A reader writes:

“Nords,
I’m an avid reader of your website and love your Reddit replies. I’m active duty with 14 years of service.  I’m saving a considerable amount of my paycheck and investing in dividend growth stocks with a portfolio that yields about 3.5%.

I can retire at 20 years or try for one more promotion, but I’d do the High Three pension which would put me at about 22-23 years.  I would like to work in Hawaii and will be stationed there again soon.  I don’t want to buy a house because there is no guarantee I can stay there until retirement. I don’t want to be a landlord from 2,000 miles away.

If I got out at 20, I would probably need to get a job until I reach FI.  If I promoted and stayed past 20 then I probably wouldn’t have to work again.  I am kind of torn, but I have the time to figure it out.

My questions:
– How do you afford to live on Oahu on a military pension and investments?
– Do you regret not going further in your military career?

Just wanted to get your thoughts.  Thanks for all you do!  You have made a tremendous impact on so many people!”

My response:

You’re welcome, and I’m glad it’s helping!

“How do you afford to live on Oahu?”

The biggest expenses of life on Oahu are housing and commuting. Once you find a hack for those situations, the rest falls into place.

The easiest housing hack is roommates. Another answer is a small 2BR cottage on a lot next to a bigger home (that you rent to tenants).

You could also use geo arbitrage: pay your rent (in Hawaii) by owning high-performance investment rental properties (anywhere else in America) to provide the cash flow.

You could:

• Buy a multi-family building here and have your mortgage paid by the other tenants.
• Rehab ugly neglected properties on beautiful lots. (See the example at the end of this post.)
• Offer incentives to neighborhood people (realtors, property managers, mail carriers, friends) to let you know when bargains are going up for sale.

“How can I afford this?”

Over the last 17 years, my O-4 military pension has grown 40% from cost-of-living adjustments. It started at $31,860/year when I retired in 2002 and in 2019 it’s $45K/year. Back in 2002 our investment portfolio was $1M (and >90% equities). Despite two recessions, that’s grown faster than inflation. We started withdrawing from it in 2002 at the 4% Safe Withdrawal Rate ($40K/year).

Over those same 17 years, our spending has grown a bit less than inflation. It’s been a little lumpy but in real (inflation-adjusted) dollars, it’s remained flat over the long term. Today my spouse and I spend about $80K/year— some years a little more, some years a little less. This post shows what our finances would look like if our spending came from only our investments and without my pension.

More interestingly, our non-discretionary spending has dropped (just like the research in that link) and our discretionary spending (travel!) has gone up. If we ever had to cut back on our spending then we could easily do so, but it wasn’t necessary during the Great Recession.

Our finances have survived the sequence-of-returns risk and our assets are growing faster than inflation while our spending has stayed flat. That’s sustainable. Our portfolio will last longer than we will.

After the military, I’d recommend renting everywhere (including Oahu) for at least a year. You’ll figure out the best neighborhoods for your needs, and then you’ll watch for a good property selling at a discount. Oahu currently has a severe housing shortage, but new construction will come on the market in the next five years (Koa Ridge, Ho’opili, Kakaako) to reduce the median prices again. The rapid-transit light rail corridor will also create another construction boom which will eventually reduce the prices of properties which are farther away from the rail line. That creates more real estate bargains for people who don’t have to commute to a job.

“Do you regret not going further in your military career?”

That’s a tough question to answer because humans (even submariners) tend to rationalize those situations. I was demoralized and confused for about a year after hitting my career limit, but then I realized it was a blessing in disguise.

I commissioned in 1982 (the Cold War’s 600-ship Navy) and I was drafted into the nuclear power program (as were many of my classmates) by my academic performance. I screened “XO in excess” in 1993 (the drawdown after the Cold War and DESERT STORM). I had the performance to be a 1980s Cold War XO and I might have screened for CO. (Back then the quantity was much more important than the quality, but those are sea stories for another day.) However, in the 1990s drawdown, I didn’t make the cut to be in the 40% of my year group who served an XO tour. They earned it with their performance. I did not.

This *was* my happy face back then.

By then my active-duty spouse and I had started our family. During 1993-94 I was miserable about falling off the career track but I also realized how much more family time we could gain. Then my spouse and I stumbled into instructor duty, which gave us much more work-life balance than sea duty.

Two years after not making the cut for XO, I was very grateful to have been forced off the submariner career track. I was left alone by my assignment officer, and I made my own submarine career at training commands until I retired.

In retrospect, I should have left active duty for the Reserves, but I was too ignorant & scared to attempt that. Our finances would’ve worked out about the same, but our quality of life would’ve soared.

I also realized that I didn’t want to work after Navy, and our research led to resources like “Your Money Or Your Life” and “Millionaire Next Door”. I had the time (and bandwidth) to focus on our family and our finances instead of devoting my waking hours to being XO or CO.

