personal finance
Three Questions
As I progress in my career, I find myself getting busier and busier. Some of it is my own doing. Like many people, I am cursed by two things – a reluctance to say no and a propensity to have opportunities floated my way.
I also find myself financially independent. When my Navy commitment ends, I will have amassed enough that I no longer need to work. This is a nice problem to have, but it means that I finally have to figure out what I want to be when I grow up. If I continue to work, it won’t be because I need the money.
As a regular reader of financial blogs, I recently read one on ThePhysicianPhilosopher.com titled “Life Planning: The Three Kinder Questions.” The Kinder Questions were created by a financial planning guru named George Kinder. You can read about them in a Money.com article titled “3 Questions That Will Get Your Finances — and Life — on Track.”
The Kinder Questions are designed to help you think about how you use your money to create the life you want. Here are the questions:
- I want you to imagine that you are financially secure, that you have enough money to take care of your needs, now and in the future. The question is, how would you live your life? What would you do with the money? Would you change anything? Let yourself go. Don’t hold back your dreams. Describe a life that is complete, that is richly yours.
- This time, you visit your doctor who tells you that you have five to ten years left to live. The good part is that you won’t ever feel sick. The bad news is that you will have no notice of the moment of your death. What will you do in the time you have remaining to live? Will you change your life, and how will you do it?
- This time, your doctor shocks you with the news that you have only one day left to live. Notice what feelings arise as you confront your very real mortality. Ask yourself: What dreams will be left unfulfilled? What do I wish I had finished or had been? What do I wish I had done? What did I miss?
Since most reading this are in the medical field, we can probably relate to the second and third question. Stuff happens, and you never know when or if it’ll happen to you.
Not many people reach the end of their life and think “I wish I had worked more” or “I wish I had more money.” Your career and your financial resources are tools that should enable you to live the richest life you can possibly live. Reflecting on your unique answers to these three questions may help you assess whether your financial journey is getting you where you want to go or if somewhere along the way you took a wrong turn.
Finance Friday Articles
- 4 Ways the Pandemic Has Impacted Doctors’ Financial Lives
- Best 529 Plans for 2021: Reviews, Ratings, and Rankings
- Don’t Overdo Frugality
- Experts Forecast Stock and Bond Returns: 2021 Edition
- For Their Sake
- Is the Market Getting more Efficient?
- The 1% Rule for Real Estate Investing
- What the Coronavirus Means for the Future of Financial Planning
I Fund Change Still on Hold and Finance Friday Articles
Here is an update about the Thrift Savings Plan I Fund change that is still on hold. The change would move the I Fund from holding only developed international stocks to holding developed and emerging markets (including China, which is/was the political issue):
One of the TSP board’s five seats is vacant and the other four are being held on holdover status. Biden will have discretion to make three nominations and the other two seats also are in the hands of Democrats since those nominees are chosen by the House speaker and Senate majority leader.
That board typically is not seen as partisan in nature although a partisan note was introduced last year when President Trump made three nominations just as the board was about to implement a long-planned expansion of the international stock I fund to cover more countries, including China. That plan was then put on indefinite hold and it remains suspended even though Trump’s nominees were not confirmed.
Throwback Thursday Classic Post – My Investment Portfolio
I write a lot about personal finance. If you are wondering what I’m doing for my own finances, here’s a detailed look at my own portfolio. I’m not going to give you dollar amounts, but percentages. If you want to know the dollar amounts, they can be expressed in one word. I have…enough:
At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds,“Yes, but I have something he will never have . . . enough.”
Retirement Assets
My retirement financial assets from largest to smallest include: (all percentages are rounded to the nearest whole percentage)
- 34% – My taxable mutual funds, which is where I put our retirement savings when I fill our retirement accounts. It is currently invested in:
- 55% – Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
- 44% – Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
- 1% – Individual stocks that were gifted to me.
- 27% – My Thrift Savings Plan (TSP) – Currently invested in the Lifecycle 2030 fund.
- 15% – My wife’s TSP – Currently invested in the Lifecycle 2030 fund.
- 14% – My wife’s Roth IRA – Currently invested in the Vanguard Target Retirement 2030 fund.
- 7% – My Roth IRA – Currently invested in the Vanguard Target Retirement 2030 fund.
- 1% – My wife’s individual 401k – Currently invested in the Vanguard Target Retirement 2030 fund.
- 1% – My wife has a 401k that is invested in the Fidelity® 500 Index Fund (FXAIX).
529 Plans
We have two Nevada 529 plans, both of which are at Vanguard and are invested in the age-based investment options.
