Retirement: BRS/High 3

[Spekkio]

Please do enjoy it while you can. You guys work hard and get paid well. Make sure you enjoy some of that money today. Your 20s as a naval officer is a great time to have a sweet car, nice gear for you athletic pursuits, fun toys, nice watches, big trips etc. in a few years you’ll be thinking about college for kids, mortgage for a big home, private school so you might as well enjoy some of your money while you can.

This. There is a non-zero cumulative probability of death as you age.

This is the reason I am paying off my mortgage early vice investing more into retirement. While I will make more $ assuming I survive until 85, I would prefer to have the drastically reduced cost of living from age 46-60. It's still netting me 3.5% guaranteed return to boot.

 

[pourts]

This. There is a non-zero cumulative probability of death as you age.

This is the reason I am paying off my mortgage early vice investing more into retirement. While I will make more $ assuming I survive until 85, I would prefer to have the drastically reduced cost of living from age 46-60. It's still netting me 3.5% guaranteed return to boot.

I've been on team @Spekkio for most of the debate in this thread. Bottom line is the government rolled out this plan to SAVE MONEY, and on the whole, it will do just that. Sorry @DanMa1156

BUT, I have to vehemently disagree with paying off the mortgage early at only 3.5%. I just can't get enough 30 year debt locked in at 3.5%! I have 4 mortgages in the range from 3.5 - 4.5% and the interest is either a tax write off (up to only $750k now, but still good) or a tax write off (investment properties). Five years from now you could very easily be buying a car with a "good" 5% loan. Heck, people with bad credit have to pay 5% or more for a $20k car loan. By happy accident of timing I am fortunate enough to continue with a $300k loan at only 3.5%. Reduced cost of living at 46-60? Give me that time value of money for the next 15 years, and I am confident I can beat your 3.5% hurdle rate. Furthermore, if I am only beating a 3.5% hurdle I don't need to hit home runs. I can be conservative, which decreases the expected volatility of my returns. The money I'm not wasting by paying down my mortgages early I am investing in the stock market and earning tax free compounding (Roth IRA and TSP). Boom, now you are diversified to boot.

The only time I would recommend anything like what you are talking about is if you live in Australia. They have this crazy thing called an offset account. Basically, if they put extra money into a special escrow account called an "offset" it lowers their interest rate. Also, most other countries in the world don't have the option of fixed rate mortgages like we do.

If we ever go into a true deflationary environment (beyond what Japan has seen recently) for a long time, paying the mortgage early will have proven to be a smart bet. But if that happens, things will be so crazy weird that I think all bets are off.

 

[pourts]

Appreciate the tip on the premature maturation. Also, with respect to maxing the TSP - what, if any, is the benefit of splitting the amount required to max among the incentive/special pays vs. just using a larger percentage from base pay?

No difference.

 

[AllYourBass]

I've been on team @Spekkio for most of the debate in this thread. Bottom line is the government rolled out this plan to SAVE MONEY, and on the whole, it will do just that. Sorry @DanMa1156

BUT, I have to vehemently disagree with paying off the mortgage early at only 3.5%. I just can't get enough 30 year debt locked in at 3.5%! I have 4 mortgages in the range from 3.5 - 4.5% and the interest is either a tax write off (up to only $750k now, but still good) or a tax write off (investment properties). Five years from now you could very easily be buying a car with a "good" 5% loan. Heck, people with bad credit have to pay 5% or more for a $20k car loan. By happy accident of timing I am fortunate enough to continue with a $300k loan at only 3.5%. Reduced cost of living at 46-60? Give me that time value of money for the next 15 years, and I am confident I can beat your 3.5% hurdle rate. Furthermore, if I am only beating a 3.5% hurdle I don't need to hit home runs. I can be conservative, which decreases the expected volatility of my returns. The money I'm not wasting by paying down my mortgages early I am investing in the stock market and earning tax free compounding (Roth IRA and TSP). Boom, now you are diversified to boot.

The only time I would recommend anything like what you are talking about is if you live in Australia. They have this crazy thing called an offset account. Basically, if they put extra money into a special escrow account called an "offset" it lowers their interest rate. Also, most other countries in the world don't have the option of fixed rate mortgages like we do.

