personal finance

Put Retirement First

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Jonathan Clements was a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get (free) on his blog Humble Dollar. Here is one piece of advice from his site:

PUT RETIREMENT FIRST. Are you socking away at least 12% of your pretax income toward retirement, including any matching contribution to your employer’s retirement plan? To amass enough for retirement, you may need to throttle back other financial ambitions, including the size of the house you buy and how much you help your kids with college costs.”

This advice is about two things, savings rate and priorities. First, let’s tackle savings rate.

One of the seminal moments in my financial life occurred when I read the book The Automatic Millionaire by David Bach. In that book was a table that said something like this:

  • If you want to be poor and work your entire life, save < 10 percent of your gross or pre-tax income.
  • If you want to be normal and retire at a traditional age, save 10-20 percent of your gross or pre-tax income.
  • If you want to be rich and retire early, save 20 percent or more of your gross or pre-tax income.

You can probably guess how my story ended…I saved 20 percent. Then I increased by 1 percent every 1-3 months until I hit 30 percent, which has been my savings rate ever since. This is probably the #1 reason I am financially independent. The #2 reason is the value of my military pension.

As Mr. Clements discusses, when you put retirement first it isn’t just about your savings rate, though. It is also about priorities.

You can’t borrow money to retire, therefore you need to max out your retirement savings before you start saving money for your kids’ education.

You need to max out your retirement savings before you buy a house that is larger than you really need.

You need to max out your retirement savings before you pay for private school.

You need to max out your retirement savings before you purchase a new car or a used luxury car.

It’s your life and it’s your retirement. Get your priorities straight and make retirement your #1 financial priority.

Prepare for a Long Life

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Jonathan Clements was a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get (free) on his blog Humble Dollar. Here is one piece of advice from his site:

PREPARE FOR A LONG LIFE. For a quick gauge of your life expectancy, try Social Security’s calculator. For an in-depth look, use this calculator built on academic research. What will you learn? First, the longer you live, the longer you can expect to live. Second, lifespans vary widely—with educated, health-conscious Americans living three or four years longer than average.”

According to the Social Security calculator above, I’ll live for 81.7 years. According to the in-depth calculator, I’ll live 87.09 years.

What’s the point of all this? Plan for a long retirement by starting to save for retirement now. My grandparents all lived into their late 80s or 90s, so I’ll hopefully outlive these estimates. You might too. And if you have a military pension, you won’t run out of money.

I also wondered if people in the military live longer. Here’s an article that says yes, they do, especially women:

Results

Overall, 67.9 % of RMPs lived longer than average relative to their sex-specific birth cohort. This difference in life expectancy was more pronounced among women than among men.

Calculate Your Required Nest Egg

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Jonathan Clements was a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get (free) on his blog Humble Dollar. Here is one piece of advice from his site:

CALCULATE YOUR REQUIRED NEST EGG. Once retired, you’ll likely have Social Security and perhaps a traditional employer pension. How much additional income will you need for a comfortable retirement? This money will need to come from savings. Take your desired portfolio income, multiply by 25—and you’ll have an estimate for how big a nest egg you need.”

If you stay in for 20 years or more, you’ll have a pension. That pension is very valuable and will greatly reduce the size of your required nest egg. Let’s say you think you need $120,000 per year to retire and you think that between your military pension and Social Security you’ll net $60,000 per year. That leaves another $60,000 you’ll need to generate from your retirement nest egg.

Using Mr. Clements rule above, just take the $60,000 and multiply it by 25, showing that you need to save approximately $1,500,000 to generate the extra $60,000 of retirement income.

Throwback Thursday Classic Post – A Simple and Military Specific Summary of How to Save for Retirement

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I’m a huge fam of Jim Lange. He’s a noted expert in financial management, saving for retirement, and estate planning. He’s written a number of books, some of which you can get for free on this page. If I ever move back to Pennsylvania, I’ll probably have him do my estate planning so that I don’t have to worry about anything in retirement.

He sends out a monthly newsletter that I get via snail mail, and it usually has a useful article in it. If you want it, you can get it here.

A previous edition had a section called “Jim’s Point-by-Point Summary of the Whole Retirement & Estate Planning Process.” It was simple but extremely useful. Below in bold are each of the points he lists for people who are still working, which is most of my readership. Let’s take each bolded point and militarize it for you so it is specific to those of us in the military.

Contribute at least the amount to your retirement plan that your employer is willing to match or partially match.

For those under the legacy retirement plan, this is not an option. For those under the new Blended Retirement System (BRS), you need to contribute 5% of your basic pay to the Thrift Savings Plan (TSP) to get the pull 5% DoD match:

BRS Matching

You also need to make sure you contribute 5% every month and don’t fill the TSP too early. If you max it out in October, you won’t get a match in November or December.

If you can afford to, contribute the maximum allowed to your retirement plan even if your employer does not match.

This is $19,500 in 2021. You can do an extra $6,500 if you are 50 or over. You can even do more if you are in a combat zone.

Once you have maximized contributions to your plan at work, contribute the maximum you can to an IRA, even if you cannot take a tax deduction on it.

If you are able to fill your TSP account, next you’ll need to open an IRA at an investment firm. Vanguard is the obvious choice due to their across the board low investment fees and unique non-profit structure, but you can do this anywhere (Schwab, Fidelity, etc.).

If you make too much to contribute to a Roth IRA, you just use the back door Roth IRA option.

Consider your personal tax bracket when trying to decide if you should contribute to a Roth or a traditional IRA/retirement plan.

With a traditional plan, you take a tax deduction now and pay taxes later when you take the money out. With a Roth plan you pay the taxes now and the withdrawals are completely tax free.

