Military Retiree and FI

[RLTW]

Hi all - I just wanted to send a update. I haven’t been on here in a while but glad this forum is still around. I originally posted back in 2007, and said that I wanted to be financially free. I think I finally made it to FI. I toughed it out in the Army for the past two decades and came out the other side(barely). I retired on 1 Dec however, like most coming out of the military. I don’t want to stop earning income just yet. I could if I wanted too and that is all that matters.

A little more about me now. I am 43 with a wife and 2 boys (15YO and 6YO). I just moved back into the house that I bought 6 years ago and rented out. It is in a nice community near ATL. We are planning to stay here until at least my youngest gets out of high school (12 years). We moved so much in the Army (17 times in 20 years - which includes 3 deployments). Now we just want to settle down for a little while and establish some roots in the community.

A little about my financials -

Current Cash Flow:

Inflow: ~$25,000/mo
• Passive income: $10,000/mo—> $4850/mo for military pension (taxable) + $3746/mo for VA disability(not taxable) + $1,600 Rental income (taxable) + $300-1000/mo from a small side internet business
• Earned income: $15,000k/mo

Outflow: $14,000/mo
• Living Expenses: ~$8,000/month ($1,300 PITI payment + all other wants and needs for family.
• Taxes: ~$6,000/mo

So that leaves us with ~ $11,000/mo to save for future expenses (investments, travel, big purchases, gifts, etc)

Net Worth: I think about this in 3 buckets; Real Estate, short/mid term savings, long term savings. I know my investment balances are not huge, but I plan to put a lot more in starting now.

1. Real Estate = $700,000 in equity
a. Personal residence = worth $500k, owe $200k @2.25%
b. Investment properties = worth $400k, no mortgages

2.Short-mid term Savings = ~$300K
a. Cash (short term savings <2year and emergency fund) = $267k
b. Brokerage ( mid term savings) = $0 (but going to start putting much more in now)
c. Kids college fund = $35K (also they will get my GI bill benefits for a couple of years each)

3. Long term Savings (+15 years) = $400K.
a. Roth IRAs (tax free) = $200K
b. Traditional (tax deferred) = $200K

So..Now I am just trying to settle into my new life. I am still trying to figure out how to balance my health and wealth and find that sweet spot. I did get another job that I really enjoy and it gives me the freedom to walk my youngest boy to school and work from home most of the time. I believe now my objective is to find my right balance to be completely healthy, wealthy, and wise. Healthy = (mind+ body + soul); wealthy = (money+time+relationships+experiences). And wise enough to know what that balance is and strive to help others.

So what do you think? I am new to this FI feeling, am I missing anything?

 

[Bigdawg]

Good job OP. Lots of retired military on here. You have set yourself up well. Good job on the VA Dis. Hope nothing there is too debilitating. I am at only 60% and DW got a 0% rating. Working to get both of those higher. Plenty wrong but just not documented properly. You have won the game. Now you just need to keep the mind engaged. DW and I are both retired USMC. FI but both working because we enjoy what we do.

 

[RLTW]

Thanks - BigDawg. Nothing too bad but a career of getting shot at, jumping out of high speed aircraft, and rucking definitely takes a toll on the mind and body. I never really went to the doc my whole career. But those last 2 years before I got out, I finally went and made sure everything was properly documented and diagnosed.

Thanks again - it does seem a little unreal to win the game and be out of the rat race.

 

[Nords]

So what do you think? I am new to this FI feeling, am I missing anything?

Welcome back, RLTW, and enjoy having more life in your work/life balance!

You seem to have figured out the cashflow part. Let us know if you have more questions.

 

[pjigar]

I am a "Time > Money" guy. If I have guaranteed cashflows like you then I would not want to work to earn money. You should rather focus more on the side business you already have and grow it. YMMV.

 

[RLTW]

Thanks Nords - I’m sure I will have lots of questions. Right now, I am struggling with the age old question of, should I pay off my mortgage or invest the money. I know the right answer is invest the money, but I always like to lower my required monthly expense. I keep going back and forth. Since inflation is so high and interest rates seem to be raising, I landed on keeping the mortgage and taking the money and investing. What do you think?

 

[RLTW]

Thanks pjiger - Yes, I enjoy my time too...but what do you do, if you "have nothing to do, and all day to do it" I am still trying to learn what I enjoy filling it with. I want to stay productive.

