Young butter bar seeks wise financial advice

[junior3042]

Hello All,

I discovered this great site and wanted to seek some advice from those who are FIRE'd or on their way to becoming FIRE'd. I am 24 a 2d Lt. in the US Air Force. I am currently contributing 15% to the TSP @:

C fund: 60%
S fund: 20%
I fund: 20%

total so far in TSP: 5k

I worked throughout college and saved up by religiously listening to Dave Ramsey. In addition to my current investments, I currenlty have an additional $14,500 in savings; however I am getting married in June (soon to have what you all refer to as a "DW" lol). Luckily my fiancée and I will have no debt as newlyweds and she will graduate from college and soon become a nutritionist. We have both come into agreement about our finances and we plan on living within our means and continuing to save and invest the way I have been doing. I currently have a Roth with USAA with 5k; however, I am looking at rolling it over to a Vanguard fund due to USAA's high expense ratio. That is where my dilemma begins. I just read Bogle's "Little book of common sense investing" where their is a lot of "push" for the Vanguard index 500 fund (VFINX). I have also researched and read a lot of good things about Vanguards Wellington (VWELX) 10k minimum, Vanguards Wellesley (VWINX) 3k minimum, and Vanguards Lifestrategy funds. Are all these funds I mentioned roths? (Sorry for the lack of knowledge) What would you do if you were in my shoes? I also plan on opening up another fund in her name. Again, what/which fund would you advise me to look at for her? What would be a good portfolio as far as diversification and tax efficency. The plan is to keep whatever I choose for my roth and her roth for the long haul. Hopefully between these retirement vehicles we will be on our way to being FIRE'd like you all. I greatly appreciate your responses in advance for a newbie such as myself. THANKS!

 

[Westernskies]

Welcome to the forum, and thanks for your service to our country.

 

[lemming]

Welcome and good luck to you. I've branched out from the I500 to total stock market but keep a lot in Wellington also for the asset allocation.

Encourage your wife to also max out her IRA options.Even if it is more then 15% of her income. With your combined incomes it should still make a workable living wage.

Work on getting promoted. Remember what happened to all the second lieutenants on Startrek.

 

[jerome len]

Great Plan!

Start with the total stock market! After you have a minimum of 10k, start branching out and in the mean time research balanced and lifecycle funds. Always leave 10% cash, have 3 months of living expenses set aside and try to double up on your investments when the market sinks......if you buy then, think of it as similar to buying milk on sale.....you get more for your money. Read Money Magazine or something similar, get informed! Congratulations on great planning. You'll be a winner!

 

[Coach]

Junior, welcome aboard!

A Roth IRA is a type of account, and holds investments. You can invest in most any mutual fund, or stock, or other assets with the funds in your Roth IRA.

If you decide to roll your Roth over to to Vanguard, give them a call. They'll be happy to do all the heavy lifting and will make sure that the transfer is done correctly. You probably won't even have to contact USAA.

I hope that helps.

Coach

 

[Fireup2020]

Welcome!! (senior butter bar here!) This is the greatest forum on the planet! You two sound well grounded with great plans! Totally doable!! Wishing you the best!

 

[Nords]

Welcome to the board, Junior. I guess in a few months we'll be calling you 1LTJunior?

I'm curious-- did you happen to stumble on this board totally on your own, or through the suggestion of another Air Force officer (either on active duty or retired)?

I am currently contributing 15% to the TSP @:
C fund: 60%
S fund: 20%
I fund: 20%
total so far in TSP: 5k

If you're going to invest according to expense ratios, then take a look at the TSP: https://www.tsp.gov/investmentfunds/fundsoverview/expenseRatio.shtml

The "most expensive" funds in the TSP have expense ratios that are less than half of Vanguard's cheapest funds. Better yet, the TSP contributions are before-tax instead of a Roth's after-tax. You may not be worried about getting bumped up to a higher tax bracket right this minute, but after your promotion (and with your spouse's earnings) then it'd be nice to shelter some of your income for a few decades of tax-deferred compounding while getting your married-filing-jointly tax return into a lower bracket.

If you're not able to max out the TSP's $16,500 then at least try to contribute all of your future pay raise to it. And when you deploy to a combat zone then make sure you understand how much more you can put in the TSP and in the "Savings Deposit Program".

