My Plan for Financial Independence by Age 40

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Hello, my name is Spencer. I'm a twenty-something officer in the US Air Force and the sole writer of this site, Military Money Manual. I love writing and reading about personal finance and planning our future with my wife. You can find out more about me and this site here.

This page is quite long. It covers almost all of my overall plan to achieving financial independence by age 40 while serving on active duty military status, starting with over $100,000 in student loans when I commissioned at age 22. It should get you started navigating this site and discovering everything I've learned about early retirement, financial independence, money management, and personal finance in the military.

Let me start by saying I like my job. I've served in the Air Force since 2010 and I can honestly say most morning I love driving into work. I work with some of the smartest, loyal, and all around best people in the world.

However, I know that this job isn't forever. In an era of defense drawdowns, sequestration, spending cuts, and the end of the wars in Afghanistan and Iraq, military jobs are going to be harder to hold on to.

One day my service contract will expire. When that day comes, I want to be in a position to decide what to do with my life. If I'm loving my Air Force job, then I'll stick with it. If I'm not, I want to have the financial independence that I can say “see ya!” and get out to do something else. Or nothing else, if I want.

What is financial independence (FI)?

This chart, from the book Your Money or Your Life defines it best for me:

At the age of 40, I want my monthly investment income to equal my monthly expenses.

To generate enough annual passive income for the rest of our lives, we'll need to have saved and invested 25-33 times our annual expenditures. (This is based on a safe withdrawal rate of 3-4%). So if we expected to spend $36,000/year, we would need $1.2 million of invested assets.

Another way to think of it is for every $25-33 you have invested, you are allowed to spent $1 a year.

How will we get to 25-33x in 15 years while serving on active duty? Read on to find out…

Where it All Began

I've always been interested in investing, saving, and managing my money effectively. I opened my Roth IRA account when I was in high school and bought my first stock at the age of 16. I worked jobs every summer from age 16 until I graduated from college.

After I graduated college, my parents introduced me to Dave Ramsey. I never really liked his style or his ability to repackage common sense and sell it at an incredible markup. Or his use of churches to further his financial gain. But enough on Dave…

I started reading Get Rich Slowly and other personal finance blogs soon after. After I graduated from my initial training course for the Air Force, I checked out every book on personal finance and money management I could find from the base library. I was a bit obsessed.

After internalizing all of the collective wisdom of the PF blogosphere and every book I could get my hands on, I came up with a plan of action. At first, I merely wanted to pay off all my student loans, save for retirement, and have some beer in the fridge. But then I started diving into the minutia of early retirement and financial independence. After crunching the numbers, I decided I had a new goal. Financial independence by age 40, 4 years before I'm eligible for my military pension.

My Financial Situation After Graduating College

I graduated college in May 2010 with:

  • $1000 in my checking account
  • $8000 Emergency Fund
  • $6000 in a Roth IRA
  • $1700 Ford Explorer
  • -$60,000 in student loans

For a net worth of: -$43,300 (Now I track my net worth with Personal Capital)

Housing was provided for, as were utilities, because I lived on base. My parents gifted me a 10 year old Ford Explorer for a college graduation present, which was gratefully accepted. My student loans were in a grace period for 3 months after graduation.

Base pay for an O-1 (2nd Lieutenant) with less than 2 years of service at the time was $2745/month, before taxes. After taxes, additional pays and incentives, and SGLI (government subsidized, cheap military life insurance), I had about $1200 in my pay check. My first few months of post-college budgeting looked something like this (per paycheck):

  • $1200 income
  • -$120 Roth IRA (10% of my after tax income)
  • -$125 Sallie Mae student loans (2.5% APR)
  • -$250 USAA Commissioning Loan (2.99% APR)
  • -$150 savings for car maintenance and insurance
  • -$80 for my cellphone and internet
  • -$200 into saving account for random fun things
  • -$150 leftover for groceries, gas, going out, beer, entertainment, miscellaneous

I was budgeting down to the dollar. It was tight. Sometimes, I use a credit card to spend money I didn’t have in my checking account. I could always cover it with the next paycheck, but I was setting a dangerous precedent, and I knew it.

