I’ve heard from a reader a couple of times over the last few years. Here’s their latest question:
I’d like to find a financial planner and see what course correction(s) we have to make based on our current finances.
I will be officially retiring in five years but will supplement my military pension by working part-time. We have a little consumer debt and no home/mortgage. My spouse is an at-home parent and our kids are now 8 and 5. I don’t think there is a calculator smart enough to incorporate my family demographics and identify that we may need to buy a home and support kids until they are college age.
Let me know if you are available. Thanks!
Good to hear from you again! I’m not a financial planner but I answer a lot of reader questions. There’s no need to pay me for my advice– I give that away for free.
I don’t offer a number-crunching analysis service, although I can refer you to people who do. At the end of this post I’ll recommended a couple of fee-only CFPs who are military retirees. They’ll ask you to gather some data before they can do the analysis, and they can help you check anything that you think you might have overlooked.
Financial independence calculators
Don’t contact a professional just yet. There are several (free) calculators that will handle your questions, and every year they get better. You’ll essentially break the problem into four parts:
- you and your spouse’s spending for the rest of your lives,
- the annual cost of raising the kids,
- how much you want to spend on college (the total cost is your kids’ problem), and
- your down payment fund for your house.
Most calculators will do a great job of projecting the first two parts and they’ll treat the second two as lump-sum expenses. They handle mortgages as well.
Everyone approaches their planning in a different way, with different types of analysis and detail. Everyone prefers a different user interface. No single calculator is good for everyone, and you should probably try out two or three to compare the results. My good friend (and experienced retiree) Darrow Kirkpatrick has done an exhaustive review of financial-independence calculators on his site.
Part of the rest of this e-mail tells you what numbers you’ll need. When you’re ready to plug those into a calculator, I recommend that you start with the crowdsourced FIRE simulator cFIRESim. (FIRE stands for “Financial Independence / Retire Early”.) For a second choice, USAA members have one of the world’s most user-friendly calculators. (It hides a lot of the details from your view & control but it’s extremely easy to run, with a very high user completion rate.) Otherwise, browse Darrow’s link and decide which calculator(s) you want to run.
Advantages of a military pension
The good news is that a military pension is one of the world’s best inflation-fighting annuities. No matter what you overlook in your analysis, your pension will provide you with a basic standard of living. Your spouse will probably want the full Survivor Benefits Plan coverage, too, unless they have their own assets or prospective pension.
Another advantage of the military pension is that you can safely handle a 30-year fixed-rate mortgage. You should still save up (at least) a 20% down payment to get the best deal, but you can have the world’s most reliable inflation-adjusted income helping you to make payments on a fixed amount of principal and interest. The payments will seem like a big number for the first decade but your pension will gradually rise with cost-of-living adjustments. As your pension goes up, the mortgage will become a smaller percentage of your income.
Now back to the calculators. You’ll need two sets of numbers for input.
Running the data
First, whether you do your own analysis or pay a financial advisor to do it for you, you’ll need to know your current expenses. That drives all of the other numbers. The more details you track on your expenses, the more you’ll be able to decide what brings value to you– and where you want to stop “wasting” your money.
The next piece of data is your asset allocation. Right now you have a military income and later you’ll have a military pension. You’re planning on a bridge career as well, so those three factors mean that you can afford to invest aggressively. I’d suggest allocating at least 80% equities and the rest to CDs or cash. You could even go 95%/5%, especially during your bridge career. You don’t need to invest in bonds because your military pension is the equivalent of a portfolio of I bonds.
From those two sets of numbers, then the more you can save and invest (the more you earn and the less you spend) then the faster your assets will grow. Your analysis will track your assets versus your net expenses. (Net expenses are your annual expenses minus your annual pension.) When your assets are 25x your annual net expenses then you’re financially independent and can spend 4%-5% of your assets each year. The reason we can be so confident about this is because you have a military pension that rises with inflation, and a couple of decades after you retire you’ll start receiving Social Security. When most retirees use the 4% Safe Withdrawal Rate system, they end up with more money than they need for the rest of their lives. When you include a military pension as part of that asset allocation, you’re almost certain to have a 100% success rate. No matter what happens to your investments, you’ll be able to survive off your pension and Social Security.
