[Nords note: As you’ll learn from the details of this post, the author is an O-5 who’s trying to stay anonymous. He’s also written two other posts about his journey to financial independence. Your first thought may be “Sure, anyone could save for retirement with his paycheck!”
But when you read his earlier posts, you’ll see that he started out just like every other servicemember. He dealt with debt, paid high fees for mediocre investment returns, spent more than he wanted to for his vehicles, and made other classic personal-finance errors. We’ve all been there, including me.
His change began in 2010 when he started tracking his spending, learned more about saving and investing, and figured out what really brings value to his life. He’s laid it all out in a spreadsheet for you to copy and use for yourself.
You can start saving for financial independence at any paygrade. In a few years, you’ll notice a huge improvement in your net worth, too.
But only you can make 2015 your year of change.]
Every year I look forward to seeing my favorite bloggers put up their annual spending numbers. I’m inspired by seeing tales of a retired couple (Billy and Akaisha Kaderli) traveling the world for the past 24 years on less than $30K a year. Mr. Money Mustache also manages to support a family of 3 in stupendous luxury in Colorado for under $26K a year. And of course, Jacob Lund Fisker and his wife live on $14K a year. Now, to keep anyone from getting insanely jealous, or attempting to compare themselves to these experts in the field…I offer you a chance to relax and feel vastly superior by comparing yourself to a guy who has tried to reduce expenses for years. This author, after much cajoling and cost-cutting, has reduced his family’s 2014 spending to the paltry sum of $103.5K…wait, what? Ok, fine about $25K of that represents savings for retirement and college…but still…ouch.
I was initially concerned that it was going to sound like I was gloating or bragging with this year’s post (well, as much as that is possible with an anonymous blog posting). However, seeing this year’s spending has disabused me of that notion…and one of the primary reasons for typing up yet another annual update is that fact that it helps me lay out / articulate our financial position more clearly than I otherwise would to myself and my wife. The act of attempting to put numbers into a proposed retirement budget, and seeing the shocking reality (backed up with three years of data) of how we are currently spending our money helps to highlight in my own mind where we still have some work to do.
Cutting expenses, boosting savings
At the end of last year’s post, I was concerned about having some progress to show for 2014. I had already tried to optimize the family’s finances to cut down on expenses and increase our savings rate. So, while searching for ways to continue the trend, I adopted the passive-aggressive approach of “accidentally” leaving blog postings open on my wife’s iPad so that she would see them the next time she went online. I figured that I had to gear up for a fight and I was preparing to enter into a family showdown over control of the thermostat and painful discussions on whether or not the kids really needed anything more than ramen noodles to sustain a healthy weight. As always, cooler heads prevailed, and all my griping about wasteful spending was put into context one night when I was going on about how tight the budget was.
Typically, my wife ignores me as I rant about how reading in the dark was good enough for Abraham Lincoln and complain about children who willfully disobey my orders to stop outgrowing their shoes…but this particular night was epic and I announced that we had less than $25 left in the checking account and a week to go until payday.
Now, this got my wife’s attention and she became quiet (with guilt, I assumed) and began checking the Mint app on her iPad (lovingly installed by her husband) to see what we had done so terribly wrong that month. As I was going on about controlling our consumerist urges and cursing about the wasteful practice of eating expensive fruits and vegetables…my wife casually strolled up and asked me about a $1000 principal only mortgage payment and a several hundred dollar purchase of additional shares of our Vanguard Life Strategy Moderate Growth Index Fund.
I would occasionally…okay, daily…look at each of our accounts and decide whether or not I could shovel additional funds towards the mortgage or investments. Well, that month I got a little overzealous and left us with less cushion than normal. She pointed out that if I had the ability to siphon off more than $1500, over and above our normal savings…then I didn’t really have much to gripe about, and that I’d better jump online and transfer some funds from our savings account instead of letting the automatic overdraft kick in. Then, I seem to recall her walking over to the thermostat in her four layers of sweaters and kicking up the heat by one degree…just to rub it in.
Fortunately, all of my hot air wasn’t wasted since we did actually manage to increase our savings, and this year marked a return to full-time teaching by my spouse. So, I should be able to skim off even more from our checking account each month to put towards the mortgage.
