Finance/Retirement noob with a baby on the way!

[USAFNAV]

Hello, I am in the Air Force and have some basic financial questions I was hoping the members of the forum could help me with. I don't make a lot, but it is enough to save some money, I am just afraid I am wasting the compounding years I have on poor places to save! With a new baby on the way I really started thinking I should be sure my investments are on the right track. I have several changes I am thinking of making but don't want to make a bad decision...Any advice would REALLY be appreciated.

I am currently maxing my Roth IRA annually through USAA using the lifecycle 2050 retirement fund. I only have about 20,000 in there right now.

I am also putting about 500 a month in to the Thrift Savings Plan (TSP) and using their lifecycle 2050 fund. I have about 22,000 in TSP currently.

I use the lifecycle funds because I will deploy for 6 months or get really busy with work and don't have time to constantly moniter my investments.

For now, I can only save about 1000 a month with my current pay and I want to put it in the best place I can.

My wife does not work and I am considering taking the 500 I have been putting in TSP and maxing a Roth IRA for her as well but that would just leave me with 2 IRA's and nothing we could use before we are 60.

The TSP is also adding a ROTH IRA option next year but I don't know how I could roll over my 22,000 in to it since I already have an IRA with USAA, or wether that would even be smart.

Should I be using a different Roth than USAA target funds, like a Vanguard or something?

Should I make the switch from TSP to funding a roth for my spouse?

Are there other investments I am not thinking about I should contribute to??

Thanks for any replies, sorry for not really knowing basic stuff.

 

[W2R]

I'm sure you will get a lot of opinions, but personally I really like the TSP, and I like your idea of using the lifecycle funds.

The TSP has been wonderful in retirement, for me.

 

[pb4uski]

I'd be interested in others views, but I actually prefer tax deferred savings to tax-free savings (like the Roth). I've been told that the TSP is similar to a civillian 401k, but is it tax deferred? In other words, does the amount you contribute reduce your taxable earnings?

The reason I prefer tax-deferred savings over tax-free savings is that I think most people will have a higher marginal tax rate during their accumulation years and lower marginal tax rate during their retirement years (even with the current uncer, so the tax deferred savings is better economically.

So I would fund tax deferred accounts first and then once those are maxed out fund a Roth.

 

[Bestwifeever]

Thanks for your service, congratulations on the bambino on the way, and have a look at this forum here: Early Retirement FAQs - Early Retirement & Financial Independence Community. There are many threads that may be of interest to you as you look through them--watch for the name of Nords, who is a precious resource for military retirees.

Welcome!

 

[deserat]

Yes, and get a copy of the book for early retirement with the military when it comes out - author is Doug Nordman - he's got a website with lots of information as well.

 

[REWahoo]

Yes, and get a copy of the book for early retirement with the military when it comes out - author is Doug Nordman - he's got a website with lots of information as well.

Here's his website: Military Retirement & Financial Independence

 

[Nords]

I use the lifecycle funds because I will deploy for 6 months or get really busy with work and don't have time to constantly moniter my investments.

My wife does not work and I am considering taking the 500 I have been putting in TSP and maxing a Roth IRA for her as well but that would just leave me with 2 IRA's and nothing we could use before we are 60.

The TSP is also adding a ROTH IRA option next year but I don't know how I could roll over my 22,000 in to it since I already have an IRA with USAA, or wether that would even be smart.

Should I be using a different Roth than USAA target funds, like a Vanguard or something?

Should I make the switch from TSP to funding a roth for my spouse?

Are there other investments I am not thinking about I should contribute to??

Welcome to the board, Nav, you're doing fine. Browse the blog when you have the time. The older posts are the basic material from a military perspective-- and the newer posts build on the basics.

When you have even more time (and interest) then you can learn more about asset allocation from the BogleHeads Wiki (Main Page - Bogleheads) or from this board's "Recommended Reading" list, like Berstein's "Four Pillars" book.

You should keep socking it all away in the TSP. When the Roth TSP is available, and after you've maxed the TSP, then you should put more away in the Roth TSP. Only after you've maxed both of those would you want to put more money in your Roths, and only after you've maxed your Roths would you want to bother with any other investments.

The TSP has the world's biggest index funds with the lowest expense ratios. Only Vanguard even comes close, and they're still nearly double the TSP's 0.03% expenses. There are also ways to tap Roths and TSP funds before you're 59.5 years old, so you'll be able to access the money when you really need it. For example, you can withdraw Roth contributions anytime without penalty (although the money will no longer be compounding for your retirement) and you can withdraw up to $10K of a Roth for a first-time home purchase without penalty.