I am definitely going to start working again on the side business.

 

[rwdflynavy]

Welcome to the club! I retired from Uncle Sugar's Navy in 2018 with 28 years. Hit 70% on the VA disability lotto.

We retired to Roanoke VA, my wife's hometown and are enjoying being almost completely retired. I'm taking a very part time online gig teaching JPME Phase 1 at the Naval War College, so that will keep me engaged with DoD to some extent.

My hobby of photography could end up making me some money, but I want it to remain mostly a hobby and not feel like work.

Your investment properties sound like a full time job to me! Best of luck as you settle in to FI if not RE.

 

[pjigar]

Thanks pjiger - Yes, I enjoy my time too...but what do you do, if you "have nothing to do, and all day to do it" I am still trying to learn what I enjoy filling it with. I want to stay productive.

I am definitely going to start working again on the side business.

I didn't mean to say you should not do anything but rather "not to work to earn money"! But yes, everyone needs to do something. I choose to spend my time on the endless hobbies.


PS: To each of their own and I don't know your/anyone's life story. But IMHO "enjoying my work" mentality has been programmed by the culture/society in our country (which is a good thing for the economy but not so good for the individual). Just see how European and Scandinavian countries live. They seem to never run out of things to do in their leisure time.

 

[ncbill]

Thanks Nords - I’m sure I will have lots of questions. Right now, I am struggling with the age old question of, should I pay off my mortgage or invest the money. I know the right answer is invest the money, but I always like to lower my required monthly expense. I keep going back and forth. Since inflation is so high and interest rates seem to be raising, I landed on keeping the mortgage and taking the money and investing. What do you think?

You could just make extra principal payments along the way to "retire" your mortgage years earlier.

 

[RLTW]

Thanks - rwdflynavy. I am definitely happy to be in the "US Club"!

I agree with you on the real estate! The promise of passive real estate investing is not quite accurate. I am planning to use this market to make an exit from real estate. I am currently under contract for one of the properties. Which will only leave me with one more.

 

[RLTW]

I didn't mean to say you should not do anything but rather "not to work to earn money"! But yes, everyone needs to do something. I choose to spend my time on the endless hobbies.

Pjigar - I understood what you meant. I was just saying that I didn't know what I wanted to do with my free time yet. I am definitely trying to figure that out now though!

 

[RLTW]

You could just make extra principal payments along the way to "retire" your mortgage years earlier.

Yes, I will definitely do that! Thanks

 

[ncbill]

Yes, I will definitely do that! Thanks

And make sure your servicer understands they are extra payments to be applied directly to principal, not just prepaying your regular monthly mortgage bill.

 

[Nords]

Right now, I am struggling with the age old question of, should I pay off my mortgage or invest the money. I know the right answer is invest the money, but I always like to lower my required monthly expense. I keep going back and forth. Since inflation is so high and interest rates seem to be raising, I landed on keeping the mortgage and taking the money and investing. What do you think?

Well, even in this forum it's a perpetual Internet debate. The answer depends on what criteria people are using.

Regardless of what inflation & interest rates are doing this decade, over a 30-year period the math & logic favors investing a lump sum now and paying off the mortgage from monthly cash flow. Whatever low future returns and high inflation may be, the longest these situations have lasted is 2-15 years before reverting back to a long-term mean.

However the emotions of behavioral finance mean that carrying a huge chunk of debt might make it hard to sleep at night, even without Dave Ramsey frowning down on people.

In your case, with an inflation-adjusted pension + inflation-adjusted VA disability compensation, you have the world's most reliable cash flow for handling mortgage payment. In addition, you have so much bond-like income from the pension & VA compensation that you're way under-allocated in equities. In your shoes, knowing what I know now, I'd keep the mortgage.

We've carried a mortgage since 2004 and refinanced every time it made sense.
https://www.early-retirement.org/fo...rtgage-without-losing-your-ass-ets-15237.html
After taxes, through the end of 2021 we've enjoyed an compounded average annual return of 9.4%. After paying the principal & interest that still leaves us with an average annual after-tax income of over $20K just from the mortgage arbitrage. We'll pay off our current mortgage in 2047 for my 87th birthday.