I found my answers to my “What if… ?”, but I agree that rationalizing (behavioral psychology) might have been a factor in my adjustment.

Don’t Gut It Out To 20

Today I tell servicemembers to take it one obligation at a time. Stay on active duty as long as it’s challenging & fulfilling. When the fun stops, though, then leave active duty for the Reserves or National Guard. Keep saving for financial independence so that you have the flexibility to design your bridge career to suit your quality of life.

Try to adopt an attitude of abundance instead of scarcity. This is difficult, yet very valuable. I stayed on active duty out of my scarcity mindset (“I’ll never find another job!”), and today I see financial opportunities everywhere. When I retired in 2002 I never even wrote my resume, yet my network delivered several job offers. I’ve had similar offers every few years since then, and I’ve blazed my own revenue path.

While you save and invest for FI in the military, the “worst-case” is failing to promote and being involuntarily separated before active-duty retirement. You’re more likely to be continued on active duty to 20 or you’ll affiliate with a Reserve/Guard unit. Either way, you’ll find more employment in your skills (with a corporation or as a consultant) and you’ll discover new interests and skills. (For me, it’s writing and coaching.) You’ll gradually build a sustainable lifestyle (with a few speed bumps) and you’ll reach FI along the way.

Our reader responded:

“Do you ever regret retiring in Hawaii, with it being so expensive? I would love to retire there but the taxes are unreal. Wouldn’t your money go further in another state?”

Hawaii no ka oi!

Every day… if I could recover quickly enough.

We have no regrets about living in Hawaii– in fact, we haven’t found anywhere else which creates the same feeling. By the time we got here in 1989 (seven years after college, 13 years before I retired) we’d lived in enough places to recognize our combination of climate, cultures, and lifestyle. Our extensive global travel since then has not changed our preferences.

One learning experience was leaving Hawaii in 1994 for a three-year tour in San Diego. My spouse and I were both stationed at training commands, and we returned to Oahu 2-3 times per year to teach at Hawaii commands. When our planes landed at Honolulu, it felt more like “coming home” than when we landed back in San Diego.

That was a hint. Our discussion changed from “Hawaii is too expensive!” to “How can we afford to live here?”

Our money would go further in many other locations yet we’d lose our quality of surfing, er, I mean, our quality of life. None of the dozen other places I’ve lived in the Navy (and the other dozen I’ve visited since then) have all three factors of climate, culture, and lifestyle.

I’ve lived at this address longer than anyplace else in my entire life. Our daughter was born & raised here. She and her spouse (from a very cold state!) are interested in living in Hawaii. They’ll find a way to align their spending with their values, and they’re willing to work & invest for it.

It’s not the taxes.

I would not let taxes drive your choice in locations.

First, figure out the lifestyle priorities which matter to you (instead of the cost of living). When those priorities are truly important to you then you’ll be willing to work and save for them.

The best resources to find your place in the world are websites & databases like TheEarthAwaits and asking questions of residents like me. But then you’d want to dig into the numbers that matter to your lifestyle and figure out how you’d optimize them. You’d visit a place for a few months. If you like what you’re living (and spending) then stay for a year, or else keep traveling.

Second, if taxes are your priority then dig into the rates to find out how they actually affect you. Run an income-tax calculator to see how much you’d have to pay in both federal and state taxes.  For example, Hawaii workers carry the tax burden because employee salaries are taxed more than many other states. However when you’re financially independent then you don’t need a salary.

The state excise tax (4.5% on Oahu) is a regressive form of sales tax, but it’s still a consumption tax. The less you consume, the less you pay. There’s no excise tax at the military exchanges or commissaries.

Hawaii also has low property taxes and does not tax military pensions. That more than makes up for the excise tax.

Our personal state income tax bill for 2018 was $2090, and in each of the two earlier years, it was $1046 & $1340. Much of that was incurred for Roth IRA conversions, and we’re finished with those.

Research your living expenses

Perhaps your research shows you Hawaii’s median expenses without describing the ways to reduce them.

Note the new (used) PV panel to add to the house’s roof array.

The climate is benign, our home is energy-efficient, and we don’t use heating or air conditioning. Our solar water heating system and our photovoltaic panels have cut our electric bill to $18/month. (We invested $16K on those in 2005, and 65% of that was recouped through federal/state tax credits.)

We spend less money per year on gasoline (on this 30×40-mile island) than anywhere else we’ve lived in the U.S. I bicycled a lot when I was working, and now we retirees don’t drive very much. We just bought a used Nissan Leaf electric vehicle that we’ll recharge from our PV array, and it requires almost zero maintenance (no fuel-burning engine).

