Military Financial Independence

Lifestyles in Retirement: Hawaii Vacation

Posted on May 1, 2014 by Doug Nordman

The Mainland weather is getting warmer and most of you seem to be thawing out. I wouldn’t torture you with this post in January, but now that spring has sprung it seems to be a good time to answer the urgent financial independence question that I get several times a month:

“Hey, Nords: what should we see & do in Hawaii next week?”

That’s a tough answer because Hawaii has so many different visitor experiences. If you were a surfer then you wouldn’t even ask me that question– we’d be deciding whether to meet at White Plains or at Queens. If you enjoy nature then you’d be all over the hiking trails and diving/snorkeling sites. If you’re a hardcore shopper then you’ll be spending more time in the malls & stores than on the beach. A surprising number of servicemembers & veterans want to visit all the military museums and memorials. Some of you want to know where to find the best local food & drink while everyone is seeking cheap hotels with frugal entertainment. A few of you have seen enough of Waikiki and want to visit a neighbor island. Others are contemplating military transfers here, and you’re wondering how to make Hawaii your home. I even know a couple of Reservists who visited for a military exercise and then moved back here for full-time active-duty orders.

If you have no idea what you want to do here, then my default answer is the “101 Things To Do in Hawaii” website. Once you’ve wandered through its lists for a few hours you’ll come back with more questions, and then we’ll know what kind of visitor you are.

But last month I found another way to describe this: my daughter made her last visit to Hawaii for the next few years. (She graduates from college in a couple of weeks and starts paying back her Navy ROTC scholarship by “seeing the world”. But that’s a subject for another post.) She brought several friends with her for the blowout spring break that they’ve planned since 2011. Their interests cover the whole bell curve, and during one week they saw and did most of Oahu’s visitor attractions on a college student’s budget. I’ll share their itinerary and the logistics.

You won’t accomplish much during your first day in the islands. The shortest flight to Hawaii is five hours, and if you fly nonstop from Houston then it’s over eight hours. If there are any delays for repairs or connecting flights then you’re going to lose the rest of the first Hawaii afternoon, and in any case you’ll be too worn out to party. Your best bet is dinner, a walk around Waikiki or the beach, and an early bedtime. Your body is still adjusting to Hawaii time so you’ll be up at the crack of dawn anyway.

A couple of popular Hawaii attractions have limited hours. Hanauma Bay is closed on Tuesdays, and the Aloha Stadium Swap Meet is only open on Wednesday, Saturday, and Sunday mornings. (If you’re staying in Waikiki, check your hotel’s reservations desk or see if they have a free “Aloha Oahu” continental breakfast with tour & activity presentations.) Our group’s first full day on Oahu happened to be Sunday, so they planned it around the Swap Meet. After breakfast they went to the USS ARIZONA Memorial (right across the street from Aloha Stadium) and picked up tickets to the (free) shuttle boat. (If you’re setting up your itinerary in advance, you can also reserve tickets from the National Park Service website.) They had their choice of times in the early afternoon, so they spent the next few hours at the Swap Meet stocking up on cheap souvenirs, local snack foods for their dorm, and lunch. They reloaded on sunscreen and spent the afternoon at the Memorial along with the (free) Visitor Center museums and other displays. If they’d wanted to spend 2-3 days on military museums they could have also visited the USS BOWFIN Submarine Museum, the USS MISSOURI Memorial, and the Pacific Aviation Museum— all of them are right next to the Arizona Memorial or close by with free shuttles. Down in Waikiki there’s also the Fort DeRussy U.S. Army of Museum of Hawaii, and a local entrepreneur offers Home Of The Brave military-theme tours all over the island.

The next day was a little busier: Waikiki. Rush-hour traffic was gone by 8:30 AM so they started with the morning hike up the inside of Diamond Head Crater for panoramic views of Oahu– and on a clear day you can see Moloka’i. There are literally dozens of places to lunch around Waikiki, but a local frugal favorite is the Wailana Coffee House and its kitschy 1970s decor. (It’s also open 24/7.) They spent the rest of the day shopping around Waikiki and over at Ala Moana Shopping Center. (They’d already scored cheap souvenirs at the Swap Meet, so this was mostly window shopping.) They stayed in town to avoid the afternoon rush hour, and by 5 PM they were at the Hale Koa Hotel to pick up their luau tickets. The Hale Koa is a military resort requiring a military (or DoD civilian) ID card. The island’s other popular luau are at the Polynesian Cultural Center, Paradise Cove, Germaine’s, or the Hilton Hawaiian Village. (No, it’s not really a state law to enjoy a luau before you can fly home, but it’s worth the price.) Be aware that hula and fire-knife dancing are professional cultural activities in the Pacific Islands, and you’re likely to encounter champions at these events.

Tuesday was an outdoors day: hiking Maunawili Falls and hanging out at Kailua Beach Park. (More sunscreen.) We’d had several inches of rain the day before so the Maunawili Falls trail was a mosh pit and the waterfall pool was icy cold, but everyone had a great time. There had been talk of kayaking around Kailua Bay and visiting the Mokulua Islands, but that turned out to be just talk. They spent the rest of the day watching the windsurfers and standup paddle surfers and walking around downtown Kailua. We barbecued at home that night: teriyaki chicken, ahi filets, mahi mahi, burgers, and all of the trimmings. After all the calories burned that day, there was a pack of starving wolverines swarming through the diningroom & back lanai.