If we ever go into a true deflationary environment (beyond what Japan has seen recently) for a long time, paying the mortgage early will have proven to be a smart bet. But if that happens, things will be so crazy weird that I think all bets are off.

 

[Spekkio]

I've been on team @Spekkio for most of the debate in this thread. Bottom line is the government rolled out this plan to SAVE MONEY, and on the whole, it will do just that. Sorry @DanMa1156

BUT, I have to vehemently disagree with paying off the mortgage early at only 3.5%.

I already acknowledge that this doesn't maximize my total dollars earned/saved, but there are other non-monetary reasons that I am paying off my mortgage early.

First, there is a probability of death that is at play here. The money does me no good in the grave. Heart attacks, cancer, etc. are all a significant reality after 40.

Additionally, at mil retirement at 45 my pay will be cut by 1/5. At that time, I'll have one daughter entering college, another 2 years later, and a son a year later. I've got the GI bill to cover one year of that for them each and a 529 to cover a second, but the way the law is written my income counts toward their qualification for aid until they are 25 (or post-military, whichever comes first). Uncle Sam pretty much expects me to pay that bill.

So paying down my mortgage puts an extra $20k/year post-tax in my pocket, because that's $20k/year that I don't have to spend. That can be the difference between me "sucking it up" for another tour to pay for my children's transition into college or taking a sub-optimal job because I need the money to make ends meet.

In short, paying off my mortgage early buys me freedom. I'll always have my house, and my $500/mo tax payment and cost of food/utilities is more than covered by mil retirement.

At 60 years old, my kids will be grown. $52k in today's dollars is more than enough to support my wife and I, particularly without a mortgage, and have plenty left over to travel, have a savings nest egg, and buy grand-children presents.

So yea, I'll sacrifice the 6-figure post 60 income in order to live more comfortably in my middle age.

 

[RadicalDude]

Though, iirc with a Roth IRA or 401k (presumably including TSP) you can withdraw your contributions (not any gains made on them) at any point penalty free.

False.

You can take out loans, which must be repaid (via wage garnishment) within 12 months.

Otherwise the only way to withdraw from the TSP is a DD-214 or a “verifiable hardship.”

 

[pourts]

I already acknowledge that this doesn't maximize my total dollars earned/saved, but there are other non-monetary reasons that I am paying off my mortgage early.

First, there is a probability of death that is at play here. The money does me no good in the grave. Heart attacks, cancer, etc. are all a significant reality after 40.

Additionally, at mil retirement at 45 my pay will be cut by 1/5. At that time, I'll have one daughter entering college, another 2 years later, and a son a year later. I've got the GI bill to cover one year of that for them each and a 529 to cover a second, but the way the law is written my income counts toward their qualification for aid until they are 25 (or post-military, whichever comes first). Uncle Sam pretty much expects me to pay that bill.

So paying down my mortgage puts an extra $20k/year post-tax in my pocket, because that's $20k/year that I don't have to spend. That can be the difference between me "sucking it up" for another tour to pay for my children's transition into college or taking a sub-optimal job because I need the money to make ends meet.

In short, paying off my mortgage early buys me freedom. I'll always have my house, and my $500/mo tax payment and cost of food/utilities is more than covered by mil retirement.

At 60 years old, my kids will be grown. $52k in today's dollars is more than enough to support my wife and I, particularly without a mortgage, and have plenty left over to travel, have a savings nest egg, and buy grand-children presents.

So yea, I'll sacrifice the 6-figure post 60 income in order to live more comfortably in my middle age.

I'm not sure I understand everything you wrote, but I have a few responses.

Regarding death: the assets go out according to your will whether it is equity in a house or stocks in a brokerage account. I don't see how that is a factor.

Your college financial aid strategy is an interesting one, and you for sure know more about it than I do, but I still have a couple thoughts. I think even you would acknowledge there is some break-even point where your pile of cash in IRAs/529s is big enough to make up for still having mortgage payments. I hope you have actually looked at that break-even point with open eyes. Regarding FAFSA strategy, I am sure there are whole books written on the subject. There is some validity to your strategy because the equity in your home will be exempted from the FAFSA... under current rules. The risk is that the rules change, and you are stuck with your lower returns.

