Reader Case: Military Family Nearing FIRE

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Wanderer

The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.

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As FIRECracker recently mentioned, we’ve been dealing with seemingly back-to-back family emergencies lately. Everyone’s fine now, and as a result we’re going to try to get back into our “normal” rhythm of two articles a week.

So on that note, FRIDAY READER CASE TIME! Today’s email comes from the US of A, with a big-income-big-spending family coming from a rather unlikely field: The military!

Hello from the Southern USA!

Just finished “Quit Like a Millionaire” this weekend which led me to your blog. Been binge reading posts and saw the option to write you both. First I want to say thanks for the book. Several new ideas or deeper dives on older ideas in it that have me pondering our way forward.

We are married in our early 40s. I am a career military man and look to retire in 3 more years from the service. My pension will start immediately and be about $60k a year before taxes plus medical. We’ll be nearly FI but the timing won’t be ideal just yet to stop. At that time our oldest daughter will be just graduating high school. Our youngest daughter will be 3 years behind her.  I have talked to them (and will continue to) about options in life. Trade schools. Military. Community college. Etc. The oldest claims she wants to be an attorney like her father. While I’m honored she wants to follow my path, I have my worries. It’s not cheap. It goes against your POT rule! Heck we just paid off my student loans when I was 40!

I make $125k a year after taxes. My wife currently stays home with the kids making sure they’re doing their school work. We budget for all $125k annually (but $36000 a year or more goes into TSP/IRAs/brokerage accounts/savings).  In retirement I’m factoring in $8500 a month to live like I want once we stop funding the accounts.

We have no debts. None. It’s a great feeling.  We keep ours cars longer and avoid debt otherwise. We do not own a house though (another thing I loved about you two when I read the book). With our life the past 17+ years we move far too often. And being a long distance landlord has had no appeal…so no houses. We rent or live on base.

The only fixed assets we have are our vehicles and only one worth mentioning. A classic car I restored with my Dad.  All owned outright. My oldest gets my daily soon and I’ll buy me something newer with cash.

We have just over $400k in non-taxable accounts. Mostly VWENX (largely Roth IRAs) and TSP (mostly traditional but in a 2035 date fund). We try to maintain a 65/35 split (another thing I loved about your book).  We have another $150k in taxable accounts (Vanguard VWINX and VDIGX for the most part). And we maintain an emergency fund of $35k.  We also have $40k in 529s and also transferred by GI Bill to my kids. This should cover both their undergrads in a reasonable state school.

I plan to work after my military retirement for another 7 years (so 10 years from now), funding our accounts at the same levels we are now (@$3k a month) or more. I should be able to land a job that pays $80k or more plus the pension. I will then be 53 and plan to retire completely. Both kids out of the house and debt free. The house we will buy post military paid off. Are we missing anything? How much sooner could we get there? The youngest will be out of the house in 6 more years…ideally I’d like to stop then!

Thanks.

MilitaryFamily

People don’t typically go into the military for financial reasons, but for those that choose a career in the armed forces there are lots of tools that can really supercharge your journey towards FIRE. You have subsidized living expenses when you’re on base, tax-free earnings while deployed in a combat zone, excellent retirement plans in the form of the Thrift Savings Plan (or TSP), and oh yeah, a gold-plated military pension that you have access to after 20 years.

We’ve been actually getting a lot of questions lately about military families preparing to retire this year, and I couldn’t figure out why until it hit me: This year is 2021. Meaning 20 years ago was 2001. So the giant cohort of people who joined the military right after the 9/11 attacks are all hitting retirement age all at once.

Well, if any group of people have earned their right to a kickass retirement, it’s these people.

So without further ado, let’s dive into the numbers and MATH SHIT UP!

Current Reality

Our reader has made the extremely smart move to avoid buying a house during their time in the military. Even though they have access to VA loans that are lower interest than other people, military personnel move around so much that they don’t actually get to enjoy the property, and if you think being a landlord is a lot of work, try doing it remotely, halfway across the world, while being shot at. No fun.

While deployed, military personnel receive a Basic Allowance for Housing, or BAH, because the military loves their acronyms. The BAH is determined by where you’re deployed, the local rental market, your rank, and the number of dependents you have.

Interestingly, your BAH is not dependent on what you actually choose to rent, so on certain deployments if you can find housing cheaper than your allotted BAH, you can actually make money by living off base, paying the cheaper rent, and pocketing the difference. And on other deployments where you can’t find a good deal on housing, you can opt to live on-base. You don’t get your BAH, but you don’t have to pay rent either. It’s an interesting optimization problem that appeals to the narrow overlap of military people and spreadsheet nerds.