Wednesday was another trip to the east side for Hanauma Bay snorkeling and Makapu’u Point. (Bring extra sunscreen.) A couple of the women needed snorkel masks (Wal-Mart) but they still arrived early enough to find a parking spot. Hanauma Bay is one of the island’s most heavily used nature preserves and has seen extensive human damage over the years, so visitors watch a conservation video at its Marine Education Center before being allowed down the steep slope to the beach. Makapu’u Point went especially well because several whales were still cavorting close to shore. They usually hang out in the islands from November through February but by March they head back north to colder Alaska waters for the food. I’m referring to the whales, not the college students.

On Thursday the women finally got down to business: surfing White Plains Beach at Kalaeloa. I’d stocked up on used longboards from Craigslist so all five were in the water for a mass surfing lesson. Or at least that’s what eventually happened– along the way half of our group diverted to the parking lot of the Waikele Shopping Center to catch an early batch of Leonard’s Malasadas (at the “MalasadaMobile”) for beach snacks. (My daughter loves Houston dining, but she really misses local food.) By the time the malasadas straggled on to White Plains I had the first group in the water learning how to paddle in to the knee-high surf. Waikiki is a great spot to learn surfing, too, and there are plenty of beach concessions with boards and instructors, but White Plains is a quiet local beach with very wide & safe breaks right offshore. It’s much less crowded than Waikiki, too, so it’s an easy day of surfing just a few miles from Kapolei and Disney’s Aulani resort. I thought everyone would run out of steam in a couple of hours and head over to Kapolei Shopping Center for lunch at L&L or Zippy’s, but instead we stayed out all day. (It was my daughter’s last surf session for a while. In a few months she could be literally halfway around the world, so she won’t be surfing a Hawaii beach again until at least 2016.) Everyone straggled home tired, sore, and happy.

A word of advice: when you’re planning your trip, put the surfing early in the schedule. A couple of the women turned out to be surf monsters, and they regretted not having more time for it. If you’re not a surfer (or a competitive swimmer) then you’ll need an extra day between sessions for your muscles to recover.

Five hours in the water left me desperately seeking ibuprofen and a recliner, but these women are college experts. After cleaning up the gear they went down to Waikiki for drinks & sunset at the Halekulani Bar. I knew better than to wait up for their return, and I was down hard by 8:30 PM after this particular day of retirement. “Whaddya DO all day?” indeed.

Friday was their final day so they kept it short & sweet: North Shore and seven miles of surf breaks. They stopped at Dole Plantation on the way up but eventually worked their way through the pineapple fields to Haleiwa. After the mandatory pilgrimage to Matsumoto’s Shave Ice they drove a couple of miles further out to Laniakea Beach to see the honu. The island’s population is slowly recovering so there are usually several near the shore and out at the reefs in the surf. (This time I’m referring to the sea turtles but I guess this would apply to the visitors, too.) After learning to handle White Plains’ two-footers, everyone had a new appreciation for the 20-foot winter surf– by watching it from the beach.

And then it was back home for one last meal. After a few hours of frenzied packing and social media updates, we hauled everyone back down to the airport for the Houston redeye. Mission complete.

During the week they made heavy use of a classic local resource and three newer ones. Their driving navigation was mainly by mobile phone apps, but they also used a hardcopy Franko’s Oahu Guide Map. They’re printed in full color on water-resistant paper and they show what to see & do at a glance. (I’ve kept a copy of the Franko’s Oahu Surfing Map in the car for nearly a decade.) You can get around the islands with typical street maps or a mobile device, but the Franko Maps of Hawaii are one of the cheapest vacation-planning tools you’ll ever find.

The women also downloaded HulaCopter and other last-minute-bargain apps. Both offer breaking deals and online discounts. HulaCopter is especially good for last-minute visitor attractions like luau tickets or sunset cruises or fishing trips– the vendors want to fill the last few seats and they’ll offer a 75% discount if you can make it in 30 minutes. You download the app, sign up for the alerts that you’re interested in, and see what’s available. You will get great discounts, and the only question is where you want to go.

Happy Hour Pal helps you find the island’s best dining & drinking attractions, along with navigating local events like First Friday or live music. You may think it’s a new way to get hammered cheap drinks in Waikiki, and it does a fine job. However, it also offers plenty of detailed menus and last-minute meal deals. You can check in or share your experience for extra loyalty points and discounts. You’ll be seeing this app at Mainland restaurants & bars in a few months.

Before you visit the islands, make your plans with the help of 3D Hawaii. It’s another vacation-planning tool based on Google Earth and augmented reality. Instead of the typical two-dimensional Google Map, 3D Hawaii has built a realistic model of the islands using imagery from Google and visitor attractions. You can literally fly around a hotel to check out the grounds and the balcony view from your room, or find additional things to see & do in the area. They even label the surf breaks and the streets to help you navigate the unfamiliar territory.

After your first trip to Waikiki, it’s time to plan a neighbor island vacation. Check the links below for a couple of starting points.

Share your Hawaii “after action report” in the comments below, or ask me a question!

Disclosure: I’m a tiny little investor in Franko Maps and 3D Hawaii. They’re great products and a part of my life that I share with all of our guests.

(Click here to return to the top of the post.)