I currently have a Roth with USAA with 5k; however, I am looking at rolling it over to a Vanguard fund due to USAA's high expense ratio. That is where my dilemma begins. I just read Bogle's "Little book of common sense investing" where their is a lot of "push" for the Vanguard index 500 fund (VFINX). I have also researched and read a lot of good things about Vanguards Wellington (VWELX) 10k minimum, Vanguards Wellesley (VWINX) 3k minimum, and Vanguards Lifestrategy funds. Are all these funds I mentioned roths? (Sorry for the lack of knowledge) What would you do if you were in my shoes?

The Roth is the type of account, and the mutual funds are the types of assets that can be invested in an account. You could roll your Roth IRA over to Vanguard "in kind", sell the USAA shares once the IRA arrives at Vanguard, and then invest the Roth account in any of those Vanguard funds. You start the process with Vanguard and they handle all the paperwork with USAA so that you don't have to listen to USAA's [-]whining[/-] admonitions to be sure of what you're doing.

I also plan on opening up another fund in her name. Again, what/which fund would you advise me to look at for her? What would be a good portfolio as far as diversification and tax efficency.

Now, see, that's a trick question.

The two of you can contribute to both of your Roth accounts to the various limits in IRS Pub 590. (Probably $5K annually for you and for her.) If you open the accounts before 15 April then you could contribute $5K for 2010 (if you haven't already done so) and $5K for 2011 to get you to the $10K minimum.

But the "what/which fund" answer is "whatever meets your asset allocation". For example, since small-cap and international funds tend to have higher expense ratios, you'd want to invest the TSP in those assets (where the expense ratios are likely lower). Then you could invest the rest of your TSP and your Roths in whatever other equities fill out the rest of your asset allocation.

This means that you have to choose an asset allocation. You seem to have chosen one in the TSP already. If that's the case then you could decide that all of your accounts together (TSP, both Roths) would total 20% small-cap stocks, 20% international stocks, and 60% S&P500. That would probably put your TSP mostly into I & S funds and most of your Roths into the Vanguard version of the S&P500 index.

But the best answer is to educate yourself on asset allocation. Start with the Bogleheads Wiki (Category:Asset Allocation - Bogleheads), perhaps a library copy of "The Bogleheads Guide to Investing", and then a library copy of William Bernstein's "The Four Pillars of Investing". The idea is to educate yourself to have the self-confidence in the strength of your knowledge when the market drops by 30%... otherwise you'll find yourself selling out at a panic at the bottom and buying back in again at the top.

There are more references here:
http://www.early-retirement.org/for...reading-list-with-a-military-twist-46732.html

Speaking of asset allocation, in my opinion as long as you're getting an AF paycheck then you can avoid investing in bonds. (So you might not want to invest in Wellington & Wellesley yet, unless it makes you feel more comfortable and helps you sleep better at night.) You might even be able to shave your emergency fund down to just a couple thousand bucks (Dave Ramsey doesn't understand military pay). You're unlikely to be subject to abrupt unemployment.
Where to put your savings while you’re in the military | Military Retirement & Financial Independence
Tailor your investments to your military pay and your pension | Military Retirement & Financial Independence
Start saving early | Military Retirement & Financial Independence (although you're well ahead of the game here)

Hopefully between these retirement vehicles we will be on our way to being FIRE'd like you all.

With your head start and your spouse's pulling in harness, the two of you should be able to do it in less than 20 years. Maybe less than 10.
How many years does it take to become financially independent? | Military Retirement & Financial Independence

 

[clifp]

Oh and since Nords is to much a gentleman to pimp his own book.

Look for it The Military Guide to Financial Independence and Retirement
coming soon to a PX near you.

 

[deserat]

You're unlikely to be subject to abrupt unemployment.

Not so fast - Air Force is hot into Force Shaping right now - Lts and Capts are being targeted in the next year or so - he needs to make sure his AFSC is one that is in high demand or get his a$$ into one......also, the Air Force has just gone through SERBs and other active force cutting boards. We just watched a 16 year personnel officer be separated - and he had won personnelist of the year award.....bureacracies are brutal on those who aren't in the slots they want.