When you're inclined to tinker then you could apply for a Vanguard IRA and have them do the paperwork to transfer it from USAA. You'll save several tenths of a percent on the expense ratios. As an investment company, USAA sells some of the world's best car & home insurance-- and they should stick to those strengths.

You're never really ready for a baby (you just think you are) but if you haven't already loaded up the nursery then you should hit Goodwill & garage sales. We raised our kid from those fine shopping establishments. The supplies & equipment are everywhere and it's dirt cheap. You'd be amazed at what people are giving away for pennies on the dollar, and USAA might even still be handing out big discounts on car seats. If you're concerned about other new-parent expenses then you could put $1000 in a PenFed CD for emergencies. But let's face it, for the next few years (at least) most of your former "entertainment" budget is going to be redirected to "parenting" and "sleeping". Cash flow will probably not be an issue.

I'm not sure about rolling your Roth from USAA to the TSP-- I'd have to see the TSP's rulebook. I've heard rumors for years about the Roth TSP, but you're the first person who's mentioned "next year". If you have a link then I'd love to learn more.

 

[USAFNAV]

Thanks so much for all of the info. I do not have a link for when TSP will have the roth, I just read on one of the forums last night that it was supposed to happen in 2012. When I log on to my TSP there is an update for the conversion that says it was approved in 2009 but will take 1 to 2 years to get all of the details straight so I assume it should happen soon.

I want to be sure I understand what you think is the most intellegent decision from here because it seems like some people argue to keep using TSP and others say to open a roth for my spouse in addition to mine. I guess it would be great if I could fund all three but I can't as of now.

It seems like your advice is to keep trying to put as much in to the TSP lifecycle fund and USAA roth and if I get a chance, switch my USAA roth to a Vanguard. But not worry right now about a roth for my spouse since I can't fully fund the TSP's 16,500 annual limit. Does that seem right? because really I am only saving about 12,000 a year so that means I wouldn't be able to put any in a roth because it would all go to TSP. I just thought that funding a tax deferred roth would be smarter in the long run than having to pay taxes on the TSP in 30 years when I want it.

Also, if I understand you correctly I would be better off with TSP's roth than even a vanguard roth, if TSP offered it. So if I can only have one roth how will I start/combine my TSP roth with my USAA (or vanguard if I switched) roth? Is your head spinning, cause mine is

I am going TDY for a few weeks and plan on reading those books. Maybe I will get a little smarter on all this. I don't really understand what saving several tenths on an the expense ratio would equate to in the long run and whether or not it is worth it. I thought Vanguard funds were better because they were managed better.

I don't expect you to respond to all this bantering haha, I really appreciate the previous post...I have so many questions?!

 

[Nords]

Thanks so much for all of the info. I do not have a link for when TSP will have the roth, I just read on one of the forums last night that it was supposed to happen in 2012. When I log on to my TSP there is an update for the conversion that says it was approved in 2009 but will take 1 to 2 years to get all of the details straight so I assume it should happen soon.

You active-duty guys will get the news before we retirees do. I'm interested to see whether I could put my spouse's Roth IRA (with its 0.40% expense ratio for an international ETF) into the TSP's "I" fund. On a $50K balance, going from a 0.40% expense ratio to 0.05% (estimate) is $175/year.

It seems like your advice is to keep trying to put as much in to the TSP lifecycle fund and USAA roth and if I get a chance, switch my USAA roth to a Vanguard. But not worry right now about a roth for my spouse since I can't fully fund the TSP's 16,500 annual limit. Does that seem right? because really I am only saving about 12,000 a year so that means I wouldn't be able to put any in a roth because it would all go to TSP. I just thought that funding a tax deferred roth would be smarter in the long run than having to pay taxes on the TSP in 30 years when I want it.

There's not a simple answer because of the difference between funding the TSP with before-tax salary and the Roth IRA with after-tax money.

In general, the TSP's lower expenses will save you more over 30 years than the taxes you'll pay when you start RMDs. You're also paying lower taxes now because the TSP contribution is reducing your taxable income. But if you're sticking to Vanguard funds with their own low expense ratios then it might go the other way, especially if you're already in a low tax bracket. And if you start withdrawing from the TSP at age 59.5 instead of waiting for mandatory RMDs then you can also dodge a lot of taxes.

That gets into a fairly detailed spreadsheet which isn't much fun to keep track of while you're deploying and otherwise trying to live your life. But considering the higher expenses of most lifestyle mutual funds (I'm not familiar with Vanguard's lifestyle funds) I think the TSP will win out.

Anyone else on the board seen any studies or spreadsheets on this?

