Out Of Debt & Heading For Financial independence

A reader writes:

“After seeing a couple of your posts on the Mr. Money Mustache forum I checked out your book from the library and finished it in a day. It was great but I would love your opinion on what to do in my own situation. My spouse is a junior officer. We married nearly six years ago with significant debt. This month we are debt free. Now that our debt is paid we can begin saving and investing but I don’t know where to start. Neither of us are risk takers. Since we know very little about investing and we aren’t risk takers putting our money in the stock market makes us very nervous. We have my spouse’s TSP and my Roth IRA (with USAA). I think I read that TSP has a Roth. Can I roll my USAA Roth into the TSP Roth? This is all so foreign to me. If you don’t mind I will summarize our goals and my plan of action and you can give me your opinions and advice.

Retire in seven years (at 20 years of service)
Not need another job after retirement
Own a home.
Plan of action:
Rent for the next two years until we transfer to a new duty station
During those two years save money for a large house down payment
Buy a mid-range house at next duty station
Pay off house and save up down payment for a larger house
Rent out first house
Pay off second house
Retire with pension and rent profit to live on.
I should note that I don’t have a paid job. I am a stay at home parent with three children under the age of 4. I care for the children, cook, clean and monitor our finances. We plan to have as many children as we can.
Thank you for your help.”

Thanks for reading the book! And better yet, congratulations on reaching debt free!! With your saving skills you’re well on your way to your next goals.

I’m going to give you an overwhelming number of references. I’m not suggesting that you should read them all this month! I think they’ll keep you going for at least a year, and possibly two years. I recommend you switch around among them until you find something that interests you or that matches your situation. For example you’ll want to start with real estate books during the next year, and as you learn more then you’ll want to dig into real estate financial websites. If your spouse has a deployment coming up then you’ll want to switch your reading over to the TSP.

Your goals and your plan look good. The key to your success will be a (very) high savings rate, but you’ve learned how to do that from paying off so much debt. You’re probably planning to save your spouse’s annual pay raises, the biennial longevity raises, and the promotion pay raises. You could try to save all of those and hold your expenses constant, or you could save 80% of them and splurge a little with the remainder. The trick is to feel that you’re winning at frugality without crossing the line into deprivation.

I can offer all sorts of cheery reassurances about the stock market, but behavioral psychology has shown many times that if you’re not comfortable with investing in equities then you’ll find it very difficult to stay the course through a bear market. If you’re seeking education on the stock market then I recommend the Bogleheads wiki. Even if you decide to stay away from stocks you’ll still use many of the wiki’s same techniques to choose your asset allocation (real estate, cash, maybe bonds) and to start saving for retirement. Two more resources are the Bogleheads Military Finances wiki and the Bogleheads presentation on basic military personal financial management. That last one is a 70-slide PowerPoint brief from a retired officer, and it’s very easy to skim through the slides for the highlights of topics you may have questions about.

William Bernstein is another great resource. The library probably has a copy of “The Investor’s Manifesto” and you can read more at EfficientFrontier.com. He started in the 1990s with two complex books on asset allocation and investing*, but he’s spent the last decade breaking the subject down into smaller (reader-friendly) topics with more practical advice.

Whether or not you decide to invest in stocks, those websites and books will help you develop your long-term asset allocation.

You probably know exactly how you want to save for your home’s down payment, and it’s best to put that money in a combination of money markets and CDs. You already know about the rates at Navy Federal Credit Union, Pentagon Federal Credit Union, and USAA. You can also find good rates at online banks like Ally Bank, and you can get the latest recommendations on Mr Money Mustache’s forum.

Next you want to figure out if you’re cut out to be a homeowner and a landlord. I’ve already reviewed “Rent vs. Own” on the blog (and it’s in most libraries). Two other popular books on the topic are:
Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who’s taken over the new editions) and
Landlording by Leigh Robinson (7th edition or later).

If you find yourself chewing through these references and hankerin’ for more, then check out the blog’s reading list.

You’ve probably seen MMM posters mention BiggerPockets.com. Their free “Ultimate Beginner’s Guide” is a big help, as well as the practice that you can start today with their post for new real estate investors. I think it takes at least a dozen Sundays of open houses to get to know a neighborhood and to develop your eye for what you want in a home and a rental property.

While you’re exercising your eye for a good property, you should also train your brain for the financial analysis. Frank Gallinelli’s “Real Data” blog posts put numbers on the decision, and read through his “10 Commandments” series before deciding whether you need to spend money on his products. I’ve learned plenty from his free resources.

When you know where you’re transferring next, you can use these websites for more information:

Automated Housing Referral Network (both as a landlord and a renter)
Home Circle on USAA (great tools for home values & rentals)
Military For Sale For Rent
Military Town Advisor

And, of course, if you’re coming to Oahu then I’d be happy to help you figure out the neighborhoods.