Military Financial Independence on Amazon:

Reach your own financial independence
Retire on your terms
Success stories and personal checklists
Royalties donated to military charities

Use this link to order from Amazon.com!

Posted in Travel | 6 Comments

Book Review: “When She Makes More”

Posted on April 24, 2014 by Doug Nordman

I’m financially independent, but I’m blissfully ignorant of popular culture. (Maybe those two facts are related?) I had never heard of Farnoosh Torabi.

I first noticed her work a few years ago when she interviewed blogger buddy Darrow Kirkpatrick for Yahoo! Finance about his early retirement. (Yeah, I know now that she wrote for Money magazine and covers financial topics on TV, but I don’t read Money magazine or watch TV.) I dropped track on her after Darrow’s interview until Farnoosh popped up again to interview Mr. Money Mustache for Yahoo! Finance about his early retirement. Then she agreed to be the keynote speaker for FinCon14 this September, and I realized that she’s a major personal finance guru.

More importantly (to me, anyway), she writes books. I like books. I know those accelerate financial independence.

The title of Ms. Torabi’s latest, “When She Makes More” immediately hit a chord with me. My spouse and I started our Navy careers only a year apart, and for the first 15 years my submarine pay meant that I was earning more money for our marriage. However, that all changed when my promotions stopped– and hers kept going. Intellectually I know that more promotions (and more money) are a very good thing for everyone in a marriage. (Hers certainly accelerated our financial independence.) But deep down inside, a whiny little testosterone-poisoned inner He-Man was occasionally kvetching that I wasn’t hauling home my share of the bacon anymore.

Cover of When She Makes More by Farnoosh Torabi | The-Military-Guide.com

Pre-order now for 1 May!

Those feelings turn out to be common among both men and women. It happens more often today, too: during my life, the number of higher-earning wives has quadrupled. In 25% of today’s American marriages, the woman earns more— and the percentage is even higher for recently-married couples.

In the last 20 years, financial researchers have verified that behavioral psychology is a huge factor in managing our finances. We all know that we’re supposed to track our spending, make a budget, and save for financial independence– but behavioral psychology gets in the way. (To learn more about this issue, see Jason Hull’s large collection of studies on “Monkey Brain”.) This is not just a matter of sternly lecturing ourselves about behaving like adults. Our brains have survived the jungles for millennia by developing dozens of shortcuts, and we are not evolved for the modern world of rational reflection and logical financial decisions. We have way too many hormones and reflex responses hijacking our brains to make us feel a certain way when we should be thinking a different way. When we start to act on our financial feelings instead of our analysis, that starts trouble.

Ms. Torabi’s book also got my attention for another reason: my young-adult daughter is smarter than me, she has engineering skills, and she’s going to earn a lot more. She needs to know about these issues so that she can avoid society’s pressure to live out a stereotype.

Unfortunately, women seem to be hindered by their behavioral psychology almost as much as men, but both genders experience it in different ways. This is not feminism or gender equality– it’s about relationships where each of the couples responds to the same situation in different ways, and with very different feelings. We have to understand our own reactions before we can appreciate what our better half is feeling.

When she makes more, it can turn into a vicious spiral. Whether her career blasts off or his career hits an air pocket, their relationship takes a non-traditional (yet more common) turn. She’s spending hours at a high-pressure job yet may still feel obligated to manage the house & kids to the ridiculously high standards that society has encouraged for generations. He has his own high-pressure job (it just doesn’t pay as well) while he’s almost always more relaxed about cleanliness & parenting. He’d like to manage the finances (as so many men prefer) but he’s bothered by not having the majority vote. Friends & family (especially mothers and mothers-in-law) are constant reminders of the roles that everyone’s expected to fill. Tired & stressed couples find themselves even more unhappy with their home lives. He withdraws (as guys do), she pursues, the arguments escalate, and eventually, the fateful question is considered: “What do I need him for?!?”

They both know that her higher income is no longer unusual. They both realize that traditional gender roles have shifted. Yet neither one of them really understands what brought them to this crisis.

Ms. Torabi supplements the psychological research and surveys with hundreds of her own interviews and stories of couples, families, and counselors. This is not pop-psych self-help buzzword encouragement. This is a wake-up call with stark facts, clear trends, and rising awareness– by marriage counselors and psychologists. It’s a 200-page read, but it moves very quickly. You either know that couple, or you are that couple.

The first two chapters present the problem, but the next eight discuss the solutions. The first step is awareness: there’s a problem, and each gender perceives it differently. Yes, men and women have different standards, but that’s just one part of the problem. Once that’s recognized, the solutions are much easier to see and the book shows you how to make it happen. The magic takes time, and gender reflexes will still kick in at the worst possible moments, but there’s less arguing and more problem-solving.

[Guys, no worries. This is not a male-bashing polemic. Ms. Torabi is living the situation in her own marriage, and she’s sharing the solutions. She actually advises women to relax their standards a little and even cut the man some slack. She helps each person understand what the other is thinking and what will make both of you happy. If you’re wondering what’s causing the arguments and how to deal with your own feelings, then this book has the answers.]

The solution starts (as in so many relationships) with the money. She shows how to divide up the financial chores and run the house like the business that it’s always been. The book explains how both of you can contribute to the financial needs while still having your own money for your own wants & entertainment. You’ll both feel responsible and accountable for using the income to reach your shared goals, no matter who earns it.