We shop the commissary and Costco for local foods. We do our own chores & yard work (and for great exercise). We do our own maintenance and most of our own repairs. We only irrigate the yard during the summer months. Our biggest utility expense is $100/month to replace Oahu’s aging sewage system.

We’ve considered surfing meccas like Panama and Costa Rica. The surf is great, but my spouse and I see no reason to uproot ourselves for the sake of a cheaper cost of living. I’ve followed the stories of people who’ve lived in those places (like Arif Sealey from The Military Guide book). Jim White of Route To Retire is about to move his whole family to Panama.  If I couldn’t live in Hawaii then the areas near San Diego or Seattle might be all right. Andalucia (southern Spain) is very attractive. I wouldn’t enjoy the climates as much but the cultures are interesting, and I could hang up my longboard and substitute a stand-up paddleboard or a kayak. We appreciate the fun and benefits of living outside the U.S., but we also love Hawaii’s cultures and lifestyle.

The best advice: research the databases and make a list, then visit them for a few months. If the cost of living seems too high then figure out how to minimize the non-discretionary expenses.

You’ll find the right balance between lifestyle and budget! You’ll feel comfortable with the living expenses because you get so much enjoyment out of your chosen location.  You’re also not required to live there for the rest of your life, and you may shift from “Here’s my place!” to “Let’s try it here for a few years and then think about whether we want to explore somewhere else.”

Postscript: An Example of a Hawaii House Hack

In 2018 a friend bought a single-family home in foreclosure. They report:

“When the previous owner was foreclosed there was a balance of $882K on their mortgage. A previous appraiser must have valued it for $900K to $950K back in 2006 when prices were inflated.

We put 20% down, so we needed $121K for the down payment. We also budgeted $7K in closing costs and $50K in repairs. It’s not a small amount of capital. However, if you can come up with the capital, the monthly payments are low when you have small rental units attached which are offsetting your mortgage payment.

I did about 25% of the work myself (demo, flooring, painting). My handyman did 65% of the work (framing and finishing) with me working as his assistant. I hired out 10% of the work (plumbing, electrical, and texturing the drywall).

The 650 sq ft basement unit was a total gut job. It took about six months. It functions as a legal mother-in-law suite. No full kitchen. We have had great tenants downstairs since January. We get $1600/month rent and our total expense (mortgage principle & interest, taxes, and insurance) is $2686/month.

Now I’m thinking about building a detached accessory dwelling unit on the property next year. My lot size is .39 acres and set up fairly well to accommodate a second detached 800 sq ft ADU.

The upstairs was livable from day 1 and just needed some cosmetic upgrades. We are 75% done upstairs. I am doing new flooring in the bedrooms (vinyl plank) which will take me about one week. After that, it’s a moderate list of very small repairs.

Overall, I was very happy with the renovations and stayed within budget.”

October 2020 update:  my friend just checked in again.

“I think now is the time with interest rates being so low. I was thinking you could use my actual numbers from 2018 with a purchase price of 603K or you could re-frame as if I sold it to another person in 2020 for 800K.

My actual PITI is $2680 with a loan of 482,400 at 4.5%.

PI: 2445
Taxes: 130
Insurance: 105

The total payment would be almost identical if my house re-sold for 800K and the new owner got a 640,000 loan at 2.75%.

Purchase Price: 800K
Down Payment: 160K
Closing Costs: 10K
Loan: 640K

PI: 2613
Taxes: 168
Insurance: 105

Total Payment: 2,886

The rent for the basement unit is $1600 for a 650 sq. ft. one-bedroom. However, I have to pay 4% GE tax on the gross, which is $64/month and my utilities are probably $50/month more. As a result, the net off-set of the rental unit is $1486/month.

The $2886 mortgage would be off-set by $1486 of rent and the new owner would be left paying $1400/month. And that’s not all… The first mortgage payment would have $1146 going toward principle. I also included my utilities below.

Electricity: $180
Internet: $75
Propane: $45
Water: $45
Trash: free (property taxes).”

For more resources, see the BiggerPockets link in the “Related articles” section below.

[earnist ref=”the-military-guide-to-financial-independence” id=”70177″]

Related articles:

Yes, the mail buoy is a Navy thing. Don’t get fooled!
Reddit’s Military Finance forum
Good reasons NOT to live in Hawaii (with links to many more resources)
Stay For 30 Or Retire At 27?
Don’t Buy A Home When You Leave Active Duty
How Much Is The COLA On My Military Pension?!?
VA Loan Guide – What You Need to Know About Buying a Home with a VA Loan
“Hey, Nords: How’s Your Net Worth?!?”
Frugal living is not deprivation
The BiggerPockets real estate investing website (for many more house-hacking resources)