Also, if I understand you correctly I would be better off with TSP's roth than even a vanguard roth, if TSP offered it. So if I can only have one roth how will I start/combine my TSP roth with my USAA (or vanguard if I switched) roth? Is your head spinning, cause mine is

You can have as many Roth accounts as you can keep track of, as long as the grand total of your annual contributions to one or all of them doesn't exceed the IRS limits.

If the TSP goes with a Roth option then I'm going to be very interested in rolling over all of spouse's Roth IRA (which is considerably larger than her TSP balance) over to it. And I'm also gonna be mightily pissed off if the TSP won't let me back in, because the contribution limits in the late 1990s were so low that my retirement in 2002 resulted in a "too small" balance for the TSP to be willing to keep me on their books.

But the TSP is probably rightfully focused on the active-duty and Reserve/National Guard servicemembers, not us veterans.

I am going TDY for a few weeks and plan on reading those books. Maybe I will get a little smarter on all this. I don't really understand what saving several tenths on an the expense ratio would equate to in the long run and whether or not it is worth it. I thought Vanguard funds were better because they were managed better.

I've seen Vanguard ads of how much their expense ratios save over 30 years compared to other company's funds. It's several years of max TSP contributions.

I don't think Vanguard necessarily has better managers (although Gus Sauter has an impressive record) as much as their passive indexing approach keeps them from shooting themselves in the foot like so many actively-managed funds. They've also grown enough over the years to take advantage of their economy of scale.

However (IMO) Vanguard's customer service is more along the lines of "you get what you pay for". If you're investing passively & regularly through automated deductions then you won't need much customer service and it won't be an issue.

And just keep asking those questions! If the answers are working for you then you could contribute your stories to the book's second edition...

 

[Fireup2020]

Welcome! This board is great for all (including young ER-wannabe's!) Heading anywhere exciting TDY?

 

[USAFNAV]

This one is to Vegas (probably not the best location when your talking about saving money, but I always stay under my per diem rate!!!)

Nords, thank you for taking your time out to answer my questions. I plan to use this forum to stay up on my endless financial conundrums that will inevitably come up so if I hear any more details on the roth TSP I will post it to this. I am calling them tomorrow just to see if they have a proposed timeline. I think the TSP should focus on veterans as well as active duty, and thank you for your service.

On a random sidenote, I was curious as to why you would put all of your wife's roth in to the I fund. Isn't that fund basically founded on the global economy? I guess if the economy can't get too much worse (I shouldn't say that) it is a good time to get in it, I just don't know enough to make that call. I want to take as many risks as I can early on since I have time on my side and don't really panic when things go bad (left everything in through 2008 despite losing 38% and just finally got back to pos 10% avg this year). But I don't want to take risks just for the sake of taking them. I am sure you have an intelligent take on the I fund if you want to get in it...

As of now, with all of the factors you have laid out I think I will continue to do TSP as much as I can afford and continue to max out my roth. I will just wait for more money to start my spouses roth since I have a lot of room left in TSP for additional funds. If TSP starts a roth I will use it for mine and start a vanguard fund for her.

My wife keeps asking me why we have to save so much and I try to tell her it's really not that much!!! I told her I wanted to start saving 25% instead of 20% and she looked at me like I was crazy. She will be happy in 30 years when it all comes to fruition. On the bright side, flight pay will go from 200 to 650 in a year or 2 and if TSP shows 100% for my contribution of "special pay" we can just call it out of sight out of mind

Thanks again, this forum has been great for my financial SA.

 

[USAFNAV]

Also, thank you for reminding me that all of the TSP contributions go in before tax. I knew that was the case but I always forget to consider that when I am comparing the TSP to a standard mutual fund. People always tell me that TSP is pointless because the government doesn't match any contributions, but I guess the pre-tax aspect combined with the low maintenence costs are where the $ is made.

 

[USAFNAV]

I just checked out the website for your book. It sounds like an awesome idea and the charitable aspect is a great thing. Thank you for contributing to the military in such a specialized and selfless way. I will pick it up as soon as it is available. For now I am going to read about the 4 pillars and how I don't currrently have them

 

[Nords]

On a random sidenote, I was curious as to why you would put all of your wife's roth in to the I fund. Isn't that fund basically founded on the global economy? I guess if the economy can't get too much worse (I shouldn't say that) it is a good time to get in it, I just don't know enough to make that call. I want to take as many risks as I can early on since I have time on my side and don't really panic when things go bad (left everything in through 2008 despite losing 38% and just finally got back to pos 10% avg this year). But I don't want to take risks just for the sake of taking them. I am sure you have an intelligent take on the I fund if you want to get in it....