I also knew that if I could hang on for just a few years though, I’d start making a bit more money. Total compensation for military servicemembers rises rapidly in the first few years of their service. A US military officer in any branch, with no special pays, will see their biweekly paychecks rise from $1200 as a brand new officer to $3000 in 4 years as a captain. That’s going from $36,000/year to nearly $80,000/year (before taxes) in just 4 years!

I knew that I needed to get my crazy amount of student loan debt under control. At graduation it represented 200% of my annual after tax pay. Just the minimum payments on these loans consumed 35% of my paycheck! I made student loan debt repayment my first priority.

I also knew that time is on the side of the young investor. I had opened my Roth IRA in high school and knew that regular contributions, invested wisely, would eventually grow into a large retirement nest egg. Retirement savings became my second priority.

Finally, from hearing horror stories around the web and from family and friends, I knew car ownership could become ridiculously expensive. I set aside $150 of each paycheck to cover maintenance and insurance costs. This was my third priority.

Now that I had my priorities, I spent the remainder of my money on fun things. I didn’t have much a goal, other than to achieve my three priorities and have some fun doing it.

My Financial Plan After College Graduation

Here was the plan I followed in college and immediately after graduating:

1. I only hold checking and savings accounts at banks that don't charge fees. My go-to bank in 2010 was ING Direct (now Capital One 360) and USAA. Today, I do all my checking and savings account banking with USAA. For online spending, I primarily use whatever credit card is offering the best cash back. For in person spending, I use a debit card, to keep impulse buying in check.

2. I never allowed myself to spend more than I had, in high school, college, and beyond, so I've never paid the credit card companies a dime in interest. This is probably one of the smartest things anyone can ever do. Once you fall into the trap of easy credit, it is so difficult to dig out. Most of the success stories you read about online begin with people drowning in credit card debt and eventually paying off their burdens.

3. Educated myself by reading books from the library, blogs, and other online resources. This is probably the most important step towards financial independence/retiring early (FIRE).

4. Minimized my student loan interest rate with a USAA Commissioning Loan (dropped from 6.8% to 2.99%). The USAA Commissioning Loan is an excellent way to drop the interest rates on any current debt you have. It’s also a great way to begin a lifetime of slavery debt. Use it carefully.

5. Built a $10,000 emergency fund. This was primarily accomplished by investing the USAA Commissioning Loan into USAA CDs that were offering 4-5% interest. This covers 4 months of our expenses. It’s also a nice, round, 5 digit number that reassures me that I can ride out most financial difficulties.

6. Aggressively began paying off my debt as soon as I graduated college, making payments of $1000/month with $696 minimum payments. This set me up to pay off my student loans 5 years ahead of schedule and save thousands of dollars in interest payments.

7. Maximize my Roth IRA contributions by automatically allocating money each month to my Roth IRA account in MyPay. Because of this aggressive saving, we saved enough to put a down payment on a condo in 3 years.

8. Build my savings for future expenses, such as a wedding ring, car, or house down payment. I recognized that in the near future I would probably have more expenses, both recurring and one-time.

My Priorities as of December 2013

Some things have changed since I graduated college.

  • We got married
  • I got promoted (twice)
  • I got deployed (twice)
  • We bought a house
  • We moved three times
  • We saved a $10,000 emergency fund
  • I learned much about financial independence and early retirement

Because of all these changes, my priorities have changed a bit. Especially important has been continuing my financial education with big picture thinkers like Mr. Money Mustache, Early Retirement Extreme, and Doug Nordman's Military Guide.

The global financial big picture has also changed dramatically. New financial products have become available that were not available 3 years ago. The Roth TSP option became available.

We're Not Signing Up for the “Great American Plan”

Because of all these changes, we started thinking a lot about “the great American plan.” This plan is especially prevalent in the military, which tends to be an overly conservative institution.