Another part of the solution is communication. As a guy, I see the domestic situation differently. I know that when the trash can is “full” it still has at least 10% remaining capacity. Maybe the kids are filthy from a great soccer practice after school, but it’s homework time and they can take a bath after dinner. The house might be a mess and the sink is full of dirty dishes, but we’ll pick up for 10 minutes after dinner. Tomorrow I’ll take out the trash and clean the bathrooms. Sure, things are less than perfect, but none of this bothers us guys because I have a clue and a plan.

Yet when Mom comes home from (another very long day at) work she sees a full trash can, filthy kids and– oh great– someone’s left her a sink full of dirty dishes.

How do you think the next 10 minutes is going to go? It all depends on communication: learning what’s important to each other, what triggers our emotional reflexes, and what we can do to make each other feel better. I was just optimizing the trash & cleanup, but now that I understand how she feels about a full trash can and the kitchen sink then I’ll gladly clean up sooner for a happier relationship. She caters to my preference to run the finances, and I can certainly cater to a few of her preferences.

The third part of the solution is dealing with your environment. If a shiny clean home is important, then you both have to make the effort. If that can’t happen then the next step is either changing the standards or hiring a housecleaner. Figure out what’s really important, but be willing to pay for it if necessary. If you can’t afford it then the standards have to change. The key to this decision comes from both of you agreeing on your financial priorities and then communicating about the choices.

Once you’ve turned your relationship back into a strong team and then cleaned house (so to speak), you’re ready to deal with the rest of society’s stereotypes. You’re going to have to handle workplace expectations– and the expectations of family & friends. Ms. Torabi lays out the statistics, the research, and the stories to help explain the situation. You have to set boundaries with work and have a plan for the inevitable daily schedule disruptions. You have to respond appropriately to the commentary from mothers-in-law and deal with the rest of the relatives. Your real friends will understand your relationship, even if it’s not their choice. “When She Makes More” shows you how to navigate these situations– and when to move on.

Got a handle on all of that? Great: now you’re ready to talk about kids. See Chapter 8 (of 10).

My spouse and I have known each other for nearly 35 years, been married for nearly 28 years, and (thanks to the military) lived together for over 25 of them. We’re a great team, but I still learned quite a bit from this book. Our daughter is going to have an eye-opening experience with it, and now we all have the vocabulary to discuss it. You will too.

I’d normally recommend that you wait for this book to show up in your local library. However, this time I suggest that both of you read the book at the same time and keep your own copy handy for future reference. And if you’re the parent of a young adult, I strongly recommend that you buy them their own copy. They’re going to enjoy their own relationships no matter how you feel about them, but at least you can equip them with the understanding and the vocabulary to deal with it.

If you’re a visual learner then take a look at the trailer for “When She Makes More“, and order the book.

If you’re a military spouse, let us know what you’ve learned from it and what you’ve changed. I’d most especially love to hear from the men military spouses!

Related articles:
Book Review: Liz Weston’s “The 10 Commandments of Money”
Book review: “All The Money In The World”
Book review: “Pocket Your Dollars”
Dual military couples
Book Review: “Give and Take”
I wrote this post on 5-10 April but was scooped again by J$! Enjoy his link for more Farnoosh quotes.

Posted in Reviews | 2 Comments

Can I Count On A Military Pension?

Posted on March 6, 2014 by Doug Nordman

A reader asks:

“Thank you for your words of wisdom in your blog and being a source of motivation. I have a quick question and I would appreciate your advice. I have 18.5 years towards my military retirement and plan to go another 10 years or so. That would put me at 50 years old which is my goal retirement age. Unfortunately along the way I have not saved quite as well as I should. I am debt free but only have about $150,000 saved in several Vanguard index funds. I also have $20,000 cash in a money market. That’s it. I do place $1500/month into my TSP and Vanguard index funds (some of which are Roth IRAs) and plan to do so until I retire from the service in 10 years. My current plan to be able to retire is completely reliant on my military pension. My question is this: if you were in my shoes would you trust having this military pension for the rest of your life or would you continue to work past 50 in order to have the actual assets in your portfolio to retire without having to rely on this pension? Basically, how solvent is the military pension in your opinion? Thanks!”

It’s interesting that you ask these questions after Congress tried to whittle down the military retiree COLA. It’s the worst attack on retirement benefits since REDUX, and it took over a decade for the military to persuade Congress that REDUX wasn’t working. This COLA controversy was totally unpredictable (political risk) and changes to the military compensation system might still return someday to bite future military recruits.

Personally, especially after the COLA controversy, I’d trust the military pension for the rest of my life. (Nearly 12 years so far, so good.) It’s an entitlement in federal law. Military pension payments come from a special-purpose Treasury bond that DoD is required to fund, and it’s probably more financially secure than Social Security. (It’s definitely more stable than Medicaid or Medicare.) The other side of your question is that if DoD stopped paying military pensions, then other aspects of life in America would have become so bad that you’d no longer be concerned about the pension.

As we’re learning, benefits are more negotiable than entitlements. MOAA and other military advocacy groups are constantly educating our elected representatives on how a “small” benefits cut will affect readiness and trust. Keep yourself informed– subscribe to their website and e-mails for news that could affect your pension and other benefits. Join the national organization or a local chapter and help keep legislators aware of the effects of their budget votes.