One of my better moves this year was giving myself a raise while simultaneously upping our TSP contributions. Yes, I was finally spurred into action and decided to update my IRS Form W-4. I had previously always withheld at the higher single rate while claiming only one allowance. This was great every year around tax season, but it also meant that I was giving the government an interest-free loan, so I’ve resolved to try and decrease the amount of the refund that I receive every year. My wife’s new job and the requirement to fill out her W-4 provided the impetus to go ahead and claim at the married rate with two allowances for me, and she is claiming at the single rate with one allowance. So, while I expect to still get a refund, it should be smaller next year, and in the meantime, I was able to increase my monthly paycheck while simultaneously increasing our TSP contribution by over $500.
This brings our total monthly savings up to:
My ROTH IRA Monthly Contribution: $458.37
Spouse’s ROTH IRA Monthly Contribution: $458.37
ROTH TSP Monthly Contribution: $900.00
Standard TSP Monthly Contribution: $252.67
Child #1’s 529 Monthly Contribution: $175.00
Child #2’s 529 Monthly Contribution: $175.00
Child #3’s 529 Monthly Contribution: $175.00
Total Monthly Savings: $2,594.41
Keep in mind that these new monthly totals for the TSP have only been in effect since the start of the school year in the Fall of 2014 when my wife started teaching. I look at that total and think that we aren’t doing too badly…then I read about others that are contributing >50% of their income towards retirement, and I realize that we have a lot of room left to improve. The retirement portion of the savings adds up to $2069.41…which represents only 13.47% of our gross income. Though the contributions should continue to creep up during the coming year (due to a 1% pay raise for the military)…I can’t help but wonder when I’ll muster the budgetary discipline to max out our TSP account?
While 2013 was a banner year for the stock market…2014 also proved to be plenty profitable. This year’s values (including contributions) now stand at:
|Account||Dec 2012||Dec 2013||Dec 2014|
|My Roth IRA||$81K||$105K||$119K|
|Spouse’s Roth IRA||$49K||$66K||$77.5K|
While we are at it, the 529 plans for the children also experienced some gains:
|529 Plan||Dec 2012||Dec 2013||Dec 2014|
Do we have enough yet?
As I calculated the figures this year, as well as the >$100K of equity in our rental house (conservative estimate), I began pondering whether or not we had already crossed a threshold of inevitability with regards to achieving financial independence. Dividends and capital gain appreciation are poised to overtake our own contributions as the primary driver of portfolio growth, and while I’ve already passed the 20-year retirement eligibility mark, every year that I remain in the military increases the pension by another $200-$300 a month.
Of course to know when you’ve reached your savings “number”, you have to know your expenses. Fortunately, I have tracked every single penny spent for the past three years, so I think that I am beginning to get a pretty good handle on where our money goes. So, armed with my trusty excel spreadsheet that I continually update…I began plugging in the data that Mint has collected.
This tracking of expenses is handy for determining whether or not our spending aligns with our values and priorities…or whether we are mindlessly frittering away our money on things we don’t actually care about. A look through our spending as a percentage of our net income lets us make better decisions (hopefully) about this. I can justify (barely) the 6.67% of monthly income spent on tuition because it keeps the kids in a better school, and the wife works at the same school which reduces transportation concerns and gets us a 50% discount. It also keeps all 3 of them on the same schedule and avoids a 45 minute bus ride each way to a mediocre school for the oldest. Alcohol & Bars however, while only representing 1.58% of our monthly income…doesn’t align with my desires to save money or lose weight. I’d love to blame someone else for this category…but sadly, that expense is mostly mine as the Trappist Beers that I like don’t come cheap. Looks like it is time to explore some cheaper local alternatives.
There are of course some changes that will occur throughout different phases of life (retirement from the military, paying off the mortgage, children attending college, etc.), and some of the data represents OCONUS prices, but I think there is still enough information there to begin to form an estimate of what our retirement budget might look like. While I am horrified to see how much we spend (you can see all the gory details in the attached excel spreadsheet), it is also encouraging to see a downward spending trend in a number of areas. Based on the numbers from 2014 spending (with some confirmation from the average spending over the past 3 years) I can foresee a few scenarios playing out.
Three retirement scenarios
Caveats for the following retirement scenarios:
- Children successfully finished with university and living independently
- Mortgage paid off on rental home
- Retirement from the military at the 25-year mark (in 2019) as an O-5
- Assumes zero growth (or loss) in the portfolio…uses 31 Dec 14 as baseline.