Finally, if you’re going to stay away from stocks then you should still diversify your real-estate investments with inflation-indexed bonds. Equities are the only asset class that has reliably beaten inflation, but real estate and inflation-indexed bonds will at least keep up with it. The Bogleheads wiki can teach you all about I bonds, TIPS, and the TSP’s “G” fund. The reason I recommend these choices is because the TSP has the world’s lowest expense ratios (lower even than Vanguard) and you need to save for retirement as well as for real estate. For now, perhaps you could put 50-60% of your savings toward your house down payment and the rest of it in your TSP and your IRAs. Once your spouse retires, you’ll never be able to invest in the TSP again.

You asked about Roth TSP and Roth IRA transfers. The TSP actually has two separate programs with very confusing names. The conventional TSP allows you to contribute pre-tax dollars to their funds (including the “G” fund). The Roth TSP lets you do the same with after-tax dollars. Unless you feel there’s a huge tax difference, I think it’s probably better to pay your income taxes now and put your after-tax dollars in the Roth TSP. You could choose the “G” fund or, if you’re willing to risk a little on equities, one of the “L” funds.

Your IRAs have nothing to do with the TSP, although they also use the “Roth” word. You and your spouse can both have your own IRAs, and they can be a mix of a conventional IRA (with contributions from pre-tax dollars) or a Roth IRA (contributions from after-tax dollars). I think that once again it’s better to pay taxes now and invest in the Roth IRA. Unfortunately, you can’t roll your spouse’s Roth IRA into the Roth TSP, let alone your own. However, I recommend keeping (and contributing to) your Roth IRA because contributions can be withdrawn anytime, and an additional $10K can be withdrawn penalty-free for the purchase of your first home.

If your spouse deploys to a combat zone then you’ll be able to invest a huge amount of tax-free pay into the Roth TSP, the conventional TSP, and the Savings Deposit Program. This is the chance of a lifetime to put tax-free income into tax-sheltered TSP investments. If your spouse has to deploy to a combat zone then I strongly recommend maxing out all three of those programs.

Here are four more posts on how to treat the TSP:

Finally, I’m going to recommend three women who know a tremendous amount about raising large families and investing in real estate. You may already have read about them.

First up is Kate Kashman, the “Paycheck Chronicles” blogger at Military.com. She’s raising four daughters as a military spouse, and they’ve bought at least two rental properties even though they’re stationed overseas.

Next is Ellie Kay. She’s an expert at getting out of debt, organizing your finances, and setting your goals. She’s a military spouse, too, and she’s raising seven kids. She may have more small-unit leadership experience than her spouse…

Finally, there’s Amy Dacyczyn, author of the Tightwad Gazette (in your local library). Not too many readers remember that Amy raised her six kids on her enlisted Navy spouse’s salary and his eventual pension.

Please let us know what you decide to do!

* For you hardcore asset allocation readers, here are two of William Bernstein’s best:
The Intelligent Asset Allocator
The Four Pillars of Investing

Related articles:
Old-school frugal
Frugal living is not deprivation
Simple ways to start saving
Start saving early
How many years does it take to become financially independent? (the chart version)
How many years does it take to reach financial independence? (the calculator version)
Asset allocation considerations for a military pension (part 3 of 3)
Saving base pay and promotion raises
Total Pay: How much will your next paycheck be? (worth the 99 cents!)

WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

  1. Is it possible for someone who was unaware of the possibility of early retirement at 17 years and who was discharged instead 2011 to go back and get retirement for those 17 years?

    • Diann, that’s a tough question to answer without a lot more info.

      My first suggestion would be to search your service’s website for the information about the 17-year retirement program. For example, if you were involuntarily discharged under a program that was later modified to permit retirements, then check the information (and its references) to see if there are any deadlines. Figure out who to contact, ask them the same question about deadlines, and (this part is critical) find out the references they’re using for those answers. Research those questions and references at Military.com and MilitaryTimes.com.

      For example, here’s one issue that the Navy was dealing with last year:

      Next you should consult with a lawyer who understands military benefits and retirement. Show them what you’ve learned, make sure you both understand the references and the law, and assess your options. Even if you missed a deadline, your service might have been legally obligated by federal law to keep you informed– and may still be legally obligated by that law to resolve the question. This may also involve filing a claim with your service’s board to correct your records (and receive your pension).

      Another possibility is that you separated with more than 15 years of service yet may have been eligible for any of the service’s temporary early retirement programs. The transition programs may have been required to make sure that you understood your options, but your lawyer could help you decide whether you’d be able to claim the retirement now.

      Two other possibilities are that you voluntarily separated with more than 15 years of service and would not have been eligible for any early retirement programs, or that you separated with less than 15 years of service. I don’t think you’d be able to claim a retirement in either of those situations.

      If you were discharged due to medical disability, then a review of your discharge may determine that you’re eligible for a medical disability retirement. However that’s a completely separate issue from the 17-year retirement program offered by one or more of the services.

      If you send more information to me (either through the “Contact me” link or e-mail) then I can offer a more detailed answer.

    Comment? Question? What's on your mind?