However, we also need to watch out for our own finances and have alternate plans. If a retirement plan can be derailed by a single failure, then the plan needs to be stronger. During the next decade our Tricare Prime fees will continue to rise, some bases and commissaries may shut down, and federal long-term care insurance premiums will go up. As the military draws down, senior servicemembers who have not promoted may be voluntold to retire. Nobody wants to spend their entire retirement worrying about a part of our finances that we can’t control.

Take a look at your “worst case” minimum retirement assumptions. For example, you may decide that the fun has stopped and you’d like to retire at exactly 20 years of service. Calculate your pension for that rank. If your spouse elected full Survivor Benefits Program then your pension income would drop by 6.5%, and after federal taxes it would drop by another 10%-15%. If you’re not ready to retire this year then you can estimate your future High-Three 20-year retirement much more precisely if you assume that the military will have a 1.0% pay raise in 2015 and 2016, and manually average your highest 36 months of pay.

Once you’ve reached the 20-year point, you can decide whether you’re still having fun in uniform or whether you want to start your bridge career. If you’ve pushed hard for financial independence, you may determine that you don’t even need a bridge career. Maybe you’ll pull down a six-figure income in a defense industry related to your military skills. Maybe your military pension covers your expenses, and you’ll find a totally different (yet still fulfilling) way to spend your time. Take a harsh look at your expenses and make sure that you’re spending your money where you feel it has the most value. If you’re happy with your spending then you’ll be willing to work for it (either in uniform or in civilian attire). Don’t cross the line into deprivation, but cut spending on the things you’re not willing to work for. The more you can boost your savings today then the quicker you’ll compound the investments to financial independence.

Ideally you’d find work you love while it delivers a huge income. Until that happens, financial independence is your top priority. As you continue to optimize your spending and maximize your savings, at some point your military pension will fund a bare-bones lifestyle. It’s an inflation-adjusted annuity which serves as your safety net, and later it’ll be augmented by Social Security. Once you reach a safety-net level of annuity income then you can keep growing your other investments until they fund the rest of your lifestyle. You could certainly go with a 4% safe withdrawal rate by accumulating assets that are 25x the annual spending shortfall between your military pension and your budget. Statistically that works over 90% of the time (for at least 30 years), and the worst case is that you’ll have to live on “just” your pension & Social Security. In practice your retirement spending will vary, and that will cover any gaps in the 4% SWR’s future expectations.

There’s no magic number at which you’ll be able to declare your financial independence. Instead you’ll reach the point where one or two unpleasant surprises (like shrinking military benefits) will not bankrupt your planning and force you back into the workplace. Until then, if your plans can be derailed by a single point of failure like a smaller COLA, then you should keep working or finding more ways to cut expenses.

Military Financial Independence on Amazon:

Reach financial independence
Retire on your terms
Publisher’s royalties donated to military charities

Use this link to order from Amazon.com!

Posted in Military Retirement | 8 Comments

Financial Independence and The Cost of Raising a Family

Posted on February 27, 2014 by Doug Nordman

A few weeks ago, Darrow Kirkpatrick blogged about the cost of raising a family while you’re saving for financial independence. Before I read his post, I had just finished emptying our 529 account with the final payment for our daughter’s college room & board. This seems like a great opportunity to compare our parenting expenses to the national statistics.

Raising a family is worth every penny, but finances are the wrong reason for starting a family. Hopefully, you make your decision to have kids (or not) for all the right reasons in your situation. Nobody has to start a family– there are already plenty of people in the world who need your love & support. Families are a personal choice, and financial fears should not hold you back.

Yet starting a family might even improve your finances.

Before we justify that bold assertion, I highly recommend that you click the link to Darrow’s post. (It’ll open a new tab in your browser so that you can switch back & forth between our blogs.) He and I reach the same conclusions, although we got there by different paths.

For those of you reading on a tiny mobile device, here’s a key quote from Darrow’s post:

According to the USDA’s 2012 Expenditures on Children by Families, child-rearing expenses to age 18 across the U.S. averaged $241,080 per child in two-child middle-income families. Higher-income families spent $399,780 per child. (Expenses for an only child were greater by a factor of 1.25, while those for 3rd and subsequent children were lower by a factor of 0.78.)

Photo of baby sticking out its tongue at parent.

Setting a good example.

That cost doesn’t even include college! Are you really going to spend a quarter-million bucks on your child? More importantly, how much sooner could you retire if you invested that money?!?

First, let’s see whether those numbers are realistic. According to the government’s agricultural experts, my spouse and I should have spent at least $300K raising our little bundle of joy. If we’d elected to stay childless and invest that $16,700 per year in the S&P500 between 1992 and 2010, then we’d have a cool $543K in our Fidelity account.

We reached financial independence in the late 1990s, so even by the end of 1997, we would have saved a minimum of $85K. That would have substantially improved our net worth, generated a few thousand dollars a year in dividends, or made a nice down payment on a Hawaii rental property.

Yeah, but who even bothers to track 18 years of expenses, let alone the costs of raising a child?

Photo of a parent holding a baby upside down.

Future Navy officer.

Hey, I’m a nuclear-trained submariner. I like taking logs.

My spouse and I have recorded our spending since 1986. By the time we started a family, I was rockin’ Quicken 5.0 for DOS on our PC-XT. That database is getting a little creaky today with over 150,000 transactions, but it includes everything from the crib (garage sale, $10) to the college fees.