Still though, I cringe when I hear you say your strategy buys you more freedom. Freedom is a pile of liquid assets, not equity in a home that costs several thousand in fees to borrow against. Equity in a personal residence is an illusion until you sell or borrow against it. I'm not knocking real estate as an asset class (I am heavily invested in it) but there was a lot of equity that vanished in 2008. I think my strategy is less risky, and more diversified.

Last (random) point: if you think you are about to get sued for big $$$, buy the most expensive house you can in Florida and become a resident of that state (or a similar one). FL exempts the value of your personal residence in any lawsuit. Little nugget I learned form a great book called "Black Edge."

 

[pourts]

False.

You can take out loans, which must be repaid (via wage garnishment) within 12 months.

Otherwise the only way to withdraw from the TSP is a DD-214 or a “verifiable hardship.”

Wrong on the Roth IRA, right on the TSP. You can always withdraw principal from a Roth IRA penalty free, even before 59. This makes sense, since you already paid taxes on it.

Edit: there's also some weird 5 year rule, but in most cases you can withdraw no problem.

 

[villanelle]

This. Avoid maxing out early for this reason. @villanelle is right about dollar cost averaging, but I don't want to give up free cash.

Ah, got it. I didn't realize (or didn't process) that this was part of the BRS commentary. Being that Husband is Old, BRS isn't an option for us.

Sorry if I missed a correction on this already in the wall of text, but

The multipliers are 2.0 and 2.5, respectively. So someone that retires at 20 years would get 40% of their high-3 base pay under BRS, or 50% under legacy.

Unrelated but related, I can't recommend enough making a budget and/or downloading a program like Mint or YNAB, especially for those starting out. Seeing money coming in vs money going out allows you to cut unnecessary expenses and make educated decisions about how to allocate TSP, IRA, and savings contributions. For example, if you're maxing out TSP, but you're still paying interest on CC debt, you are wrong.

It'll also gut-check you from doing this. You gotta enjoy SOME of your money while you can. When I retire around 65-70, I doubt I'm gonna be able to do a fair bit of the things I can do for fun now, and I don't think I'll want to travel a whole hell of a lot at that point. Set goals, and know why.

Sure, but by putting away a lot, when Husband and I retire at 50 or 55, (and it would have been earlier if I hadn't sacrificed decade of earnings and pay raises to OCNUSness), I'm going to be able to do a lot more of the things I could do for fun now that I could if I waited another 15 years. And I certainly don't feel even the tiniest bit deprived. (We aren't putting away 50%, or anywhere near, but certainly still a fair amount.) I think it's fairly easy to do both--save a significant amount and indulge thoughtfully. Ours is hardly a Spartan existence.

For anyone interested, consider checking out the Mr. Money Mustache blog. He can be a sanctimonious prick at times, and I'm far, far from a hardcore follower, but it's a look a cheaper lifestyle from both philosophical and practical standpoints.

 

[RadicalDude]

Wrong on the Roth IRA, right on the TSP. You can always withdraw principal from a Roth IRA penalty free, even before 59. This makes sense, since you already paid taxes on it.

Edit: there's also some weird 5 year rule, but in most cases you can withdraw no problem.

Yeah sorry I was referring specifically to the TSP—Roth and Standard.

 

[Spekkio]

I'm not sure I understand everything you wrote, but I have a few responses.
Your college financial aid strategy is an interesting one, and you for sure know more about it than I do, but I still have a couple thoughts. I think even you would acknowledge there is some break-even point where your pile of cash in IRAs/529s is big enough to make up for still having mortgage payments. I hope you have actually looked at that break-even point with open eyes. Regarding FAFSA strategy, I am sure there are whole books written on the subject. There is some validity to your strategy because the equity in your home will be exempted from the FAFSA... under current rules. The risk is that the rules change, and you are stuck with your lower returns.

Like I said, I understand that my strategy is not maximizing dollars. But that's where utility functions come into play. Having more freedom in middle age (46-60) and the ability to afford having 3 teenagers on mil retirement income is more valuable than having a stockpile of cash tied up in the stock market that I cannot use for another 15 years.

The point I was making about college is that I would prefer not to tell my children "go figure it out," while they get penalized for my income, even if it's *only* mil retirement. That's certainly not the federal government's expectation.

