New to Retirement Planning

[Boots]

Hello,

I am currently in the military, and I plan on being in another 19 to 20 years minimum with another 20 years after that before I really retire.

I'm trying to review my options for creating a nest egg that will have the best effect.

I enrolled in the TSP with this current open season, but now I'm starting to wonder if there aren't better options available. From the sounds of it, a Roth IRA is a much better investment then the TSP unless you receive matched contributions from your employer, which I don't.

I currently have a small amount of debt, but that will disappear in about 6-8 months. After that I want to have about a three month emergency fund that is easily accessible. From that point I want the rest of my money, to include annual bonus payments for the next four years, to go towards home equity and a well thought out retirement nest egg.

I'm pretty ignorant right now about what my options are and how the investment world works. Any help would be appreciated.

[FundSurfer]

The advantage of the TSP is that it is set up to come out of your paycheck and is a pain to change. This forces controlled savings. A Roth can be set up to automatically withdraw from your bank account but that can be changed quickly. For some people the forced discipline is better. If you are truely motivated and will be a reliable saver, then Roth can have more flexibility to be a more aggressive investor. However, if you pay attention to this board, you will see that there are some who trade within TSP often and increase their risk/reward ratio.

Me, I know my limitations. I'm a weak saver. (That new trolling motor for the boat is important after all.) I need the discipline of TSP. Every year I up my contribution percentage when we get our COLA and thus I don't feel the difference.

[Mike]

Negatives:

1. Lack of choice - you only have five funds to choose from and you can't do "shorts" i.e. bet the market will go down, which limits your earnings potential in bear markets to whatever the G and F fund do.

2. Inability to trade shares in real time - if you make a move before 11 a.m. central time today, it'll takeeffect at the end of the trading today. If you don'tmake the move 'til after 11 a.m. today, it won't take effect until the end of trading tomorrow.

3. Tracking your moves - TSP does not provide an easy way to see what you've done during the current quarter. The only way to track it is to retain the paper records they send you each time you make a move or to electronically enter it yourself. Otherwise, you won't know until sometime after the quarter ends and the participant statements become available online.

Positives:

1. Ease of use - you just set your percentage to take out during an open season and then it's automatic.

2. Taxes - by taking out pre-tax income, you lower your tax liability. Without TSP, I'd probably pay another $2,000+ per year in taxes.

3. Low expenses - you simply won't beat these funds on expenses and fees.

[ou81200]

Boots---

Your planning the future while still young. Great Job:)! Tsp is a good investment because it deals with a wide variety of stocks, funds, etc. I like to compare it to a mutual fund. A mutual fund is a bunch of stocks in one package. You could have twenty or more different stocks in a mutual fund. This way, if say five of those twenty don't do well, the other fifteen that did do well will still give you a capital gains.

Dealing with stocks alone can be scary if you don't know what your doing.

Does TSP do any matching with funds for active duty military? If they do, that is a plus. a ROTH IRA is an excellent investment option. But you have to stay the course with it. With a ROTH, you have more flexibility with options.

I hope this helps.

[Boots]

The military does not match contributions, no.

My biggest question is: after I get out of the military and I'm no longer able to contribute to the TSP, would it have been better if I had gone with a Roth IRA because I can continue to contribute or will I still get good results by starting a different form of investment at that point to go hand in hand with my TSP?

[MB550]

Disappearing debt, emergency fund, nest egg--you are definitely on the right track.

Why not take advantage of boththe TSP andthe Roth IRA? As a long term investor you can work towards maxing out your contributions to both over time.

Your biggest decisions will be your "assett allocation"within them (what percentage to put inC,S,I,F and G funds and then decide what to investin your IRA tocomplete your desired allocation). There is plenty of research on assett allocation out there.

[ou81200]

As long as you are active duty, you can stay with TSP. If your finances are able, you could start a Roth IRA also. After 20 years of service, you could then roll it all into an IRA. You indicated that you would be in the service another 19-20 years.

BTW, what branch are you in? I used to be Army.

[Mike]

Invest as much as you can as early as you can. Compounding is a wonderful thing.