Staying with the plan
The key for you (and your spouse) is having enough confidence in that asset allocation to sleep comfortably at night. As much as possible, the investments should be in your Roth Thrift Savings Plan (L2050 fund or C, S, and I funds) with their world’s lowest expense ratios (0.03%). More of your investments should go to passively-managed equity index funds (also with low expenses of less than 0.20%) in your Roth IRAs for you and your spouse. You’ll have a pension and a bridge career, so you won’t need to tap those funds until age 59.5. Even before that age there are several tax-free and penalty-free ways to tap the funds if needed.
Keep saving and invest even more in your taxable accounts. Your taxable investments should be in a passively-managed equity index fund with low expense ratios. (Just like your Roth IRAs.) That would be a total stock market index fund or an S&P500 fund. The key is buying funds with expense ratios below 0.20%… maybe even below 0.10%. Don’t waste your time chasing active managers or “smart beta” or other buzzwords. Use the index funds to get 99.8% of the market’s return with about 1% of your personal effort so that you can focus on other important financial decisions.
The more of this analysis you can do on your own, the more you’ll understand it and feel committed to it. Even better, you’ll be more alert to lifestyle events which could affect your retirement. A fee-only CFP will give you a great plan, and some of them will add in quarterly or annual reviews (for a fee), but you’ll be the first to notice signs of trouble. You’re the one who cares the most about the success of your plan.
Most people build a spreadsheet to project their annual, including the lump-sum expenses like college, down payments, replacement roofs, and replacement vehicles. (Some of the calculators enable you to input this level of detail.) When your asset allocation is at least 80% equities (in the TSP and passively-managed index funds) then you can reasonably assume long-term annual average returns of 5%. The more you save and compound, the faster you’ll get to the point where your assets are 25x your annual net expenses.
Fee-only CFPs can help
If you decide to have your financial analysis done by a fee-only CFP then I’d recommend Rob Aeschbach of The Military Financial Planner or Forrest Baumhover of Westchase Financial Planning. Rob’s in Norfolk and Forrest is in Tampa but they both work by Skype and e-mail. Both are extremely familiar with all of the aspect of the transition and military benefits. They can also help with questions like “SBP or term insurance?“, “What states are tax-friendly for military retirees?“, “Buy a home or rent?“, and “How much should we save for college?”
I also recommend that you read at least one personal-finance Internet forum or Facebook group. It’s a great place for ideas and even ask questions to help with your analysis. (cFIRESim was developed by a poster on one of the forums.) I’d suggest the Mr. Money Mustache forum, the Early-Retirement.org forum, the Facebook group “Personal Finance For Military Service Members And Families“, or “Military in Transition“. I regularly read all of them, and Rob and Forrest post to those FB groups.
Our reader responded:
Funny that you mention the USAA Retirement calculator, but it stated that I met the goal at 100%! I am a little skeptical because my gut feeling is that even with a pension, a bridge income, stay-at-home spouse, no home (no home equity) and with not all kids college costs covered that I really felt I was behind the 8-ball. I will try that cFIRESim to see where I stand.
Quick question: when you stated the ideal asset value to be 25X annual expenses, does asset value include the cumulative value of my military pension?
Your asset value for the 25x expenses does not include your pension. Instead, you start with your total retirement expenses (including SBP premiums, Tricare Prime premiums, applicable federal/state taxes, and all of your other spending). You’ll assume that those expenses will rise with inflation. This simplifies the spreadsheet math while also building in a little safety factor: research shows that retiree expenses actually tend to drift down with age, especially past age 75.
Once you’ve determined your complete retirement expenses, you subtract your pension from that amount. The net “expense gap” is what you’ll pay for from your invested assets, and you’ll need investments of 25x that expense gap.