You know this plan well:

  1. Graduate high school
  2. Go to college
  3. Take on massive student loans
  4. Graduate college
  5. Get a low paying job you hate (or no job, these days)
  6. Buy a car you can't really afford, take on more debt for it
  7. Find a wife/husband
  8. Get married, spend $25,000 on a wedding
  9. Have a baby
  10. Buy a house you can't afford, watch its value fall when the housing market collapses
  11. Continue working in jobs you hate to pay for things you don't need to take your 2 weeks of vacation per year (4 weeks if you're military!)
  12. Retire at 60-65 (or don't, because you haven't saved enough)

My wife has never been one for the plan. I was onboard until I started reading more and questioning a lot of assumptions:

  • What if I actually like my job and it pays a pretty competitive salary?
  • What if I pay all my student loans off in 5 years instead of 10?
  • What if instead of making a $200 per month car payment, I instead spend that on travelling around the world?
  • What if we get married, but only spend 25% of the average American wedding cost?
  • What if we never want to live in the same place for more than a few years and we can rent cheaper than buying?
  • Will we really need to retire on 80% of my annual income?
  • What if there was another way to play the game?

What I found was that there IS another path. A path towards financial independence and the freedom to retire early, start a business, take on a second career, spend time travelling, learn a new language, or do whatever you want.

So as of today, December 2013, this is our current roadmap to financial success and lifelong happiness:

Our 5 Step Plan for Financial Independence

  1. Pay off Debt – I have just under $30,000 in student loans to go. We continue to not accumulate any new debt by automating our savings, spending wisely, and never buying anything we can't pay for immediately. I recently retired my USAA Career Starter Loan, which can be an awesome opportunity to start your military career by paying off your existing higher interest debt or can be a ball and chain you wear for 5 years.
  2. Max the Roth IRA – since we're married, we can contribute $11,000 per year into our Roth IRA fund. Since Roth investment options allow you to be taxed now rather than when you withdraw the money, and our effective tax rate is under 10% with much of our income tax free (Combat Zone Tax Exclusion, BAH, BAS, etc), we are choosing to pay our taxes now. Since Roth IRA contributions can be withdrawn at any time, we are happy to contribute the max every year and invest in diversified Vanguard funds.
  3. Invest the maximum amount in the Roth TSP – Ever since the Roth Thrift Savings Plan option became available, we have worked to invest the maximum allowable amount ($17,500 in 2014). The low cost index funds in this retirement account, combined with our very low tax rate, make this our second investment option (after Roth IRAs). Because my pay is essentially untaxed (through tax free combat pay), the money goes in untaxed, grows untaxed, and can be withdrawn after age 59.5 untaxed. Amazing!
  4. Enjoy life now – we love saving for the future. We also love living in the moment. Balancing the two is a constant struggle for many people. We have chosen to spend money on the things that maximize our happiness: family, travel, friends, and good food. We can afford these things and still save for FI because of our lifestyle choices. We have no car payment so we can put away $200 per month for travelling. Small things like this make a world of difference.
  5. Invest in our “Gap Fund” – we are planning on becoming financially independent and “retiring” early in our lives at the age of 40. That leaves 20 years from when we become financially independent until we can access our tax advantaged retirement accounts without penalty, at age 60. In those 20 years we’ll rely on our “gap fund,” a collection of taxable investment accounts and perhaps a property or two providing us with dividend payments, capital growth, rental income, and interest payments. Since we take a long term investing view, we invest with low cost, diversified Vanguard funds.

As of May 2013, we are well on our way to achieving FI by age 40. We are rapidly retiring my remaining student loan debt. Now that my USAA loan is paid off, our monthly minimum student loan payment has dropped to $225 from $696. Because the interest rate on this debt is so low (1.75% and 2.75% for the two remaining Sallie Mae loans), we are beginning to make contributions to our gap fund.

Our income continues to increase through time in service pay raises and promotions in addition to another income generating projects such as AirBnB and this website. My wife’s start up company is beginning to take off and may be producing income within a year or two.

We are very excited for what the future holds and to watch our progress towards financial independence at age 40. Along the way to our goal, I'll share tips and tricks on how I grow my wealth while serving in the US Armed Forces. Check back on this blog for updates!