Below, I'll illustrate the power of compounding working on your behalf (instead of against you which is what credit cards and most types of borrowing do):

Avg. return / years needed to double investment (estimate)
3% / 24 <-roughly the inflation rate over the past 10 years, minus energy cost fluctuations*
4% / 18
5% / 14.5
6% / 12
7% / 10
8% / 9
9% / 8
10% / 7

Tax-deferred is a good thing because you will *probably* pay less in taxes on retirement income than you would now (depending of course on how much you wish to draw out of retirement each year). You should also consider exactly what kind of lifestyle you want to have after you quit working. If you plan on traveling a lot, you'll need more money. If your parents / other relatives have nasty medical histories, you will probably want to set aside extra for future medical expenses. Another option here is to enroll in a high-deductible plan that allows you to invest the deductible each year in an interest-bearing medical savings account. And yes, definitely invest in the Roth if you can. Time is on your side, especially while you're still young. :^

[Boots]

Couple of last questions: After leaving the military I want to continue with my contributions. Can I convert my TSP account to an IRA? I don't know if I'll have the option of a 401K in a post-military job, so an IRA is the only other thing I can think of that I might be able to roll it into.

Also, I know that during the first few years of owning a home you pay considerable interest expense. Wouldn't it be more strategic to make near-double payments to get the principle down even though there are investments that have a higher percent gainthen the mortgage?

I'm in the market for a home and I'm a first time home buyer. I'm shooting for a home around 75k for 15 years and going with bi-weekly payments and paying an extra couple hundred per bi-weekly payment. From the calculations I estimate I could have the house paid off in roughly 6-7 years as opposed to 15. It would also save me around 22K in interest expense.

[ou81200]

Boots---

I will tell you with my first home (which I'm still living in).

I have a small home, about 1000 sq. ft. In 1994,I paid 69 thousand for it. It's worth about 105 thousand now. By the time it is paid off, I would have paid 225 thousand dollars for it. That's at a 30 year mortgage at 6.625%. By making one extra payment a year, I will knock off 7 years off my mortgage. When you pay extra into your mortgage it should automatically go into the principle that you owe. When you buy a home and finance it for 30 years, only about 5 % of your mortgage goes to the principle of your home for the first 5 or six years. After that, the percentage slowly increases.

I know it stinks, but that's the way itis. Good new is your home increases in value as you own it. That's called equity. Also, you get a tax write off on the interest you pay on your mortgage and the county or other local taxes that you pay with your mortgage.

Home ownership is grand :).

[Boots]

ou81200 wrote:
only about 5 % of your mortgage goes to the principle of your home for the first 5 or six years


That's the problem right there. Being in the military, I probably won't be in one place for more then a few years at a time. The good news is that the base I'm currently stationed at has a very hard time getting people to volunteer to come here. They offer a program to interested people who actually want to stay here called a controlled tour. On a controlled tour the military will not be allowed to move me from my current base for a minimum of five years. Beyond that five years, I don't know where I'll be.

If I only have five to six years to stay here, I don't want 5% of my mortgage payment over that time to go towards interest. I think it would be in my best interest to put as much extra money as I can into the principle, seeing as I might be forced to sell in five to six years.

[ou81200]

Boots---

You have a point. But you can also look at it this way. If you don't own a home, then you have to rent one. The money you pay in rent, you get nothing back other than a place to stay. Also, you have to consider that when owning a home, you get more bang for your buck. I pay 533 a month on my mortgage. That includes the escrow in my account that is used to pay the taxes and insurance.

For 533 a month, I have a three bedroom house, one and a half bath. A big yard and a garage. Find a place like that to rent for the same price.

When you eventualy sell your house, you will get more money for it. Even if you only live there a few years.

[MB550]

I just wonder about the wisdom of paying extra towards your mortgage, especially when you are going to be moving every few years. Perhaps it would be better to wait until you are living in the home you plan to retire in?

The value of your home will probably go up over time, but it could also go down over the next few years.

Paying extra saves you interest, but you lose the chance to earn interest with that money by putting it into your Roth or TSP. Mortgagerates are low so it is relatively easy today to earn morein yourinvestments than what the mortgage will cost you.

Also, you don't have to set up a biweekly plan where the lender charges you a fee to do it--just send in the extra payments marked for principal.

