER.

The last 10 years have been eventful for us—PCSed (moved) five times, deployed three times, were blessed with another child, and received two more promotions. Throughout the years we’ve faithfully maxed our retirement account contributions and saved aggressively for a house as well as for our kids’ college. We met our 529 savings goals last year, are currently at ~80% for our retirement savings goal, and are at ~50% of our retirement home savings goal. Project we’ll have met all savings goals and be financially independent by the time I retire from the service in the next few years.

We’ve worked hard over the years to keep our lifestyle at a reasonable level and have “lived” our expected retirement budget for several years; I expect my military pension to fully cover our retirement costs, including medical. I don’t intend to begin withdrawing from our retirement accounts until 59.5, but the lionshare are Roth so that provides flexibility. Once we start drawing from those accounts, they should yield a secondary funding stream worth approximately ~75% of my pension at a 4% withdrawal rate. We intend to use this money to hedge against unexpected costs and for traveling, kids’ weddings, etc (and, eventually, as a supplement to SBP).

The great advice and ideas presented on this forum have shaped and informed our plan over the years and, although we haven’t settled on the exact retirement year, it is definitely within sight. I believe we’re on a good glide path to a sustainable retirement, but am certainly not immune to blind spots—thoughts/feedback is certainly appreciated.

[JDARNELL]

Not a lot of feedback other than you seem to be on your plan you laid out 10 years ago. So that tells me you are on point. I think you are tracking just fine. Make sure you get all your medical stuff documented and work on keeping healthy. Life in the check of the month club is pretty nice.

[av8er]

Thanks, JDARNELL—certainly looking forward to being part of the club in the next few years!

[Nords]

Sounds like you’re on track!

Quote:

Originally Posted by av8er We intend to use this money to hedge against unexpected costs and for traveling, kids’ weddings, etc (and, eventually, as a supplement to SBP). ... but am certainly not immune to blind spots—thoughts/feedback is certainly appreciated.

Have you considered *why* you’d want SBP? It can be combined with term life insurance, or you could choose one or the other, or neither. If you’re living within your pension now then your savings/investments may be more than your spouse needs after you’re gone... especially if you’re saving/investing the 6.5% of your pension that you’d otherwise be paying for SBP.

The SBP is just as much a sleep-at-night comfort decision as a logical financial decision, but you might want to work through the whole thought process and see how you both feel about it. I’d recommend Forrest Baumhover’s excellent analysis:
https://www.amazon.com/Military-Tran...dp/1534883959/

Hopefully you won’t wait another decade for your next update!

[braumeister]

Quote:

Originally Posted by Nords SThe SBP is just as much a sleep-at-night comfort decision as a logical financial decision, but you might want to work through the whole thought process and see how you both feel about it.

+1
I originally took the SBP without fully working it out, just because it seemed to be "the right thing to do".

A year or two later, DW (who is smarter than I am) took a good look at it and told me to cancel it. That turned out to be the best decision. She is the numbers person in our union, and she worked it up in all sorts of different ways, leaving no doubt.

It's not a simple decision, despite what the military would like you to think. Simple for some, but very complex for most.

[SnowballCamper]

I went and looked at a few older threads with discussions on SBP. I was surprised to see so many people comparing it to term life insurance. By default DW and I have SBP on each other at 55%. As I re-examined the decision I observed the following in my and DW's family.

My dad is still alive and my mother died about 20 years ago.
DWs mother is still alive and her father died 30 years ago.

My one of my grandfathers outlived his wife by over ten years, and the other predeceased his wife by over 20 years.

For us, it's subsidized income insurance, so why not take advantage.

[av8er]

Nords/Braumeister,

Honestly never considered forgoing SBP...time to do some research and math!

[jimnjana]

Quote:

Originally Posted by SnowballCamper .. For us, it's subsidized income insurance, so why not take advantage.

Could have been right decision in your case. DW is 10 yrs older than me. In our case SBP didn't make much sense for either of us. We have been investing a portion of what SBP would have cost and also got some 30 yr level term insurance just in case.

[samclem]

Quote:

Originally Posted by av8er Nords/Braumeister, Honestly never considered forgoing SBP...time to do some research and math!

The math is important, and of course the results you get from that process will depend a lot on the assumptions you make in your modelling.
One factor for DW and I was that I do most of the investing, "what-if'ing," etc. With the SBP in place, the (COLA'd) checks are gonna keep coming to her if I check out, and even if the investments go into the dumpster.

In a little over a decade from now our SBP premiums will stop and we'll enjoy the small monthly raise. Man, where does the time go?

[JDARNELL]

We took the sbp option over the term life because I couldn’t find apples to apples that would protect over age 70. If CINC house put up with me all those years I wanted to make sure she would have enough to survive if a conman cleaned her out after I am gone.

[Nords]

As you dig into the details, it becomes a highly individual decision.

Quote:

Originally Posted by jimnjana Could have been right decision in your case. DW is 10 yrs older than me. In our case SBP didn't make much sense for either of us. We have been investing a portion of what SBP would have cost and also got some 30 yr level term insurance just in case.

Quote:

Originally Posted by samclem The math is important, and of course the results you get from that process will depend a lot on the assumptions you make in your modelling. One factor for DW and I was that I do most of the investing, "what-if'ing," etc. With the SBP in place, the (COLA'd) checks are gonna keep coming to her if I check out, and even if the investments go into the dumpster.

Quote:

Originally Posted by JDARNELL We took the sbp option over the term life because I couldn’t find apples to apples that would protect over age 70. If CINC house put up with me all those years I wanted to make sure she would have enough to survive if a conman cleaned her out after I am gone.

My spouse and I declined our SBP on each other because we have enough assets now and we’ll have enough pension & Social Security income later. We’d rather have the 6.5% premiums to spend on each other now instead of having even more money later.

I sure hope we’re done investing. It’s nearly in autopilot now, and I’ve turned most of the routine over to my spouse. In 20 years or so she’ll turn it over to our daughter.

Quote:

Originally Posted by samclem In a little over a decade from now our SBP premiums will stop and we'll enjoy the small monthly raise. Man, where does the time go?

“360 payments and at least age 70.”

FI time seems to be moving a lot faster than I expected it to.

The Terhorsts have been FI for well over 30 years and the Kaderlis for nearly 30. John Greaney at RetireEarlyHomePage is about to notch 25 years and age 63. Vicki Robin is in her 80s, still giving seminars, and has a part in the Playing With FIRE documentary.

In less than six months I’ll celebrate my age 59.5 half-birthday. That milestone is probably getting pretty common around this group.

[ExFlyBoy5]

Quote:

Originally Posted by Nords FI time seems to be moving a lot faster than I expected it to.

You aren't kidding. I'm still a relative newbie especially when compared to your list of esteemed predecessors but as I look at entering my 6th year of being FIREd, it amazes me how *fast* the time has gone by. I am a blessed man...no doubt about it!

Oh yeah, we elected the SBP. It's not a great expense for us, but I like the idea that DW will continue to get wake up pay on the 1st of the month if I happen to *stop* waking up.

[23isme]

Quote:

Originally Posted by JDARNELL We took the sbp option over the term life because I couldn’t find apples to apples that would protect over age 70. If CINC house put up with me all those years I wanted to make sure she would have enough to survive if a conman cleaned her out after I am gone.

I agree that it's a "sleep at night" decision. We ran the math a few different ways and did our best to come up with some apples and oranges to compare. We ended up declining the SBP and getting a term life policy to cover me to 65. I also knew I was stepping into a W-2 job for a few years, and we bank 100% of that paycheck, so by the time I stop working there will be more than enough.