 

[Badger]

You could just make extra principal payments along the way to "retire" your mortgage years earlier.

+1 We did this once I realized we weren't getting any benefit on our federal tax and the interest wasn't enough to itemize anymore. Saved us a chunk of money in the process and once paid off gave us peace of mind getting rid of the last money we will ever have to borrow. The extra available money each month went into maxing out tIRA, Roth, and savings.



Cheers!

 

[RLTW]

In your case, with an inflation-adjusted pension + inflation-adjusted VA disability compensation, you have the world's most reliable cash flow for handling mortgage payment. In addition, you have so much bond-like income from the pension & VA compensation that you're way under-allocated in equities. In your shoes, knowing what I know now, I'd keep the mortgage.

Thanks Nords - Yes, it is definitely a good debate and thanks for your perspective. I never really thought of my pension as "bond like income". I like it and agree that I am way under-allocated in equities. I definitely need to change that. I am not really concerned with my cashflow or allocation anymore. Now, I want to ensure my family is okay if something happens to me. I took out a fairly large 20 year term life insurance policy before I retired. So have about 20 years to make sure I have enough in our pile of money.

Would you recommend that I sell my investment property and invest that money too? I am planning to but wondering what you thought.

 

[HawkeyeNFO]

2.25% interest on the mortgage, eh? Fixed rate? No way would I pay that off. Make the minimum payment, and maintain your flexibility with your money, instead of locking it into the house. Never know when you might need the funds.

 

[RLTW]

2.25% interest on the mortgage, eh? Fixed rate? No way would I pay that off. Make the minimum payment, and maintain your flexibility with your money, instead of locking it into the house. Never know when you might need the funds.

Yes- 2.25%, 30 year fixed. I got it about a year ago.

 

[nash031]

I'm a fairly young military retiree at 44, transitioning to semi-ER/kept man/side gig economy this week after two years of working for "the man" post-retirement. DW and I will keep our mortgage as long as we need to at 2.75%. That's what the math says and we're both pretty practical in that regard.


Kudos to you RLTW!

 

[rwdflynavy]

Thanks Nords - Yes, it is definitely a good debate and thanks for your perspective. I never really thought of my pension as "bond like income". I like it and agree that I am way under-allocated in equities. I definitely need to change that.

I agree with Nords on the bond like income idea. I'm very heavy equities in my investment accounts since I'm sitting on the equivalent of $2-3M in "bonds" between my pension and VA disability. I also don't have any intention of touching these investments for another 5-6 years at a minimum as we live on my pension and VA at this point.

I also agree on the mortgage and locked in 2.25% a year or so ago for 30 years that I have no intention of paying off early.

 

[RLTW]

I'm a fairly young military retiree at 44, transitioning to semi-ER/kept man/side gig economy this week after two years of working for "the man" post-retirement. DW and I will keep our mortgage as long as we need to at 2.75%. That's what the math says and we're both pretty practical in that regard.

Kudos to you RLTW!

That is awesome, great job nash031! I am definitely done working for "the man" too. I got a job outside the DoD just so I could experience life in the private sector for a little bit. Currently I am enjoying the novelty and I don't feel like I have the stress/pressure to perform like in the military. I make similar earned income - but it just feels 50% easier. However, the moment I don't enjoy it, I will quit and do something else. I am just trying to control life style creep, so I can stay flexible and FI.

 

[Nords]

Would you recommend that I sell my investment property and invest that money too? I am planning to but wondering what you thought.

You're probably not going to be surprised to learn that's a perpetual debate too.

If you think that you'll be happier from selling the rental and investing the money in the rest of your asset allocation, then you're right. You're probably keenly aware of the risks & downsides of landlording, and you see no reason to deal with the stress.

If you thought that you'd be happier owning more properties then you'd be asking for advice on scaling up. You might enjoy the challenge & fulfillment and you might feel that it's less stressful than stock-market volatility.

In addition to the emotions of behavioral finance about having more direct control over your real-estate investments, the math of landlording is a lot more challenging than the math of investing in stocks or bonds.

If you can find an investment rental property with a capitalization rate of at least 6% over the long term of a decade, then you're doing just as well as the stock market. If you're also challenged & fulfilled by being a landlord then you won't mind missing the opportunity cost of investing in the stock market while you build your business.