As for death: If I wanted a stockpile of money to go to someone I'll just give it to them. I have no qualms about someone getting an inheritance when I pass, but I'll be no sadder if I hit $0 in the bank that day.

Still though, I cringe when I hear you say your strategy buys you more freedom. Freedom is a pile of liquid assets, not equity in a home that costs several thousand in fees to borrow against. Equity in a personal residence is an illusion until you sell or borrow against it. I'm not knocking real estate as an asset class (I am heavily invested in it) but there was a lot of equity that vanished in 2008. I think my strategy is less risky, and more diversified.

I don't think you're tracking. Money that I don't need to spend on a fundamental need (shelter) is just as good as post-tax earnings. You want me to trade 15 more years of work for a near 6-figure income at a time in life that I won't need it.

 

[pourts]

...Having more freedom in middle age (46-60) and the ability to afford having 3 teenagers on mil retirement income is more valuable than having a stockpile of cash tied up in the stock market that I cannot use for another 15 years...

We won't change each other's minds at this point. this reply is for the audience that may be considering a strategy similar to yours.

You can spend Roth IRA principal + interest for dependent's college or for a 1st house. 529 money is for college. HSA money is for health expenses. TSP money can be rolled into an IRA when you leave the military, then used for college or a house. The money is not "tied up." Simply use the appropriate vehicle for your savings goal and enjoy the power of tax-free or tax-deferred compounding.

If by freedom you mean ability to spend on daily needs (food, utilities) or consumer goods (vacations, boat, etc) then you are correct, and I misinterpreted. I live a pretty frugal lifestyle and like to think I could downsize in some type of emergency but cutting out restaurants for instance.

If you are only worried about spending for a house, dependent's college or major medical expenses, then I am saying (politely) that you are wrong. You can have your cake and eat it too. Everyone needs readily available savings for emergency that isn't tied up -- but again, penalty free withdrawals of principal from your Roth IRA can be your piggy bank if necessary.

 

[DanMa1156]

I've been on team @Spekkio for most of the debate in this thread. Bottom line is the government rolled out this plan to SAVE MONEY, and on the whole, it will do just that. Sorry @DanMa1156
.

100% agree with you the reason was to save money. The result may just end up be better though, and for the vast majority of our force, it will be better in the long run as they will walk away with something instead of nothing.

 

[IwannabeaPHROGdvr69]

I am honestly pretty stuck between the two options and was wondering if someone could explain to me how the retirement system works if say, you separate from active duty at the 11 year or so mark of service and then serve the remainder of your 2o years as a reservist? I know that a lot is up in the air whether you even get the opportunity to go to 20 (0-4 blood baths) but it seems like there are some options in the reserves so I talked to a reserve IP about a month ago and he told me that if you are in a flying job reserve-wise each of your years in the reserves will count as a full year towards your retirement because the flying days add up a little bit more than a regular reserve job. I tried to mess around with the BRS calculator and I know there was actually an example in the JKO about an aviator going to the airlines while flying in the reserves to make 20 and opting in, but I am really with @pourts here that since the government is trying to save money on this retirement system I might want to take a long hard look and make sure opting in to BRS is really the best option. I keep hearing over and over again that you will walk away with nothing if you don't opt in but this seems like somewhat of a fallacy to me because even with BRS most of your retirement is coming from your own personal contributions, which you can do under the old system. Anyone have any experience that can shed some light?

 

[LFDtoUSMC]

Sorry, that’s what I meant. As a Civil Servant my matching goes in to Roth. Very odd that that isn’t an option for Mil.

Specifically referring to where the match will go. I was perusing BRS literature this morning and found this in one of the slides.

http://militarypay.defense.gov/Port...S December 2017.pdf?ver=2017-12-18-140805-343

Page 5: "Defined contribution member contribution rate: 3% automatic; full DoD match requires 5% contribution; default to Traditional TSP account, Lifecycle (L) Fund"

Page 14: "Your Service Matching Contributions are based on the total amount of money (traditional and Roth) that you contribute each pay period. All Service contributions are deposited into your traditional balance."

(Bold added for my own emphasis)

This leads me to believe that once it is set in motion you cannot change where you want the match to go. Which would not make sense based on what Pags was saying for GS employees.

Has anybody seen anything else definitive?