Scenario 1: Ridiculous luxury (current lifestyle minus only child specific expenses)
- We continue to rent (similar size) or purchase another home with a mortgage
- We continue to travel, dine out frequently, and spend like rock stars
- End result: -$1,960.98 shortfall each month…which we can cover for 126 months (10.5 years) out of our current savings…I/we would need to get a job to cover the gap between savings shortfall and start of social security
Scenario 2: Moderate luxury (downsized version of current lifestyle)
- We rent a small apartment or purchase a small home with a mortgage
- We would travel modestly, dine out 2-3 times monthly, and spend moderately
- End result: -$842.81 shortfall each month…which we can cover for 294 months (24.5 years) out of our current savings…at which point we could draw social security and continue living in the same manner or even slightly better. It is worth noting that this is essentially the same rate of withdrawal as prescribed by the 4% rule…which, while under attack in much of the financial press, is still a pretty good guideline.
Scenario 3: Economy Living (only essential spending)
- We move back into our rental house (lower cost, but also loss of rental income)
- We eat at home and don’t travel
- End result: +$2,033.52 surplus each month…and we would never have to touch our savings (or social security payments)…hmmm, this presents some interesting options as we would never have to work again and could potentially travel the world and take advantage of cheap overseas living.
In reality, I expect that we will do better than the scenarios described above. We plan to keep contributing to the retirement portfolio as long as we continue working. There is a possibility that I could stay in the military longer than 25 years and earn a higher pension. We could also raise the price on our rental property. At any rate, none of the scenarios above are too terrible…and even the riskiest of them only requires a part-time minimum wage job (until we are eligible for social security) to make up for the difference in income vs. spending.
It is that last scenario of course that intrigues me the most. It makes me think that with just a few more tweaks, we could optimize our spending and savings to achieve a life of early retirement and financial independence. I am definitely getting close enough to this possibility that I can start to smell the barn. However, an early draft of this blog entry was proof read by my wife…and her comment was something along the lines of “You’d better re-evaluate this plan of yours to sit around the house all day drinking beer once you retire from the military…because you would drive me nuts.”
So what will I do all day?
Of course, that begs the question: why am I doing all of this? While my fascination with financial independence still shows no sign of abating, after several years of reading everything I can find on the topic, it is getting increasingly difficult to find articles and stories with a new angle that hasn’t already been covered elsewhere. Perhaps that is because the basics are so simple that they can be summed up by a cartoonist or even fit onto an index card. Ahhh, brevity…another trait I lack.
That being said, one change in my reading habits has been the shift from accumulation and investment strategies towards figuring out my underlying reasons for continuing to save aggressively. As outlined above, I have passed the point of retirement eligibility, and there is a good chance that I may have already saved enough to meet my spending requirements through a combination of military pension payments and modest withdrawals from the investment portfolio…at least until I reach social security eligibility.
So, how do I determine when I have enough to stop saving…perhaps I already have everything I need. I have read studies that say happiness peaks at $75K a year, and my baseline income of a 25-year retirement and the rental house income will already exceed that amount. So, again, why keep saving? (Aside from the excel chart that shows the redonkulous spending habits that I am supporting.) Though in fairness, there is perhaps a degree of satisfaction that can be achieved from all this compulsive planning and tracking. I also know from my readings that folks are happiest when they “Retire to something”…instead of when they “Retire from something.” So, that is probably where I need to start directing some of my energy and research. I cannot honestly tell anyone…or more importantly…myself what I want to do when I grow up.
As always happens…whenever I google questions about military retirement matters, bridge careers, and escaping the fog of work…I am directed to Nords’ website (he has also been more than generous in private emails when I’ve had questions.) I have read and re-read his book and blog posts a number of times, and each time I gain some new bit of insight. The most important of which is probably to leave the military when it is no longer fun. Thankfully I still love my job and I have approximately one year left in my current position…so I will definitely stay in for another year. After that, I believe that my compulsive savings habits have given me some freedom of maneuver that others may lack. Now…if you’ll excuse me…I’m off to find some sort of avocation or calling to ease my entry into the next stage of life.
Here’s the spreadsheet again: Retirement Calculations December 2014
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