22 thoughts on “My Plan for Financial Independence by Age 40”

  1. Do you and the wife plan to have kids? Or to simply continue DINKing? No lifestyle judgment, I’m just wondering if that was factored in. I’m a fan of FI principles (particularly FU money from MMM), but we are leaning towards growing a big military family. I think it can still be done, we’ll just have to be creative!

  2. So once again, I read on another FI blog, that basically, in order to do this young, you must a) start very young, and b) make a shit ton of money that the vast majority of the country does not in order to even save/invest. Awesome…… (60% of the workforce makes 35k gross or less, and half of the population lives at or just marginally above the poverty level.)

    • Yes, I’m a college grad but being a military employee I’m not making nearly as much as I could in the private sector. Look at Mr Money Mustache’s list of jobs making over $50k a year without a college degree. Plenty of money to be had for those who work for it. There are plenty of people making three times as much as me with a tenth of the net worth. Income does not equal savings. It helps starting young but FI can be achieved in as short as 8-12 years with a 75% savings rate (see Go Curry Cracker for the details on that).

  3. Hey I am also active duty air force planning to retire at age 40 and thought I’d throw my 2 cents out there. You mention you need a “Gap” fund to last you from age 40 to age 60. Have you read about Roth IRA conversions? Once you exit the service you can roll over your Traditional TSP and Roth TSP into a Traditional IRA and Roth IRA respectively. Then you can convert money from the new traditional IRA every year into a Roth IRA. You do this the year after you stop working since it will cost you income tax for the conversion. After a 5 year waiting period, you can withdraw this money from your Roth IRA penalty free. To get through this much smaller 5 year waiting period you can use Roth IRA contributions or taxable accounts. This will maximize the amount of tax sheltered space you get and prevent you from resorting to a taxable account for as long as you can.

    The other, slightly worse, option is 72t also known as SEPP. This allows you to withdraw about 2-3% of your IRA balance every year but there are limitations on when you can stop it, and its not as flexible. I’d suggest the Roth IRA conversion ladder.

    some links with more information:

    Just wanted to say I really like your site and what you’re doing to try to explain FI to the military community.

  4. Please define financial independence quantitatively for your family. You have short term goals (Jan 2013) but what is the ultimate goal in net worth, passive income, etc? I would like to see the 2030 goals you have set for yourself. As a fellow military member i am interested in following you along the journey and wish you the best of luck.

    • Hey Jason, thanks for stopping by, and thanks for your service! You’re right, I haven’t positively defined my long term goals in very concrete terms. I’ve just made the general statement that I want financial independence by age 40. But what does this actually mean in terms of net worth, passive income, investments, retirement accounts, etc? I have a few numbers and ideas floating around in my head but haven’t committed them to the website yet. Look for these solid numbers and ideas to be published soon!

  5. Hey Spencer,
    I’ve been reading a lot of your articles ever since I stumbled on to your site. My question for this one is why do you prioritize the Roth IRA over the Roth TSP? Thanks~

    • Personally, I prioritized the Roth IRA because it was a lower maximum to hit ($11k vs $17.5k). Also, you can withdraw up to $10,000 from your Roth IRA account for a first time home purchase, which is unavailable in the Roth TSP. However, I would NEVER argue against someone maximizing their Roth TSP before their Roth IRA. You only have your time while you serve in the military (or government service) to contribute to your TSP and of course TSP has it’s famously low expense ratios. Obviously, the optimal solution is to maximize both with a $2375/month automatic contribution (married) or $1917 (unmarried).

  6. Spencer,

    Just found your site via LTNE. I like what I’m seeing and will continue to pop back in from time to time. I’m at the twilight of my Army career and was looking for jobs when I discovered SPI, Retire by 40, Mr. Money Mustache, etc… I realized that I don’t want to get just another job, but I’m not naive to think that I might not need to get one in the future. I’ll have my military pension as a security net that will enable me to work for myself. I think being an early retiree is not about not working. I think it’s about having more control of your life financially (for the most part).

    I have no doubt you will achieve FI at 40, if not by the time you retire from the service. Best of luck to you!