Liabilities
None. Aside from credit cards we pay off every month, we’re debt free.
Overall Retirement Asset Allocation
- Stocks – 76% (target 75%)
- Bonds – 24% (target 25%)
The Military Pension and Retirement Asset Allocation
Jonathan Clements is one of my favorite authors. As a prior financial columnist for the Wall Street Journal and current author of the Humble Dollar blog and money guide, he doles out common sense advice on a regular basis. One of his tenets of personal finance is to take a holistic approach to your financial life and include everything you’ve got and will receive when deciding on your asset allocation and risk tolerance.
In 2017, he published a blog post discussing how he values future income, Social Security, and pensions. If you stick around the military long enough to get an inflation-adjusted pension, his approach and the security of the pension would allow you to take on a lot of additional risk, more than many traditionalists would recommend. He and I discussed this very issue in the comments section, so do me a favor and read the post.
My comments to him were:
I am a huge fan of your writing AND the beneficiary of an inflation adjusted pensions if I stay in for 20 years, which is quite valuable. You advocate for including the value of social security (SS) and pensions in your overall asset allocation, but the other side of the camp would argue you should not because you can’t rebalance with SS or pensions. The present value of SS and an inflation adjusted military pension can be quite large, and with your approach would likely represent all of a person’s “bond holdings” unless they were very wealthy or extremely conservative.
For example, if a retired military member wanted to generate $75K in annual income, and was going to get $15K/year from SS and $35K/year from his/her military pension, that would leave $25K/year they need to generate income from. Using the 4% rule, they would need about $625K in investments.
If they wanted a 50/50 stock/bond portfolio, using your approach they might own all $625K in stocks. They’d have nothing to rebalance with when the stock market soared.
Using the argument of those who don’t agree with your way of allocating assets and don’t include SS/pensions as bond-like, they’d own $312.5K of bonds and $312.5K of stocks. They could easily rebalance.
Does the case of someone with a very large, inflation adjusted military pension change they way you’d approach retirement asset allocation?
His reply:
What you describe falls firmly into the category of “nice problems to have.” If I had $50k guaranteed every year and needed another $25k from investments, I’d set aside $125k of my $625k portfolio in cash and short-term bonds, to cover the next five years of required portfolio withdrawals. And then I’d probably put much or all of the remaining $500k in stocks.
How to Easily Figure Out the Dollar Value of Staying In vs Getting Out of the Military
Here is a table from the 2019 Statistical Report on the Military Retirement System:
Just by looking at this table, you can very easily learn a few things including:
- The dollar value of staying in for 20+ years and receiving a retirement pension.
- The incremental value of staying on active duty for additional years once you are retirement eligible.
The Dollar Value of a Military Pension
Let’s say you are an O-4 who has the option of resigning/separating at the 12 year mark. You think if you stayed in until 20 years you could make O-5, but you’re not sure just how valuable that military pension really is. You can figure that out by looking at the table above, and you can see that a 20 year O-5 pension has a dollar value of $1,458,837. You can reduce this value by about 20% ($1,167,070) if your are in the Blended Retirement System and would only get 80% of the full pension. That is what you’d be giving up by getting out at the 12 year mark as an O-4 and not staying in long enough to get the pension.
The Value of Staying Additional Years Once You are Retirement Eligible
Let’s say you are a 20 year O-5 who is weighing an extra 4 year commitment, and you think you could make it to O-6 if you stayed until 24. What is the dollar value of sticking around when it comes to your retirement pension?
We already mentioned that a 20 year O-5 pension was worth $1,458,837. If you stayed in another 4 years and made O-6 the value of your pension would have increased by $526,879 to $1,985,716, an average of $131,720 per extra year you stuck it out.
The Bottom Line
There are a lot of factors to consider when you are making the decision to stay in or get out, but by looking at the table above you can pretty easily quantify dollars values associated with:
- Staying in for 20+ years and receiving a retirement pension.
- The incremental value of staying on active duty for additional years once you are retirement eligible.
Finance Friday Articles
Here are this week’s articles:
- 10 Financial Goals for 2021
- Best Investments for Doctors
- Do Nothing, Do Well
- Drawdowns & Melt-Ups: The Year That Was in the Markets
- Monitoring your risk level & rebalancing
- The 3 best ways to estimate your home value (aka: How I “lost” $1 million overnight)
- Track Your Financial Goals with These Four Measurements
- Updated Trinity Study for 2021 – More Withdrawal Rates!
- Updating My Favorite Performance Chart For 2020
- Why I’ve Changed My Mind on Bitcoin
Joel Schofer's Career Planning Blog 