The general principle is that if you are in a lower tax bracket now than when you are retired, you do the Roth. If you are in a higher tax bracket now, you use the traditional.

No one really knows what the future holds, though, making this decision tough. Here are some resources for you to check out when making this decision:

Traditional and Roth TSP Contributions

Roth vs. Traditional IRAs: A Comparison

Do not take loans against your retirement plan. Allow the tax-deferred or tax-free status of the account to maximize the growth of your money.

While the TSP allows loans, I refuse to link to any information about it. Once you put money away for retirement, you don’t borrow from it unless it is an ABSOLUTE EMERGENCY.

Period.

The Bottom Line

Here are the point-by-point summary of steps Jim Lange suggests you take if you are saving for retirement:

  • Contribute at least the amount to your retirement plan that your employer is willing to match or partially match, which is 5% of basic pay in the BRS.
  • If you can afford to, contribute the maximum allowed to your retirement plan even if your employer does not match, which is $19,500 in the TSP ($26,000 if you’re 50+).
  • Once you have maximized contributions to your plan at work, contribute the maximum you can to an IRA, even if you cannot take a tax deduction on it. Use a back door Roth IRA if you need to.
  • Consider your personal tax bracket when trying to decide if you should contribute to a Roth or a traditional IRA/retirement plan.
  • Do not take loans against your retirement plan. Allow the tax-deferred or tax-free status of the account to maximize the growth of your money.

Aim to be Debt-Free by Retirement

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Jonathan Clements was a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get (free) on his blog Humble Dollar. Here is one piece of advice from his site:

AIM TO BE DEBT-FREE BY RETIREMENT. If you aren’t, you’ll have an added living cost to cover. That could necessitate larger IRA withdrawals or selling winning stocks in your taxable account. This extra income could, in turn, trigger taxes on your Social Security benefit and larger Medicare premiums. To avoid those pitfalls, pay off all debt before you quit the workforce.”

Confronting this issue, my friends, is where you decide if you are going to put on your big boy/girl pants and really set yourself up for success or not. As someone who is debt free, I can tell you that the feeling is like no other once you get there. If my life goes as planned, I will never borrow another dollar from anyone for anything. That is a major contributor to my status as financially independent.

A few years ago, I was having a conversation on Reddit with an active duty member that was asking what they should do with the 5 figure bonus they recently received. I suggested they pay off their car and never borrow money for a car again. Another person responded and said that my recommendation was stupid. If the interest rate is low enough, it makes sense to borrow money for a car.

To each his own, but since you can get from point A to B with a very reasonable car (like these), you should make it your goal to pay cash for whatever you are driving. You can read more about my take on used cars here – buy used.

Whether you realize it or not, you are trading your time (your most limited resource) for money. Getting to the point where you no longer have to do that takes dedication, and getting to the 20 year mark of a military career without any debt is a major ingredient to the recipe that leads to financial independence and possible retirement.

If you want to read a pretty good book about this very thing, you should get the book Your Money or Your Life.

Throwback Thursday Classic Post – Do the TSP Target Date Funds Miss the Mark?

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Blooom is an on-line financial advisory service that will manage your Thrift Savings Plan (TSP) and other retirement accounts for pretty low fees. On another blog I wrote an article about them and some readers got into a Twitter dialogue with them. During this dialogue it was suggested that an investor doesn’t need to pay for an advisor because you can always just use target date funds if you don’t want to manage your investments yourself. Blooom’s response pointed to a blog post of theirs about target date funds and all the problems associated with them. Let’s take a look at their post and see if the points they raise are valid when compared to the TSP’s target date funds, the Lifecycle Funds.

What’s a Target Date Fund?

According to Investopedia, a target date fund is:

A fund offered by an investment company that seeks to grow assets over a specified period of time for a targeted goal. Target-date funds are usually named by the year in which the investor plans to begin utilizing the assets. The funds are structured to address a capital need at some date in the future, such as retirement. The asset allocation of a target-date fund is therefore a function of the specified timeframe available to meet the targeted investment objective. A target-date fund’s risk tolerance become more conservative as it approaches its objective target date.

The Lifecycle or L Funds are the TSP’s version of target date funds. You can read my deep dive on them if you like for more information.

Are the Lifecycle Funds Too Conservative?

They used to be too conservative when compared to other target date funds, but that was recently adjusted. In 2019, the most aggressive you could get with the L Funds was the L 2050, which was 82% stocks and 18% bonds. If you wanted less than 18% bonds, you couldn’t do that with any of the L funds, but now you can get as aggressive as 99% stocks and 1 % bonds with the L 2065 fund.

If you look at the L fund targeting the year you want to retire, though, and you think it is still too conservative for your liking, to compensate you can always just pick a L fund that targets a later year. For example, if you want to retire in or around 2030 you would normally pick the L 2030. Instead you could pick the L 2035 or L 2040 to get more aggressive.

Do the Lifecycle Funds have High Expense Ratios?

This is a definitive no. While other target date funds can have high expenses, the L funds are composed of funds with the lowest expenses you will find anywhere. You probably cannot find a target date fund with lower expenses than the TSP L Funds.

Do the Lifecycle Funds Lack Personalization?

Yes, they do. There’s no way around this one. You can personalize them a little bit by adjusting the target date you invest in, as described above, but they are by definition standard for all investors.

I would argue that these standard asset allocations are good enough for just about everyone to come up with a reasonable investment plan. If you want a personalized plan, though, you may have to get some help or use a financial advisor.

The Bottom Line – Do the L Funds Miss the Mark?

I think it depends. They are definitely low cost, so they hit the target there. They used to be too conservative, but that was fixed and you can also just adjust that by using a fund with a target date that is further off. They are definitely not personalized, but I don’t think they need to be. The asset allocations they use would do for 99% of the people investing, including myself.