Bottom line - it's not a guarantee anymore - however, if he's smart and makes sure he's in an AFSC that is desired and in the top 50% or so, he can make that 20 or more years and retire comfortably - yes, if he saves during this time, he's even likely to have that as an option at the 20 year point. Then there's the Reserves......

I'd also like to know how he found out about this board - are there some lurkers out there who are mentoring the young'uns?

 

[Joshua]

Welcome to the forum! There are a lot of informed people here, so you should be able to find some good assistance. The forum archives are full of interesting reading.

I will admit to being slightly envious. I am still about a year away from finishing my BA. It is costing me some almost sleepless nights spent on homework, but it's going to get done. When it is, I will be doing everything within my power to convince the Army to send me to OCS, so I can get one of those little yellow bars for myself.

Josh

 

[Fireup2020]

I'd also like to know how he found out about this board - are there some lurkers out there who are mentoring the young'uns?

I share this site with any sailors (and others!) who express interest in retiring! (even if 20 years down the road!) I feel it is my civic duty!

 

[rgarling]

you are definitely headed in the right direction. You will find kindred spirits and an unmatched source of reliable information over on the Boglehead forum (Bogleheads Investing Advice and Info).

good luck

 

[REWahoo]

Look for it The Military Guide to Financial Independence and Retirement
coming soon to a [-]PX[/-] BX near you.

Fixed it for ya...

 

[Nords]

I will admit to being slightly envious. I am still about a year away from finishing my BA. It is costing me some almost sleepless nights spent on homework, but it's going to get done. When it is, I will be doing everything within my power to convince the Army to send me to OCS, so I can get one of those little yellow bars for myself.

It might not hurt to ask that question now, especially if your college has a ROTC unit.

Of course there's nothing like the [-]firehose drowning[/-] total-immersion experience of just showing up at OCS to let them explain to you what they can do for you...

Fixed it for ya...

I'm hoping that before the year's out you'll all be sick of looking at that cover in the exchanges!

I'll stick up for Clif-- in the last year I've spent more time in the Schofield PX than the Pearl Harbor NEX.

Haven't been on Hickam in years. But the Navy was so desperate to get its hands on the Hickam O-Club (with its unique view of ships using the Pearl Harbor channel) that they agreed to a merger...

 

[REWahoo]

Haven't been on Hickam in years. But the Navy was so desperate to get its hands on the Hickam O-Club (with its unique view of ships using the Pearl Harbor channel) that they agreed to a merger...

I'm not sure desperate is strong enough to describe what it must have taken for the Navy to cooperate with the AF...

Although I flew in and out of Hickam a few times and once had a three-day layover, I never went to the O-Club. Since our aircrew of 4 had both officers and enlisted, we generally didn't go anywhere one of the crew wasn't welcome.

 

[Nords]

I'm not sure desperate is strong enough to describe what it must have taken for the Navy to cooperate with the AF...

It's been a local joke for over six decades. There's all that great Hickam beachfront (with its own beach restaurant) to watch the ships go by, and the O-Club lanai is practically close enough to the channel entrance to reach out and shake hands with the ship's fo'c'sle lookout. Meanwhile the Pearl Harbor part of the channel has a stretch of senior officer housing and a big ol' long stretch of industrial shipyard. Visitors not welcome in either area.

Although I flew in and out of Hickam a few times and once had a three-day layover, I never went to the O-Club. Since our aircrew of 4 had both officers and enlisted, we generally didn't go anywhere one of the crew wasn't welcome.

No worries, you didn't miss anything. I was asked to leave the O-Club in the late 1990s for inappropriate attire. Docksiders-- not even slippers but docksiders. I was already wearing a collared shirt & pants, and I was even wearing socks. The 20-something hostess enforcing the rules was apologetic yet firm, and it was funny & sad at the same time. I never went back.

Come to think of it, I don't believe that Pearl Harbor even has an O-Club anymore. That would also explain their eagerness to be in charge of Hickam.

During the decades before the joint base there was a gate along their shared property lines. For a number of years each service actually had sentries posted at that gate-- we weren't sure whether it was to keep the other service out or to keep us in.

 

[Rustic23]

When we lived on Hickam we were three blocks or so down from the club. We would walk down and watch ships gong in and out. Two things impressed me. The size of a carrier, and the stealth of a sub. Most surface ships were noisy when going by, the sub just seem to slink by.