For example, if your projected retirement expenses are $82K per year and your pension is $42K/year, your expense gap is $82K-$42K = $40K. You’ll need 25x that amount or $1M.
Note that the 4% Safe Withdrawal Rate (4% = 1/25) is based on a lot of research and probability analysis, but there are no guarantees. The factors that work in your favor are (1) choosing mutual funds (or ETFs) with low expense ratios and (2) investing in an asset allocation that’s heavy in equities (at least 60%-80%). What really gives you a big boost in your retirement success projections is your inflation-fighting pension. (From 2002-2016, despite two recessions and several annual COLAs of 0%, my pension grew over 34%.) Another factor in your favor is Social Security, which is not part of the SWR studies. You’ll probably delay taking Social Security as long as possible, but if your retirement expenses abruptly go up (or your investments hit a worst-case global depression) then you could start Social Security payments as early as age 62.
You can read more details on your financial independence estimates in the blog’s archives from October 2010-March 2011. Those posts are mostly excerpts from the book.
Here’s your reader “call to action” for this post:
Sign up for the TSP and set up your pay deductions in myPay to your new TSP account.
Or, if you’re already contributing to your TSP account, then log in and check your asset allocation (or the L2050 fund)
The blog’s archives from September 2010-March 2011 on retirement assets
Great advice, Nords. I will state, however, that if one is of the mindset to plan anyhow, that they will adjust as times adjust. I remember a thread on the Early Retire board where they talked about the 4% rule and that during 2008, that rule might not be good enough (i.e. needing more than 25X). The best comment I saw was that as humans we tend to adjust and that one would adjust their spending in down times – in fact, the book by Bob Clyatt, “Work Less, Live More” postulates just that and builds a portfolio mechanism for that.
Nevertheless, your elastic waistband, belt and suspenders approach can still be good in the beginning as it enforces a discipline. After a bit of time, you can loosen up or tighten up as you become more comfortable and confident. I know I have loosened up a bit – not tracking my spending so much as I’m not spending more than what’s coming in and my ‘spidey sense’ of “whoa too much” kicks in habitually now without having to refer so much to the numbers. That’s what happens with habit built over time….
Thanks, Deserat! I wish we had a better financial independence calculator for variable spending plans. Bob Clyatt’s system works great.
After 14 years of financial independence, we’ve also loosened up on our spending.
The first part of the official trainings on the blended system is now available on JKO and military onesource. It seems there will be 4 different rollouts for training.
Thanks for the heads up, Gerald!
I just worked through the JKO training at this link:
I’d also caution readers to watch out for the blended retirement system’s huge flaws:
An old Senior Chief at my 1st duty station gave me the best financial advice I ever received. “How hard you need to work post your military career will be determined by how hard you choose to work in the military”. 30 years later, advice is still sound. The financial success one has post a military career or separation is many times determined by the choices and decisions made in what “bridge” career one has for the military retired set, or another career vector one does post a separation. Retired at 0-5/23 years so I am not exactly on food stamps. But i knew I could not afford just to sit back at collect retirement pay at 51 for the rest of my life, so I fashioned, planned, trained and networked for a very good bridge career/job that I will retire from at 62. I planned this for 4 years before I actually retired from the military. Plan ahead.
As to the question posed. My counsel is that the expected rate of return on investments, 7% average on fixed income (bonds) 10-12% on stocks 1980-2007 will not be repeated 2016-2030. Too much public/private debt to worked through, with the 10 year at 1.8%, expect nominal return in the 3-5% range on risk assets for the next 10 years or so. Cash is looking better every day. Simple solution is work longer than expected, save more than what one assumed. “Support kids until they are college age?” So who or whom is paying for their college? Also health care, who is going to pay for that with a part-time job? 5 years to retirement, he needs to be working on his next chapter in his vocational/financial life like now.
Thanks, Peter, good points.