Author: Joel Schofer, MD, MBA, CPE
Finance Friday Articles
This annual report from Vanguard is particularly useful for people who like to nerd out:
In addition, here is their investor action guide from their study of how Americans invest:
Here are this week’s articles:
- 10 Things That Rich Doctor Across the Hall Isn’t Telling You
- Early Retirement: Boring
- Find Out How Much Your Housing Allowance Will Change in 2021
- Help Today’s Self
- How to Beat the Stock Market
- IRA Recharacterizations (I Should Have Back Door Rothed!)
- My 2020 Investing Lessons
- Paying Yourself First – 6 Ways to Automate Your Financial Life
- The 2020s Will be the Decade of Customization For Financial Advisors
- The Best Way to Organize Your Assets
- The Why and How of Happiness
- Which Real Estate Side Hustle is Right for You?
Throwback Thursday Classic Post – The Easiest Way to Figure Out Your Optimal TSP Investment Plan
If you invest in the Thrift Savings Plan (TSP), you need to come up with a plan for how you are going to invest. Here is the easiest way to come up with that plan.
Step 1 – Figure Out Your Asset Allocation
In the TSP, you can only invest in two broad asset classes – stocks and bonds. Because of this, the first decision you need to make is how you are going to divide your TSP among these asset classes.
To figure this out, take this Vanguard survey.
At the top of the page it will give you a suggested allocation, such as 80% stocks and 20% bonds. Jot this down somewhere.
Step 2 – Find the TSP Lifecycle Fund That Most Closely Matches This Asset Allocation
Here are the current broad asset allocations of the TSP Lifecycle Funds as of 12 DEC 2020:
- L Income – 22% stocks, 78% bonds
- L 2025 – 49% stocks, 51% bonds
- L 2030 – 60% stocks, 40% bonds
- L 2035 – 66% stocks, 34% bonds
- L 2040 – 72% stocks, 28% bonds
- L 2045 – 77% stocks, 23% bonds
- L 2050 – 82% stocks, 18% bonds
- L 2055 – 99% stocks, 1% bonds
- L 2060 – 99% stocks, 1% bonds
- L 2065 – 99% stocks, 1% bonds
Step 3 – You’re Done
Pick the one that is closest to your suggested asset allocation from the Vanguard survey. For example, if the survey said you needed 80% stocks and 20% bonds, I’d pick the L 2050 fund because it is closest.
Seriously, it is that simple. I’m not saying this is the best strategy, but it is the easiest and in all honesty, if someone MADE me do this, I’d be fine with it. It is very reasonable way to approach saving for retirement, which is why I’m telling you about it.
Why do I make you take a Vanguard survey instead of just picking the Lifecycle fund that is closest to the year you want to retire? Because the Lifecycle funds are a little too conservative for my tastes and when you compare them with other target date funds. For example, the Lifecycle 2040 is 72% stocks and 28% bonds. The Vanguard Target Retirement Date 2040 is more aggressive at 81% stocks and 19% bonds, which I think is more appropriate.
The Easiest Way to Get Rich in the Military – Take the Leap and Just Stay In
Because of the value of the government pension, staying in is the easiest way to get rich. And when I say “staying in” I’m not talking about becoming the Surgeon General of the Navy. I’m talking about doing a reasonable job as an officer for at least 20 years. Let’s look at the most common scenario.
A 20-Year O5
Let’s assume that an officer was commissioned in 1999 at the age of 22, and stayed in 20 years until 2019, making it to O-5. According to the DoD actuarial tables, the value of a 20-year O-5 pension is $1,458,837.
Yes, just by staying in for 20 years you are already a millionaire and you’re only 42 years old. Depending on how much you saved in the TSP, you could be a multi-millionaire or darn close to it.
You Can’t Screw It Up
People try to time the stock market, wind up buying and selling investments at the wrong time, take loans from their retirement accounts, don’t save/invest enough, and find all manner of ways to screw their finances up. But when it comes to the military pension and the value it provides, the best thing about it is that you can’t screw it up.
Stay in for 20+ years…do a reasonable job and promote at the normal times…you’re rich. It’s that easy.
DOD Releases 2021 Basic Allowance for Housing Rates
Here’s a link to the article:
DOD Releases 2021 Basic Allowance for Housing Rates
Here’s the calculator that allows you to see the 2021 rates:
It’s Easy to Get Rich in the Military
The title says it all. Many people would disagree with this statement, but I know it is true. Here are a few ways I know of to get rich in the military:
- Stay in for the pension – Many civilians work 40+ years before they can retire. You only have to stay in for 20 years to retire with an inflation adjusted lifetime pension. It’s even tax free in some states. You might not realize it, but the value of the pension alone can make you rich. According to the Department of Defense, the value of a 20 year pension for an O5 at 20 years, the value is $1.46 million. Combine this pension with regular savings in the Thrift Savings Plan, and you’re automatically a multimillionaire.
- Live frugally and become a super saver – There are a few advantages you’ve got that will allow you to live frugally and sock away more of your income. They include government housing or a tax free housing allowance, government subsidized meals (Basic Allowance for Subsistence), free medical and dental care, on base services (exchanges, commissaries, gyms, auto shops, child care, etc.), uniforms to wear instead of expensive clothes, military discounts, USAA insurance, and no income lapse when you change jobs.
- Purchase houses or condos at each of your duty stations and turn them into rental properties – The details of doing this are complicated, and not everyone wants to be a landlord/real estate investor nor will it make economic sense in all duty stations. You have to purchase your properties as if they are an investment, but if you are motivated and the economics make sense you can turn the downside of frequent moves into an upside. A potentially very lucrative upside.
- Use special programs for veteran entrepreneurs – There are many programs available that help veterans with an entrepreneurial spirit. Own your own business or side hustle and become wealthy.
A few upcoming blog posts will discuss each of these in detail.
Here’s What’s in the Finalized Defense Bill
Here’s a link to this good review:
Joel Schofer's Career Planning Blog 