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Kate Horrell asked a great question on my 1 year financial plan post:
Spencer, I’d love to hear your logic about funding your IRA over your wife’s IRA. You have so many more earning and saving options, including TSP and possibly a military retirement check. Military spouses typically have lower lifetime earnings and find it very hard to maintain consistent employment, particularly in fields that offer 401k or 403b plans. They lose time from work with every PCS and if someone is going to stay home with the children, it is the spouse. A well-funded IRA is a much larger piece of a spousal retirement plan than it is for the active duty member. I always advise my clients that if they aren’t going to fund both, they should consider funding the spouse’s first.
Kate – thanks for the question, I'll see if I can break this down, please let me know what you think:
Our Main Goal Right Now: Paying off Student Loans
Our goal right now is paying off my student loan debt. That is our highest priority. Mathematically, it's only a few hundred dollars in interest saved versus potentially thousands of dollars if we invested the extra loan payments in another (not FDIC insured) investment. But the freedom from paying our creditors once we're debt free is a powerful motivation, as well as the cash flow we'll be freeing up. We've made the choice that we'd rather be debt free in a few years than have a few thousand dollars in our retirement/savings accounts. My wife's already reached that goal, paying off $45,000 in student loans in under a year.
Now, if there were FDIC insured CDs or savings accounts offering 4-5% returns like there were in 2005-2008, you can bet that we would be crunching the numbers and probably making a different decision. But with interest rates so low, there's no incentive to invest in the short term investments. Also, two of my loans are variable rate loans, and right now they're under 3%, so it'd be great to knock them out while they're still low.
So because our priority is student loan repayment, we're not as focused on retirement funding.
…But We're Still Investing for the Future
HOWEVER, I believe that not investing now would be a huge mistake. I won't explain right now about the “if you start investing at 20 vs if you start investing at 30” charts, but essentially the earlier you start saving, the more time compounding interest has to go to work.
We decided that we would max out one of our retirement accounts while we paid back our student loans. We picked mine simply because my wife doesn't have one open yet.
I looked into doing the TSP route when I came on active duty in 2010. Because at the time they weren't offering a Roth option, I decided to just focus on my civilian Roth IRA.
Now that they offer a Roth option, I will probably start using that, after my student loans are paid off. We will also re-examine our retirement savings plan when the student loans are paid off, our income goes up, or something else big changes in our financial situation.
Early Retirement Funds
Another important factor for us is having access to cash and other assets before we reach “retirement age.” If we stick to our plan of having enough assets by age 40 to cover the 4% safe withdrawal rate, then we're going to need 20 years of funds (from age 40-60) before we can access our normal retirement accounts (Roth IRA, IRA, TSP, etc).
This is going to require some investment vehicles outside of the normal retirement accounts, such as taxable brokerage accounts, Lending Club, CDs, maybe a military retirement package (although the earliest I would be eligible for this under current rules is 44).
And that, Kate, is my 657 word answer to your comment! Please let me know if you think I'm missing something here. I love getting feedback on my plans.
I have recently just started listening to your podcast, and it has been making a massive impact on my financial life. My question for you guys is based on a weird situation I find myself in currently. Luckily I have had a surplus of cash after maxing out my Roth IRA and TSP, which I’ve just been putting into a taxable brokerage account. This surplus of cash has significantly grown over the years. I’m now looking at some new expenses (House payment, kid on the way), and I would like to start using some of my surpluses from the taxable investment account to fund my Roth IRA. How should I do this? Should I just sell $6,000 at the start of the year and put it into the Roth IRA, or just sell $500 a month? Is there a better way?
Hummmm-I agree with paying off loans BUT, I respectfully disagree with your decision about the IRA.
She is moving every few years for your career- not building a pension.
You should reciprocate and build Her IRA. It takes about five minutes to open one ( “mine is open” did you really use that as an excuse????).
As a “retiree wife” it was essential that my IRA was always funded. To me it was a small way for “us” to show that my contribution was just as important to the family. We are both FI- together and independently. It is an under pinning to our 31 year marriage. No resentments.
Something for you to seriously reconsider.
BTW- An officer’s on call/retirement pay (you can be called back at any time until 60) is worth- easily- 1 million in the bank. “We” have been retired for 17 years and at 25 years “we” will have received almost million dollars in pay+ medical. You would be silly to walk away at age 40, in my humble, mother- like, opinion.
Pensions really aren’t an option at most companies any more, so that doesn’t really fit into the equation. We actually did just open a pension for her this year, and yes, it took about 5 minutes (so that wasn’t a good excuse!).
As to walking away at age 40…I would have 4 more years until I would be eligible for my 20 year retirement. At this stage, I have no desire to be a career officer. Would I trade 4 of the best years of my life for an extra $50,000 for the rest of my life? I don’t know yet. But I want to be in the position where I get to choose. With $1.2 million in the bank at age 40, I’ll be able to make the choice without having to worry about how I’ll feed the family for the next 60 years. It’s all about freedom and choice, something the military is not very good about giving you.
Thanks for the advice though, I do appreciate everyone’s input!
Remember, you can withdraw contributions from a Roth with no penalty and tax free at any time. This might help you plan better from age 40-60.
Good hunting!