How much did it cost to raise your kid?

I’ll spare you the suspense: just under $156,000. (The data table is at the bottom of this post.) You can also scroll down there to see the USDA’s infographic on the cost of raising a family, which breaks down the numbers in much more detail.

Photo of young girl eating a slice of pizza.

Mmmm… pizza.

Raising our daughter cost barely more than half of the USDA estimate. Admittedly I didn’t track her food expenses separately for all of those years, but our happy & healthy darling cost at least as much to feed as a full-grown adult. If you check the prices on formula & baby food, and if you’ve seen a teen eat, then you’ll know that this figure is conservative. That hammered our spending harder than anything else, and at 22% it’s well above the USDA’s 16% average.

I also included over $27K for the price of starting college and, in our case, nearly a semester of room & board. The USDA data goes up to age 18 but they didn’t consider all of the expenses for Kumon math tutoring, AP classes & exams, SAT/ACT fees, college visits, and applications. (If you’re doing it from Hawaii then add extra for airfare.)

You could spend far less on your own teen’s college prep, or you could spend far more on private high schools, but I bet we’re pretty close to the middle of the bell curve. I think it’s also a fair compromise on the perpetual debate over whether to pay full retail for Harvard– or make them pay their own way through college.

Photo of teen driver changing oil on car.

“My first oil change.”

I should point out that the USDA also spends way more than necessary. They claim that “housing” a child is nearly a third of the total cost, but we had already bought a home that we were perfectly happy with. We didn’t buy a bigger place just because we were parents, and we were already in a great school district because we shopped for a nice neighborhood.

The USDA also claims that transportation is 14% of the total, but our daughter only rode the school bus for three years out of 12. She wore out some sneakers and bicycle tires, but when she got her driver’s license she paid that back that investment by running all of our household errands. We did some driving for sports and other activities, but we could have stayed local and ridden a bicycle.

The real payoff

You might be reassured to know that the cost of raising a family is a very wide bell curve with fat tails, and it’s a relief to know that you can do it for even less money than we spent. But if you could spend “only” $100K to launch your first child from the nest, how can this expense possibly improve your finances?

Yeah, I know, some of you more experienced parents are snickering: “Because you won’t have any spare time in your life to spend more money on anything else!” I can’t argue with that. Raising our daughter involved far more trips to the park and the library than to Bangkok or Europe.

But we parents didn’t just trade our liberty cards for a pile of food & diapers. Nearly every new parent has experienced this feeling on the first day after labor & delivery: “Holy crap, I’m exhausted we’re responsible for a human life. We’d better grow up and get our act together!” Starting a family makes you get a handle on your lifestyle, whether you’re competing for “Parents of the Year” or just trying to improve on your own upbringing. Before kids, you might not have wanted to examine the details of your entertainment budget. Once you have kids, however, you start tracking your spending just to figure out where it’s all going.

You also behave more responsibly. Admittedly you’re also too tired to get into as much trouble as you used to, but nothing improves your driving more than strapping a baby seat into the vehicle. Racy sports cars are eventually replaced by larger, more crash-resistant kid haulers. You spend less money on expensive home furnishings and instead you focus on baby-proofing. Your old wild weekend behavior that might have resulted in a visit to the emergency room is now spent at the doctor’s worrying about a cough or an ear infection. You even eat healthier. Worst of all, you now have to set a well-behaved example for a new little person who will try to imitate everything you do.

Better yet, you start planning for everyone’s future. It’s not just getting the kids out of the house and over to the park to burn off a little energy before nap time. You not only take fewer risks with your lifestyle, but you cut back on risky behavior with your money. You not only continue saving and investing, but you may become more thoughtful with your career planning. You might still quit your corporate cubicle for a startup or self-employment, but you’ll be much more analytical about the decision– and you’ll work a lot harder to make it pay off.

When we had our daughter, our planning for financial independence changed from a fantasy to a reality. I wanted to spend less time working for a paycheck (and deploying to the Western Pacific) and more time helping my daughter grow up.

Photo of parent and daughter surfing together.

High five at the end of a wave.

I’d like to think that my spouse and I would have saved for financial independence with or without starting a family. However, starting a family made our goals much more compelling, and our daughter motivated us every day.

So don’t let the USDA scare you about starting a family, let alone have money anxiety. If you decide to start a family then it’ll be for all the right personal reasons– and it’ll be a good decision. The USDA’s “average expenses” reflect more about America’s hyperconsumer lifestyle than the true cost of feeding a few more mouths at the table. (Amy Dacyzcyn, the original Frugal Zealot, raised six kids on her spouse’s enlisted Navy paycheck.) Instead, you can apply the same techniques to family budgeting that you do for financial independence– track your expenses and then spend the money only where you find the most value. Before long you’ll have your expenses more in line with your priorities, you’ll be spending far less, and you’ll be on your own path to financial independence.

Darrow, thanks again for inspiring this post!

