My spouse and I were not brilliant investors. We made the typical dumb mistakes of our 20s and 30s and we paid ridiculously large fees along the way to financial independence, but a high savings rate overcame all of those errors.
Your FI journey will be better (and cheaper!) than ours, but the math is the same. Focus on the factors within your control: your savings rate, your investment asset allocation, and your expense ratios.
I’ve given this presentation at several Camp Mustache and CampFI gatherings, and now our entire audience can enjoy it. This post expands on the original two-page bullet handout (with these same images) for groups of about 50 people. Our seminar reviewed the context of world events and sentiments during the years when my spouse and I saved for our financial independence.
[Note: For over half of my military career, I was either a student or an instructor. I gave this talk with handouts because my military audiences have been overwhelmed by decades of PowerPoint presentations. I wanted people to focus on the printed words and think of questions, not just passively watch the screen. It was very casual. I typically spoke for 25 minutes followed by 20 minutes of Q&A. Our Camp audiences enjoyed snacks & drinks in the meeting rooms, and there may have been adult beverages.]
[Disclosure: This article is part of the Life Uninterrupted campaign sponsored by USAA. The #LifeUninterrupted campaign is designed to help future retirees learn how they can transition into retirement without worrying about financial interruptions. You can receive a free, no-obligation retirement review today by calling USAA.
Note: We are receiving a fee for posting; however, the opinions expressed in this post are my own. I do not earn a commission or percentage of sales.]
I graduated from college and commissioned into the U.S. Navy’s submarine force. My spouse (then girlfriend) graduated a year later and started her Navy career in meteorology and oceanography.
While I was learning my new job, I had no spare time in my life to appreciate the following events:
- The stock market hit a new low.
- Gold & diamonds were rediscovered as “inflation-proof assets”.
- Checking accounts paid 10% APY. (Inflation had recently peaked at 21%/year.)
- Index funds went on sale in 1976. Nobody knew about Vanguard, let alone John Bogle.
- Exchange-traded funds did not exist.
- Recency bias had taken over investing. By now, we all knew that stock markets went down forever (since 1966). A bull market was just a cruel head-fake before more losses. Inflation was returning any day.
- Back then my Navy base pay was $1100/month. ($2860/month in 2018 dollars.) Including tax-free allowances, my annual income was $52K in 2018 dollars. Military active-duty health insurance was free. Traditional IRAs had been around since the 1970s but the military did not offer the Thrift Savings Plan or any other type of 401(k).
In town at my first military command, a one-bedroom high-rise apartment rented for $355/month. I debated long & hard whether to add $10/month for a 14th-floor balcony. The view wasn’t very good and I was only saving $50/month to begin with, so I decided to save the extra $10 too.
During the “Evil Empire” phase of the Cold War, I went to sea on a submarine carrying ballistic missiles aimed at the Soviet Union. I spent half of three years underwater for 90 days at a time.
I started learning about investing through personal experience:
- Many mutual funds had 5% front loads.
- “No-load” mutual funds were starting to appear.
- Hot funds still had sales charges of 3%.
- Some fund managers were closing funds to new investments, but it seemed to be a sales gimmick instead of a growth problem.
- Almost all funds had expense ratios of 0.5%-2.0%.
Black Monday (the one on 19 October 1987) was caused by program trading and “asset protection insurance”. In the 21st century, we’d call it a “flash crash” caused by “high-frequency trading”.
After two promotions my O-3 base pay was $2076/month. ($4754 in 2018 dollars.) By now I also had skills, too. My annual income (including tax-free allowances, submarine pay, sea pay, and nuclear bonus pay) rose to $85K (in 2018 dollars).
During those years in training and at sea I’d saved $22K but I had no idea where to invest it. (I was skeptical of a smooth-talking shipmate who bought stocks on margin.) I saw a newspaper(!) ad for an “investment advisor” who put all of my $22K into a Paine-Webber(!!) bond fund. I have no idea what I paid for their commission or the fund’s expenses, but if I could compare that data to current investing expenses then I’d be horrified.
My spouse and I married in 1986. I brought my bond fund and zero debt to the marriage. She also had zero debt plus CDs, foreign bonds, and an actively-managed equity mutual fund. We both enjoyed being frugal and we started developing do-it-yourself home-improvement skills.
We consistently saved 40% of our income during the 1980s and 1990s but we struggled with investing it. We’d never heard of asset allocation. We chased hot mutual funds by looking in the pages of Business Week magazine’s annual “Where To Invest” issue. (No, I’m not going to link to that series.) The “good” funds had two or even three(!) up arrows.