 

[check6]

When we lived on Hickam we were three blocks or so down from the club. We would walk down and watch ships gong in and out. Two things impressed me. The size of a carrier, and the stealth of a sub. Most surface ships were noisy when going by, the sub just seem to slink by.

Gosh, this brings back memories as I was a lifeguard at the Hickam Officer's Club pool for several years in the late '60's. It was an elevated pool and the view of the channel was terrific. Pool has since been torn down.

 

[junior3042]

Wow, thank you all tremendously for your responses. I sincerely mean that. Nords-so if you were in my shoes, you would first max out the TSP @ my current allocation and then when I get promoted with the addition $, contribute to a Roth (500 index fund) and change my TSP allocation to mostly I and S. I wish I had your head knowledge. You must be retired mil and FIRE'D! Thanks

 

[REWahoo]

You must be retired mil and FIRE'D! Thanks

Yep. You could say that he wrote the book on it.

 

[friar1610]

You've gotten great advice so far. Here's one more piece: if an organization called First Command ever invites you to a free dinner/investment seminar, decline. They're into "financial planning" for the military but will try to put you into vehicles (investments, insurance) which are much more expensive than what you will get with TSP, Vanguard, USAA, etc.

 

[HawkeyeNFO]

...have 3 months of living expenses set aside...

This advice I have ignored since being commissioned. With the steady and reliable paycheck that the military has provided me over the past 13 years, I don't see the need to keep a 'rainy day' fund. Should some emergency pop up, mutual funds can be sold fairly quickly to cover a credit card bill. However, I do my finances a little different from the average joe, and I have a different goal, too. And it doesn't include working for the man after my Navy time is up.

 

[Nords]

Wow, thank you all tremendously for your responses. I sincerely mean that. Nords-so if you were in my shoes, you would first max out the TSP @ my current allocation and then when I get promoted with the addition $, contribute to a Roth (500 index fund) and change my TSP allocation to mostly I and S. I wish I had your head knowledge. You must be retired mil and FIRE'D! Thanks

You're welcome! We military on the board enjoy helping out each other, and I enjoy writing. I was commissioned in 1982 and I've been ER'd nearly nine years.

In your shoes I'd max out the TSP. It doesn't offer active management or commodities or other exotic assets, but you don't need to care about that. Once you have the excess income (from annual pay raises, or biennial longevity raises, or promotions) then max out your Roth IRAs. Once you max those out then keep saving in taxable accounts with fund companies like Fidelity, Vanguard, or Schwab. (Each company has their advantages and drawbacks.) As you contribute to your accounts, keep an eye on your overall asset allocation (to make sure it stays near your chosen guidelines) and use the TSP for the asset classes that tend to have higher expense ratios-- "I" and "S" funds.

You'll be saving for other reasons-- replacement vehicles, perhaps a home purchase, maybe a kid's college fund. The trick is to keep aggressively saving, especially by banking 80-100% of every pay raise or promotion. Have a little fun with a little of the "extra" money, but don't expand your lifestyle with words like "bigger" or "more" or "new" unless it really meets your values.

It seems like a long way from where you're standing, but compound interest accelerates exponentially after the first 5-8 years. Many of us didn't figure out saving & investing until we were in our 30s, too, which is a more painful road to ER. Keep saving and don't get distracted by "get rich quick" hype. You don't have to be an investment guru unless you want to be one.

I haven't always been a saver or an investor, but the submarine lifestyle doesn't offer many spending opportunities... and getting married really motivated me to make sure we didn't fritter away our cash flow. (You can read more of the details on my profile here and at Nordman, Doug) Use our experience to avoid wandering around in the investment jungle before you find your own path. "The Military Guide" will be in exchanges by August (I'm proofreading the galleys now) but most of it is excerpted at The-Military-Guide.com. You can post questions there or on this board, read a few books from the recommended reading list, and put the saving/investing process largely on autopilot.

As Hawkeye has mentioned, the board's servicemembers & veterans will point out the military differences from the "conventional wisdom" of investing. A steady military paycheck lets you be a bit more aggressive in your asset allocation and with your long-term investments. If you were leaving active duty then you'd get a bit more conservative.