    Retiring Army Veteran

    • Darren

      Thanks so much for the comment and encouraging words. I’m glad that someone in the twilight of their career can look around at the retire early crowd and think “hey, that’s doable!” As for myself, I’ll just keep on saving while I serve out the remainder of my commitment and see if I’m still having fun when my commitment is up. I want to make the choice to stay in based on my needs/wants and my families needs/wants, not the “Air Force’s needs,” or because I’m afraid of not having a job for a few years when I get out. Having a military pension would be a massive safety yet, giving anyone the freedom to pursue entrepreneurship, a dream job, or just take it easy for a while. Thanks for your many long years of service.


  7. Great breakdown. I’m impressed by your discipline (military guys!). At any rate, I’m concerned about your plan, specifically figure 8-7. How do you expect your investments to generate $3,000 monthly for living expenses, yet continue to grow over time after your income ceases? Your conservative 3.33% drawdown on a $1.2 million base is good, but projecting that your investments will grow at 10% or so a year to continue to give yourself a cushion for increasing investment income is optimistic. Inflation will eat your returns overtime otherwise.
    Good luck!

    • I need to expand on how I reached that $1.2 million number. The $1.2 million is based on a conservative 3% safe withdrawal rate, allowing us to withdraw $36,000/year, or $3000/month. In terms of growth projections, I’ve only used 5% annualized return. The US stock market has returned somewhere between 5-7% annualized return over many long periods of time, after inflation. I remove inflation from my calculations by assuming only a 5% return.

      • sorry for the long delay in reply, but I still don’t understand the math behind 8-7. If you expect ongoing growth in your portfolio as pictured, your rates of return and drawdown don’t match (to me)… For instance if at age 40 you have 1.2 M saved and you expect monthly investment income to equal $5000 by age 50 your portfolio needs to have increased to 2M (2M*3%=60k). Assuming excess growth of 2% only gets you to 1.5M or so over that time. Even if you assume 7% growth (with 4% excess over withdrawal) you only get to almost 1.8M. Tax consequences haven’t been factored in at all.

        I’m not saying I don’t admire your discipline and planning, just throwing out info to make sure you stay on track! Good luck to you and congratulations on the plan!

        • The 8-7 figure is simplistic. I do not expect my investment returns to go completely exponential as reflected in that graph. However, I do expect to have saved $1.2 million by the age of 40 and to be able to safely withdraw 3% of that for the remainder of my life, yielding $36,000. The 3% withdrawal number is passed on scenarios I’ve run through the FIRECalc, a great financial independence tool.

          Tax consequences are minimal. Because my job frequently takes me into a combat zone I usually only pay income taxes 3 months a year. Additionally, I am investing my retirement savings into the Roth IRA and Roth TSP, so it will be untaxed when I withdraw it after age 59.5.

          Thanks for the feedback, it’s good to discuss my assumptions and plans!

          • Are there limits on contributing to both Roth IRA and Roth TSP? Can I max out both accounts with the yearly limit or do I have to split the amount between the two?

            I haven’t gotten a solid answer on this since the Roth TSP was introduced. Thanks!

  8. My name is Miguel and I am a junior in college, with two more years left before I commission into the Air Force. I have always been interested in finance and investments, but never really initiated anything towards my personal finance and planning for my future because it seemed overwhelming. I stumbled onto your website and I am so glad you are writing this blog. It is very easy to follow and understand with so much helpful advice. I will try to follow your plan and hope that I can be financially independent by 40! I recently paid off $4600 in unsubsidized loans which included the $600 accrued interest over the last two years and I am now deciding on whether I want to take out the career starter loan.

    Thank you and I look forward to future updates!

    • Miguel – thanks for much for the comment. Please share the site with your ROTC or Academy buddies as well. Personal finance can seem overwhelming at first…but like anything, learning a little bit at a time and taking a few steps in the right direction can yield amazing results in the long run. Have a look at my experience with the Career Starter Loan and DO NOT take it unless you use it to pay down higher interest rate debt. If you can graduate school debt free, you can definitely be financially independent by age 40 or even earlier. Good luck to you, keep me updated on your Air Force experience and journey towards financial independence!


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