Here’s the cost of raising our child to her 18th birthday:

Total	$155,948.78	100.0%
Allowance	$5,972.90	3.8%
Childcare	$12,516.22	8.0%
Clothing	$4,704.35	3.0%
College	$27,228.41	17.5%
Daycare	$22,567.20	14.5%
Girl Scouts	$837.77	0.5%
Groceries	$35,205.78	22.6%
Horses	$10,187.49	6.5%
Hula	$448.58	0.3%
School	$22,207.35	14.2%
Sports	$11,482.26	7.4%
Toys	$2,590.47	1.7%

The infographic of the USDA’s cost of raising a child (PDF)

Related articles:
“Can I Retire Yet?” blog post: Having Kids vs. Retiring Earlier
USDA’s cost of raising a family
Retiring early– with kids?
Book review: “All The Money In The World” (includes a section on raising kids)
Old-school frugal (part 2 of 2) (Amy Dacyczyn)

Posted in Financial Independence | 10 Comments

How Should I Invest During Retirement?

Posted on February 20, 2014 by Doug Nordman

A reader writes:

“I would like your opinion on an investment strategy. I’m sure you cringe at anyone who asks for investment advice, however, this question is very big picture. I have five years before I retire and I am considering discontinuing my investing in our Roth IRAs and my Thrift Savings Plan and just letting them compound until I hit 60. I want more flexibility in our investments, meaning, I want to be able to tap, should I choose, the dividends in our 40s and 50s as well. My plan is to bypass this money into another rental property and when that is paid for, bypass all my investment cash to index funds. The idea is that we’ll have passive cashflow via our rental and at some point, dividends from index funds, on top of my military pension.”

No worries and no cringing. I get the “how to invest” question a lot, and there are many paths to that success. The key is choosing an investment allocation which you’re comfortable with in both bull & bear markets, and one that requires minimal effort to maintain. If you have to keep making investment decisions every month, then pretty soon you’ll be overwhelmed by behavioral psychology’s deadly duo of decision fatigue and ego depletion.

Your plan seems sound. Ideally, your TSP and Roth IRAs are compounding at least as fast as any new contributions would boost them, and new contributions may not have as much of an effect. It sounds like you’ve already proficient at landlording, and those rentals could help cover the rest of your retirement expenses. If you need more cashflow then you can find plenty of low-expense index dividend exchange-traded funds and mutual funds for taxable accounts.

I have an asset allocation suggestion, but again the important part is keeping your comfort zone and “sleep at night” security. You can optimize your investments with cold-hearted Vulcan logic, but if it’s too hard to follow during a bear market (or too stressful) then it doesn’t matter how logical it may be. Here’s the suggestion: when you’re drawing a military pension and cashflow from rental properties, then your overall asset allocation is hugely overweighted (in a good way) in bond-like income. In that situation you might want to consider holding only equity funds in your TSP, IRAs, and taxable accounts.

You could load up on equities by selling the “F”,”G”, & “L” funds in your TSP and buying “C”, “S”, & “I”. In your IRAs and taxable accounts choose solid, large-cap, boring equity dividend funds like a cheap passive index dividend mutual fund or the iShares Select Dividend ETF (DVY) or a low-expense dividend mutual fund. Don’t invest in REITs until you’re ready to start selling off the rentals. In your tax-deferred accounts, reinvest the dividends for as long as you want. In the taxable accounts, take the dividends in cash for spending on your budget.

Instead of keeping bonds or bond funds for your retirement, keep two years of expenses in cash. (“Expenses” means “the gap between your income and your budget.”) If you want to chase yield a little, then put one year of cash in a money-market account and ladder the rest in three-year CDs.

This stash can be replenished every year when the markets are up, and drawn down for a second year when the markets are down. (Two years will get you through just about every bear market. Three years might be overkill.) Once or twice a decade you may have to break into a CD before it matures, but otherwise your pension, rentals, dividends, and the money market fund could cover your spending. If you feel nervous about replenishing your two-year cash fund by selling shares from your taxable account (the one with the equity dividend fund) then you could always consider withdrawing the contributions from your Roth IRAs.

[2017 clarification: this is only done to handle sequence-of-returns risk in the 4% Safe Withdrawal Rate. That generally applies only during the first decade of the 30-year portfolio survival, and that risk dwindles during later years. After 10+ years of financial independence, the portfolio will probably (>80% chance) grow big enough to do away with the cash allocation to two years’ expenses. After that you’d simply keep replenishing your checking account by selling shares every year, but by then the portfolio would be big enough that the withdrawal would almost never exceed 4% of the portfolio’s value.]

Just to hammer this concept into the ground, here’s a six-year example of dealing with a bear market. The purpose of this example is to show you how to manage your cashflow, and I’m going to start with fictional numbers from a ridiculously large budget. If you’re living in a low-cost area then the rental income may seem right for one or two rental properties, but if you’re living in a high-cost area then the rental income may seem way too low. Your asset allocation (and the value of those assets) may differ considerably from this example– but they’ll use the same cashflow techniques.

Budget: $80K/year (everything, including taxes).
Pension: $45K/year.
Net rental income (after expenses, before taxes): $10K/year.
Interest & dividends from taxable accounts: $10K/year.

Your retirement budget exceeds your income by $15K/year, so you decide to keep two years of those excess expenses in cash. You start each year with $15K in your money market fund, and you keep another $15K laddered among three PenFed three-year CDs.

(Note that if you’re using the 4% safe withdrawal rate and you’re withdrawing $15K/year for your expenses, that translates to investments of $375K (= $15K/0.04). You saved those assets in taxable accounts before you retired from the military. You’ve invested them in a dividend fund which yields $10K/year or 2.7%.)