[Spaf]

MB - My opinion (2 cents): diversify. Do some of it all. Property, investments, TSP, etc. Consult with your accountant! A low rate / low principle mortgage will aid itemizing for the IRS (remember the medical cost for being older), or do you want the std. deduction? You need to set a goal for yourself and have a plan that assist you in getting there. If property goes in the toilet, you still have your investments and TSP. If investments goes... well you get the picture.
:) Spaf

[jeeperspeepers]

Another two cents worth....I've been invested in real estate for 35 years. I've never seen it depreciate in all that time. The degree of appreciation varies from year to year but never have I seen it depreciate.

I think whether you pay more towards your mortgage depends on many factors...your age, your financial status, your goals, your heirs. Only you can decide the answer to that question.

For exampe, when I was younger, my goal was to get my home paid for. I did this several times, meaning several homes, by paying double or triple principle payments. Now at near retirement, I have several homes paid for. However, I am in the process of building a new retirement home. Do I want to invest large amounts of capital? No, because I will now let my equity work for me. I've taken out a large interest only equity line of credit on one of these to pay for my new home. I do not care whether this newmortgage ever gets paid off, because I've already got enough to leave my children. My goal at this point in my life is to have a small payment (therefore interest only mortgage) which is a comfortable payment on retirement income. My retirement income will be enhanced from the rental income. When I do depart and leave this home to my children, it will have appreciated considerably so the mortgage will still be much less than the fair market value (which by the way is not on this house but another home which will be a rental). I let my real estate investments pay for other purchases by renting them. I try to not sell property, but retain them and rent them out.

I personally feel much more comfortable investing in real estate than the stock market, which I know nothing about. Hence, the reason I read this Board every day.

Thanks again, Tom, for this informational site.

[Boots]

I have been very interested in real estate investing. I'm thinking of making ita primary source of income after I retire from the military.

Did you purchase a house to live in, pay it off completely, and then rent it out after moving to a new home, or did you start renting it out before the mortgage was paid off? How much time do rental properties require from you? If I were to be moved through obligations tothe military I wouldn't be able to personally oversee any rental properties.

[jeeperspeepers]

Boots wrote:
I have been very interested in real estate investing. I'm thinking of making ita primary source of income after I retire from the military.

Did you purchase a house to live in, pay it off completely, and then rent it out after moving to a new home, or did you start renting it out before the mortgage was paid off? How much time do rental properties require from you? If I were to be moved through obligations tothe military I wouldn't be able to personally oversee any rental properties.

I started with a home in the D.C. area that I lived in. I purchased some adjoining properties. Then we moved out of the general area, but kept our home as a rental. I manage it myself, that is: advertise it, contract for repairs, etc. I have not had to use a management company yet. This particular home was large, so I devided it into a couple of rental units, which I rent for under the fair market value. This gives me some control in selecting tenants, and I have very little unoccupied time. My investment has probably increased more then ten times due not just to appreciation but additions and increase in size while I was living in it. I plan on the income from this one rental to supplement my retirement income substantially. In fact it has already been doing that since I am now single and live on my salary alone with this supplementing it.

Email me directly if I can share my experience or advice with you.

[pyriel]

I totally agree with JeepersPeepers. You can't go wrong with buying your own house. The only problem with you is that you will have to move within 5 years or so. So, instead of buying a house (you can't have a dream house if you are in the military because you will be moving constantly) why not buy a fourplex. contrary to what people think, fourplex is considered a residential loan. This means that you can use your VA or you can get a conventional loan as a first time home buyer. You then live on one while you rent out the other three. The tenant will pay for your mortgage. When you have to PCS, you can then either sell it or have someone manage it. Either way, you have already built equity without paying for it and at the same time you have received (or may continue to receive) passive income. Passive income is money coming to you after everything is paid. If you can get a passive income of $500 every month, that will be $6K per year. You will never get that kind of raise in the military. The only thing I ask you is that please do your research first. Ignorance can cost you.

Pyriel

PS... If you decide to follow my advice,and youare like me who hates fixing toilet, don't worry about it. Just have someone fix it for you. It is tax deductible.