We wondered about staying in the Navy. Would we need a military pension? Could we save and invest enough money on our own? Spoiler alert: our high savings rate overcame our mistakes, and we didn’t even need the pension.
In 1987 I filled out retirement workbooks. (Back then they were “free in the U.S. mail” from financial companies, stockbrokers, and advisors.) All of their data tables assumed that we’d work until age 65 and Medicare. As a nuclear submariner, I thought it was routine to reverse-engineer the compound growth formulas to figure out how to retire in our 40s.
We’d never heard of the term “financial independence”. We just didn’t want to have to work full-time for four decades.
Our lives changed forever: we started a family, and our daughter overwhelmed our career priorities. Suddenly we weren’t so sure that we were going to gut it out to 20.
I turned out to be a slow learner about my career options because I was living in ignorance and fear of life outside the military. (Pro tip: learn about the Reserves while you’re on active duty.) Despite our suddenly explosive spending on diapers, we kept saving.
Another epiphany hit us shortly after we invested in diapers: the book “Your Money Or Your Life” by Joe Dominguez & Vicki Robin. (That’s not an affiliate link, it’s a blog post. Click it for more analysis.) Today people think “Oh, yeah, sure, the book which totally started the FIRE movement”, but back then Joe and Vicki were simply two niche speakers with a bunch of audio cassettes and very frugal lifestyles.
Meanwhile, the Cold War and DESERT STORM had ended, and the drawdown was in full force. America was spending the “peace dividend” and the military couldn’t downsize quickly enough. A year later I realized that I’d fallen off the submarine career track and reached my terminal rank. Never mind “gutting it out”– the next question was whether I’d be retained to 20.
My O-4 base pay was $3156/month. ($5649 in 2018.) My annual income had risen to $118K in 2018 dollars, but I’d seen my last nuke bonus. (Surprisingly I’d also seen my last sea pay.) However, we continued to save most of every promotion and annual pay raises.
By now our retirement workbooks had been replaced by software. Unfortunately, it was sent via U.S. mail (on newfangled 3.5″ diskettes), because the World Wide Web was still being beta-tested by Tim Berners-Lee. I knew how to FTP kilobytes of data over a 9600 bits/sec modem on our landline, but that just wasn’t going to happen with Fidelity or T. Rowe Price.
Even though I was a hardcore computer nerd, my spouse and I still hadn’t figured out that expense ratios of 0.90%-1.40% were too high. We were still chasing hot funds and active managers, while Vanguard was widely known for its poor customer service and excessive penalty fees on frequent trades. (Back then “everyone knew” that you needed frequent trades “to respond to dynamic market conditions”.) A few months later the first exchange-traded fund was invented: the S&P500 SPDR ETF would go on to kill those expense ratios.
The good news was that we’d started our daughter’s college fund. The other news was that 529 accounts had not yet been invented, but we bought EE bonds from our military payroll deductions for education savings. Those of you “of a certain age” may recall that EE bonds were a good deal up until 1996, when their rates started to float.
The World Wide Web took over the Internet, and stock-market experts insisted that double-digit annual returns were “the new normal”. Everyone was getting gigantic profits from tech startups and buying hot sports cars… well, everyone but us. This led to some 20th-century FOMO, but fortunately, we were too busy with parenting (and work) to start picking small-cap tech stocks.
However, we were even more motivated for financial independence. “The Millionaire Next Door” was published by Stanley & Danko in 1996. This book made an immediate impact across the nation, and we were pleasantly surprised to learn that we were Prodigious Accumulators of Wealth.
Two other studies made their own impacts, although only us hardcore personal-finance nerds noticed. William Bengen wrote about SAFEMAX withdrawal rates in 1994. (Yes, that’s the original article.) In 1998 three professors at Trinity University published a similar study on withdrawal rates. These laid the foundation for the 4% Safe Withdrawal Rate.
In 1999 my O-4 base pay had grown to $4444/month. ($6666 in 2018 dollars.) My annual income was now $111K, but we could see the finish line. The ‘90s had a few years when our 100%-equity investment portfolio gained more than our paychecks, and the exponential growth curve was starting its sharp turn upward.
The ‘90s weren’t all rainbows and IPO unicorns, though. Our local military drawdown closed a major base and downsized thousands of servicemembers. Among other economic shocks, the real estate market shed nearly 50% of its value from the crazy 1989 levels. Meanwhile, we lost over $100K on home equity during the decade. Our home’s value bottomed out at about 65% of the money we’d put into it.