The problem is that way too many people (especially military families) aren't familiar with the math of investment rental properties. They don't know what a cap rate is or (even worse) they think they're winning when the rent covers their mortgage.

If you told people to invest in 1-10 stocks (all in the same industry) for the rest of their lives, they'd think we're crazy. Yet landlords buy 1-10 houses in a relatively small geographic area and think they're doing well when their net after-tax income covers their living expenses. I know literally dozens of landlords like that, and there are tens of thousands of them on BiggerPockets.

If we don't manage our assets then we can pay someone to manage them for us. Financial advisors will handle a typical brokerage account for anywhere from 0.25%-1%/year, yet we think that's crazy expensive because we can do it ourselves. When a property manager insists on 8%/year to take care of our rental properties, we think that's a reasonable deal-- if we keep a close eye on the manager or if we fire the manager and spend roughly a day per month (long-term) taking care of our properties by ourselves.

Now let's tell people that we'll lend them 75% of the value of their assets so that they can go buy more. If we do that for real estate, landlords will try to leverage up to 80% or even 90%... and we have an entire industry of realtors & lenders in every neighborhood to help them find those assets and borrow the money to own them. Yet if we propose borrowing even 50% of the money that we invest in the stock market to buy more stocks, financial advisors would call us ludicrously crazy for the leverage risk added to the concentration risk.

When an investor dies, someone inherits their brokerage account (or mutual-fund account). The assets in the account keep earning money, the math of dividing the account is straightforward, and the heirs can either keep it or sell it for a very low fee. Yet when a landlord dies there's an argument about who owns what part of their assets, and every one of the heirs has to agree what to do with it. If they decide to sell then it costs anywhere from 3%-8% of the value to unload it, and by then it might not even be earning any money at all.

Don't get me started on the regulatory & political risk of landlording a few properties, let alone the issues with market rent... or an occasional global pandemic. Yet some people end up being landlords because they're not comfortable with stock-market volatility?

I know that investing in real estate can work at least as well as the stock market because I'm a member of the Millionaire Money Mentors forum. The forum has at least a dozen professional real estate investors (that I know of) who own entire apartment buildings or commercial warehouses & shopping centers. Their net worth is in 8-9 figures. There are at least a couple dozen more investors who buy shares of syndications or lend money to other real-estate investors. Their net worth is also in 7-8 figures.

Investing in real estate is very lucrative when you treat it like a business. (Not like most military families who become accidental landlords.) Landlords have to understand the math. It's also diversified when you spread it out and minimize the leverage. It probably does not scale for management (by you or by a property manager) until you get to at least 30 doors-- and maybe at least 60.

Personally, after picking stocks (and startups) over the last 40 years, and after doing the due diligence on dozens of real-estate syndications, I'm much happier with a total stock market index fund. My spouse will be a lot happier with VTI if I can no longer manage it, and our heirs will be a lot happier too.

After being a landlord for the last 27 years, I'll be a lot happier when we sell the place. We'll invest our profits (after sales expenses, capital gains, depreciation recapture, plus federal & state AMT) in... a total stock market index fund.

I'd recommend to anyone who embarks on a career of real-estate investing to not only treat it as their self-employment business (whether it's for lifestyle or to scale into a multi-million dollar company) but also to have an exit strategy.

 

[RLTW]

You're probably not going to be surprised to learn that's a perpetual debate too.

If you think that you'll be happier from selling the rental and investing the money in the rest of your asset allocation, then you're right. You're probably keenly aware of the risks & downsides of landlording, and you see no reason to deal with the stress.

Thanks again Nords - I agree with all of that and very well said. My first couple of properties were just like you described - not good investments. After those two, I started getting serious and figured out the math (cap rate, NOI, ROI, net cash flow, Cash on Cash return, etc). Once I figured all that out, it became at least a part time job analyzing properties and trying to find a solid deal. I ended up buying a few more which have proven to be pretty good investments. With that said, even though I wasn't managing them it did start to become a little stressful. Even with only 5 doors, you always have something going "wrong" each month. It was usually nothing overwhelming but my blood pressure would rise a little when I looked at my email and saw something from the property manager.

I think I will go ahead and sell. I am trying to simplify my life now and I don't need the added headache. Like you said, real estate can be a good investment, no doubt at it. It just isn't what I want do with my time anymore.