Our portfolio is highly concentrated in equities (see my profile: Early Retirement & Financial Independence Community - View Profile: Nords) and the highest expense ratio is the international fund. Moving her Roth from the EFV ETF to the TSP I fund won't change our asset allocation but it'll drop her expenses a little. Admittedly we're just polishing cannonballs. I'm hoping the Roth TSP withdrawal rules are the same as the Roth IRA rules, although in my ignorance I could be mistaken.

My wife keeps asking me why we have to save so much and I try to tell her it's really not that much!!! I told her I wanted to start saving 25% instead of 20% and she looked at me like I was crazy. She will be happy in 30 years when it all comes to fruition. On the bright side, flight pay will go from 200 to 650 in a year or 2 and if TSP shows 100% for my contribution of "special pay" we can just call it out of sight out of mind

It can be difficult to persuade a spouse that savings needs to be higher for deferred gratification, especially if that spouse doesn't have to grind through a daily job of their own. Anyway she'd probably see raising a family as a lot more rewarding than a cubicle or consulting. But if you could show her that the two of you would be financially independent in 10-20 years and able to do whatever you wanted around the same time that you'd become empty-nesters, that epiphany tends to build a lot of motivation & partnership.
How many years does it take to become financially independent? | Military Retirement & Financial Independence

Thank you for contributing to the military in such a specialized and selfless way.

Thanks! It's the product of over 50 servicemembers & veterans on this board, and it's coming from all ranks & services. As guys like you learn and apply the techniques, then you can share your experiences with us and add to our collected wisdom...

 

[JDARNELL]

If the TSP goes with a Roth option then I'm going to be very interested in rolling over all of spouse's Roth IRA (which is considerably larger than her TSP balance) over to it. And I'm also gonna be mightily pissed off if the TSP won't let me back in, because the contribution limits in the late 1990s were so low that my retirement in 2002 resulted in a "too small" balance for the TSP to be willing to keep me on their books.

I have been thinking about this also for my account. Assuming they let me do it I am all in.

Tomcat98

 

[USAFNAV]

Just an update, the TSP will be offering ROTH IRA's in the 2nd quarter of 2012.

 

[LARS]

While you do not have significant free cash flow, I would still consider getting in the habit of purchasing I-bonds (US savings bonds) as overtime you can build a nice tax-deferred, inflation protected return.

They aren't at the most attractive levels currently as the real interest rate component is zero (though the next six months inflation component will be 4.6%). Still, it may make sense to begin to start on a portfolio of I-bonds.

 

[Dreamer]

I would love to be able to move my Roth IRA's into the TSP. If anyone hears anything about this, please let us know. I guess I need to start looking at the TSP site again.

 

[Nords]

I would love to be able to move my Roth IRA's into the TSP. If anyone hears anything about this, please let us know. I guess I need to start looking at the TSP site again.

Here's one of the announcements:
TSP delays Roth option (3/28/11) -- GovExec.com

Here's a draft of the implementation bulletin for their customer service reps:
https://www.tsp.gov/PDF/bulletins/11-u-4.pdf

... and here's a longer discussion:
TSP withdrawal options | Military Retirement & Financial Independence

 

[USAFNAV]

Hello, just letting everyone know I got an email on my work account about TSP and the Roth. It will be available in the next few months and there is already a video tutorial on the front page of tsp.gov. I still don't know whether to roll to it or not, need to think a little harder on what tax bracket I plan on being in at 60!!

 

[73ss454]

I think the government will be deciding way before you what tax bracket you'll be in. Maybe it's a little to early on to figure out what the tax brackets will be.

 

[USAFNAV]

IRA

I was more thinking about what I would be doing when I was 60... I don't think the govt will decide that for me

 

[73ss454]

I'm sure they won't be deciding what you're doing but I'm also sure they will have something to say about your "tax bracket".

 

[Nords]

Hello, just letting everyone know I got an email on my work account about TSP and the Roth. It will be available in the next few months and there is already a video tutorial on the front page of tsp.gov. I still don't know whether to roll to it or not, need to think a little harder on what tax bracket I plan on being in at 60!!

I have a post in the schedule hopper for the 19th, but here's a preview of another E-R.org member's thoughts:
Most TSP Participants Should Switch To the Roth TSP

Can you PM or e-mail me a copy of the text of your e-mail, or post it here? "Next few months" is kinda vague on their part, and I've been stalking their website for a real commitment...

 

[bizlady]

I use the lifecycle funds because I will deploy for 6 months...

THANK YOU for serving our country. I admire all that do, and their famililies. Know that your sacrifice is appreciated!