The good news was that those withdrawal-rate studies showed we were financially independent. By this point I was in a tolerable job with less than three years to my pension, so we decided that I’d finish my career in June 2002.
When we tried to check our FI analysis with a fee-only CFP, we learned that we’d taught ourselves more personal-finance skills than most CFPs. (Today you can do this even more easily.) Advisors were still skeptical of safe withdrawal rates, and many of them couldn’t even spell ‘SWR’. However, the new FinancialEngines startup used Monte Carlo analysis to verify that were indeed FI. Even if we had a rare failure in its estimate of our success rate, a military pension would cover our bare-bones expenses.
It might be a surprise for today’s military families to read this, but 2002 was the first year that servicemembers could contribute to the Thrift Savings Plan. All of our savings and investments in the 1980s-1990s were in IRAs and taxable accounts.
In retrospect, the Internet Recession turned out to be a great time to start a military 401(k) of index funds with low expense ratios. However, the economy made investing a painful experience with the worst recession in 20 years. The stock market lost 1700 points after 9/11, and our investment portfolio seemed to be melting down. Amazingly, we still had enough for the 4% Safe Withdrawal Rate to work. Our assets were barely worth 25x our annual expenses, but we knew that we could cut our spending or even find part-time work.
I retired in June with a military pension of $2655/month. That rose to $3647/month in 2018 from its cost-of-living adjustments.
Even better, we finally discovered ETFs & expense ratios. During the market turbulence, we sold our last actively-managed mutual fund (with its 1.4% expense ratio!) and bought ETFs with ERs of 0.25% to 0.39%.
Best of all, we learned about our financial emotional triggers. Our two decades of education and experience helped us sleep better at night and boosted our confidence to stay the course.
Today, financial independence seems pretty straightforward. The resources are all over the Internet, the tools are more robust than ever, and expense ratios have collapsed even lower. FI is no longer a question of “if” or even “when” but rather “how soon”, and the movement’s focus is shifting to “life after FI”.
After 17 years with our asset allocation from 2002, we’re simplifying even further. We’re moving to a total stock market index ETF with an expense ratio of 0.04%, and we’re still holding on to some B shares of Berkshire Hathaway stock.
We’re minimizing both our dividend income and our capital gains distributions in order to reduce our income taxes. Our assets have grown to more than we ever expect to need, and now we’re tweaking our estate plan to make them even easier to manage.
Life is good, and we’ll enjoy it for as long as we can.
Once again, notice the parallels to:
USAA’s “Life Uninterrupted” Campaign – Get a Free Retirement Review
We were decades ahead of USAA’s new “Life Uninterrupted” campaign, and it worked.
We saved for retirement as aggressively as we could, and our high savings rate overcame a lot of dumb mistakes. We did the best we knew how with what we had, and we got the important part right. Even though our mistakes delayed our financial independence by a year or two, we did it on our terms for our FI lifestyle.
There are many paths to FI, and you certainly want to choose a path which avoids our mistakes. It’s your life energy. Find your lifestyle comfort level (the one you’re willing to work for) and optimize your tactics to get there.
Unlike our 1980s workbooks, today’s retirement tools are more robust and simpler to use than ever. You can start out with USAA’s five-step retirement calculator (which takes about two minutes to complete) or work on a more detailed goal. Once you’ve sorted out a basic plan, you can check your assumptions with dozens of other free calculators.
If that last paragraph doesn’t work for you, then it’s worth consulting a fee-only financial advisor. You can start with USAA’s free retirement review, or I’m happy to answer questions and help you find whatever type of advisor you want. (Interestingly, USAA recommends hanging on to your TSP account for as long as you can.) Take the advice you want, and then manage your own assets as simply as possible.
Your call to action:
You saw it at the top of this post, and we’ll write it again. Focus on the factors within your control:
- your savings rate,
- your investment asset allocation, and
- your expense ratios.
Believe it or not, your savings rate is the most important factor. Sure, you can delay your financial independence with an overly-conservative asset allocation or with high investment expenses. But once you’ve optimized your portfolio, a high savings rate is your accelerator pedal to FI.
Do the best you can with what you have. Work both sides of the savings rate:
- cut out the wasted spending and
- boost your income.
Like any other worthy goal, financial independence is simple… but not easy. If you have more questions then you can start here.
[earnist ref=”the-military-guide-to-financial-independence” id=”70177″]
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