At the end of the first year of retirement you spent $15K out of the money market fund, so you replenish your cash stash. (You sell some shares from your taxable assets: your equity dividend fund.) You start the second year with $15K back in the money market fund and you still have the $15K in your CD ladder.

The following year your rental income rises to $12K and your dividend funds have raised their payouts by another $2000 to $12K, so now your income is $69K. You boldly decide to reset the money-market fund and the PenFed CDs to $11K each, so when a CD matures you move cash around to start the third year with $11K in the money market fund and $11K laddered in PenFed three-year CDs.

The third year everything gets ugly. You spend $81K (over budget), you have a lengthy vacancy and repair expenses in your rentals, and the stock market drops 20%. Your rental income is back to $10K. Although your equity dividend fund shares are worth 20% less, your dividend income stayed steady at $12K (this is why people invest in dividend funds). You chew through the $11K money market fund by September and decide to break one of the CDs (losing six months’ interest as an early-redemption penalty). At the end of the year the stock market is down so you do not replenish the money market fund, and you only have about $8K left in the CDs. The coming year looks grim– as bear markets always do.

Several things happen during the fourth year. You reflexively cut your spending by holding the line on expenses. However, it happens, it’s human nature to reduce spending during a bear market. Maybe you defer some home improvements or drive an older car for another year. Maybe you take a two-week staycation instead of traveling. Maybe you cancel a gym membership and dine out a little less. Your spending drops to $75K, your second CD matured, and you had to break the third CD (for a second early-redemption penalty). At the end of the year both your money-market fund and your CDs are empty.

During the fifth year (after two years of a bear market), your military pension rises to $46K because of the cost-of-living adjustment. The stock market improves a little. Your dividend income goes up to $13K (this is why people invest in dividend funds). Your rental income recovers to $12K. You were thinking hard about withdrawing some the contributions from your Roth IRAs (no tax, no penalty) but you felt that your equity portfolio (in your taxable account) was recovering. Your income was still $4000 less than your $75K budget. You elected to cover that $4000 gap by selling shares of your dividend fund which had the highest capital gain.

During the sixth year (after a three-year bear market!) the markets recover smartly. You sell some more shares of your dividend fund to begin replenishing your money market fund and CD accounts. By the end of the sixth year you’ve sold enough shares to bring your spending back up to $80K/year and you’ve managed to set aside $11K in both your money market fund and your CDs.

You also note that your taxable account may not last for 30 years when a bear market happens early in that period. You sold a lot of shares for spending cash and the rest of the account may not recover quickly enough to avoid being used up before the 4% rule’s 30-year period. You’re relieved that you didn’t have to break into your Roth IRA contributions, but they were there if you needed them. You may be tapping your TSP closer to age 60 than age 70. However, your military pension income and your rental income are likely to rise with inflation, and you know that you can vary your spending with your comfort level.

In Hale Nords, we’ve been managing our cashflow this way for nearly 12 years. The 2001-03 recession was grim, as was 2008-09. Both periods depleted our two-year cash stash, and we nearly sold other shares to cover our expenses– but the markets recovered before we reached that point. We never had to sell equity shares at a loss. We had to break into a couple of three-year CDs, but even after the six-month early-redemption penalties we still earned more interest from this method than if we’d used one-year CDs.

Keep in mind that your retirement portfolio is the only place where I’m recommending a high allocation to equities. Your kid’s college fund might start out high in equities, but by the time they’re tweens then you’re starting to buy bond funds and I bonds. By the time they’re in high school you’ll be almost entirely in I bonds and CDs. The same short-term goal applies when you’re saving to buy more rental properties– you’d probably want to save up a 20% down payment in CDs instead of equities or bonds.

One last note of caution: one of my military retiree friends already has several rental properties and he’s excellent at finding more. Every year or two he buys another irresistible deal, and so far it’s worked out great. However, it could turn into a second career and he has yet to decide on an exit strategy. Enjoy the landlording as long as you’re having fun, but figure out your exit strategy (even if it’s “probate”) and learn when to shut off your bargain detector.

A final disclaimer: I’m not a CFP, just an experienced military retiree who reads a lot of finance books. If you’re seeking a CFP’s advice for an hour or two of fees then I’d recommend starting your search with Jason Hull or Jeff Rose.

[2017 update: fee-only CFP Forrest Baumhover at Westchase Financial is also an expert on these questions, and a military retiree.]

Posted in Investing & TSP | 6 Comments

Military Financial Independence

Lifestyles in Retirement: Hawaii Vacation

Military Financial Independence on Amazon:

Book Review: “When She Makes More”

Can I Count On A Military Pension?

Military Financial Independence on Amazon:

Financial Independence and The Cost of Raising a Family

How much did it cost to raise your kid?

The real payoff

How Should I Invest During Retirement?

Order the book now:

Please leave a comment:

Subscribe with RSS:

Get more free military retirement tips!

Recent Posts

Top Posts

Categories

Lifestyles in Retirement: Hawaii Vacation

Military Financial Independence on Amazon:

Share this:

Book Review: “When She Makes More”

Share this:

Can I Count On A Military Pension?

Military Financial Independence on Amazon:

Share this:

Financial Independence and The Cost of Raising a Family

How much did it cost to raise your kid?

The real payoff

Share this:

How Should I Invest During Retirement?

Share this:

Order the book now:

Please leave a comment:

Subscribe with RSS:

Get more free military retirement tips!

Recent Posts

Top Posts

Categories