Married Naval Officer 3 Years to Retirement Wants to Make it Count

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us-navy-ready-to-retire-and-investBelow is an email I received from a prior enlisted naval officer deployed somewhere in the Middle East. He's nearing retirement and looking to see how to maximize his investments in the few years he has left.

One massive advantage he has approaching retirement is he can count on not one but two military pensions. Combined with some shrewd investing, this deployed sailor is setting himself up for a stable financial life.

Good Morning From The Middle East!

I just wanted to start a dialogue in regards to a way I can maximize the last three years of my military career (If I decide to retire at 20) towards retirement savings. I am currently an O-3E (Did 10 years enlisted prior to commissioning) in the Navy and make decent money while my wife is a Chief (E-7) and makes decent money as well.

I am currently deployed and am putting 50% of my base pay into a TSP (L-2040) fund which equates to roughly $3350 a month. I have $0 in credit card debt, my wife has some she is paying off, and we have a mortgage and two car payments. While I don’t need exact amounts you would recommend, I was hoping you could help me decide if TSP is the right way to keep investing or if investing in Mutual Funds is a better way to go. I am also not asking to have you recommend an exact fund.. I am looking at a few Janus and Vanguard funds.. more for overall ideas.

Is TSP a solid choice or can I maximize my efforts better elsewhere? I have received an average return of 8.82% on the lifetime of my TSP fund which seems pretty good to me. Anyhow, I don’t need to be rich and enjoy what I do so I may stay even longer than 20 years since I will put on O-4 in the next year or so.. Anyhow, just hoping for some advice. Thanks.

Thanks for the email, hope you're enjoying your time in the Middle East! I did a few months over there last year. Not very excited about returning soon, but the tax-free benefits would be nice.

Let me start by saying I'm not a registered financial adviser and this is just general advice. It may not be the best course of action for you, so I'd recommend talking to a CFP (Certified Financial Planner) or someone else who can legally give you investment advice. I'm just an O-3 from the internet who enjoys investing, learning, and writing about money!

Question: do you have your SDP maxed out? The Savings Deposit Program is only available to deployed servicemembers and offers a guaranteed 10% return. You definitely need to take advantage of this if you're not already!

The TSP: Still the Best Place for Military Personnel to Invest

2014-tsp-investment-returnsNice job maximizing your TSP contributions. Since you are deployed, I would maximize your Roth TSP contributions first. Because Roth contributions are taxed now, rather than when you withdraw, tax free income (Combat Zone Tax Exclusion) goes in untaxed, grows untaxed, and then withdraws untaxed. The Traditional TSP goes in un-taxed and the contributions come out un-taxed but the earnings could be taxed depending on your retirement income.

Since you're in a Combat Zone, you are eligible to contribute $18,000 into your Roth TSP and then an additional $35,000 into your Traditional TSP ($53,000 total contribution). This is the best way to maximize your tax advantages and contributions into the TSP.

In regards to leaving your money in the TSP: YES! The TSP offers the lowest expense ratios in the world. For every $1000 dollars you have invested in the TSP, you pay only $0.27 in fees every year. Even at Vanguard, which has the lowest fees outside of the TSP, you pay twice that or 50 cents per $1000 invested on their lowest expense ratio fund (Admiral Shares). Fees are what kill investment performance.

When you're ready to invest on top of the TSP for your Roth IRAs or taxable investment accounts, I recommend Vanguard for DIY or Betterment for a more hands off approach. Vanguard has the lowest fees in the business and they are investor owned, meaning that they have a fiduciary responsibility to you, the investor, to keep costs low. This is unlike Schwab or Fidelity, which are publicly traded companies and need to create profits for the shareholders. Betterment uses Vanguard ETFs and charges a slightly higher expense ratio but offers detailed portfolio management and automatic tax harvesting.

Your 8% return in the TSP is exactly where it should be based on the long term trend of the US stock market. Investing in the Lifecycle Fund is an easy way to get great diversification. When it comes to investing, it's really quite simple: a mix of low cost diversified stock and bond funds. The TSP provides that.

Remember: past performance is no guarantee of future results. 80% of actively managed funds fail to beat their passive index over a 20 year period. The only way to win at the game of investing is consistent, disciplined investing, low costs, and sticking to your asset allocation plan (stock/bond mix) through good times and bad.

Depending on your interest rates, you probably want to pay off your wife's credit card debt ASAP. After that, see if you can negotiate a lower interest rate for your auto loans, unless they're already below 3%. Also, remember that you're going to be collecting potentially TWO military pensions. This is a huge part of your retirement plan and should not be discounted.

I would definitely recommend looking at Doug Nordman's blog. He's former Navy with a Navy wife who retired after his 20 years. Lots of good material on there. For further reading I also recommend the Boglehead's wiki, lots of great investing, asset allocation, and diversification advice on there. Hope this helped, please let me know if you have any follow up questions, and check my archive for more military money topics. Also, don't forget to share my site with your friends! I want everyone to take advantage of the unique investment opportunities military members can take advantage of to get ahead.

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