So it looks like our reader here has played that game pretty well, using either cheap rentals or on-base living to accumulate a respectable chunk of change. Now they’re approaching their retirement date, are eligible for a nice $60k DB pension, and they’re planning on working a few more years until 53. Is their plan on track for FIRE by that time?

To answer that question, let’s start by adding up their current financial assets. They have $400k in their retirement accounts, $150k in their taxable accounts and $35k in their emergency fund, for a total of $585k. The amount in their 529 we will ignore since that’s earmarked for their kids’ college tuition.

They have a post-retirement spending target of $8500 a month, or a whopping $102k a year! That means their FI target is a sky-high $102,000 x 25 = $2.55M!

If that sounds abnormally high to you, that’s because it is, but we have to remember that post-retirement, that military pension will be able to pay for a significant portion of that spending. Remember, after tax, that pension is worth about $50k, so we have to subtract that off their yearly spending to get the amount their portfolio will need to cover, which is $102k – $50k = $52k, for a new FI target of $1.3M.

So with these inputs, how does their pathway towards FIRE look?

9 years. But remember, their plan was to retire from the military after 3 years, then work for an additional 7, so their current plan’s timeframe is 10 years, which they are projected to beat with a year to spare!

Their Spending is Cray Cray

So while their current plan seems to be on track, our reader also asked us if there was anything they could do to speed this up, and the answer is obvious: Reign in their spending.

From a financial modelling perspective, MilitaryFamily’s spending is WTFH, or Way Too Fucking High (see? I can make up random acronyms too!).

Remember, that’s post-retirement spending when all the kids have left the house, so that $102k projected spending is just for the two of them.

Now, I get that our reader’s worked hard and might have more expensive taste in post-retirement toys. He’s mentioned he likes fixing up cars, for example. But for perspective, our current budget is still only $40k. That’s including rent, food, transportation, and travel. And oh yeah, that’s in Canadian dollars. That’s slightly over $30k USD. We could spend what we spend now, and buy a new Tesla Model 3 every single year, drive it off a cliff, and still not be anywhere close to $102k USD in spending. So clearly there’s some waste happening here.

Unfortunately, because our reader didn’t include a breakdown of their budget, we can’t comment on exactly where that waste is happening, but here’s a few interesting statistics.

The average US household budget is $63k, or 62% of MF’s annual spending. That’s an average across all US households, including families with dependents. It’s also more than double our spending.

But our reader doesn’t even need to get down to the US average. MF’s not going to retire from the military 3 years before he gets access to his pension. That would be stupid. So by the time he retires, he’ll have a $60k pre-tax, $50k post-tax income from his military pension, plus a retirement portfolio worth $811,353.96 (his ending balance at Year 3). That portfolio will support spending of $811,353.96 x 4% = $32,454.16. Add that to his pension and we’re talking retirement income of $82,454.16,.

So if he can get his spending down to $82,454.16 per year, which by the way is still nearly $20k more than the national average, he could fully retire once he leaves the military and not even bother with getting another job!

To Buy a House or Not

So our reader has plenty of options here, and on the surface it looks like their plan is pretty solid. The only thing that gives me pause is the following line:

The house we will buy post military paid off

That decision could make or break their FIRE plan. Which house will they buy? How much will it cost? And how will owning that house affect their monthly spending?

Making that choice wrong and overspending on a house could totally snatch defeat from the jaws of victory.

Unfortunately, because I don’t have full visibility into their budget and the types of houses they’d be looking to buy, I can’t do an exhaustive analysis of their options. But here’s an interesting data point.

If they can get their annual budget down to the national average after purchasing a house, and that should be doable since the average US household has to pay either a rent or a mortgage while this family won’t (since they’ll have a paid off house), their portfolio would only need to cover $63,000 (average US household budget) – $50,000 (pension) = $13,000 of spending.

That makes their new FI target $13,000 x 25 = $325,000.

And since they are projected to have $811,353.96 when MF retires from the military, that means he could spend $811,353.96 – $325,000 = $486,353.95 on a house (all-cash), and still be able to retire fully when he leaves the military.

However, if they don’t change their monthly spending, then no amount of house purchase makes sense. As it stands right now, they are currently projected to hit their FIRE target but there’s isn’t a lot of other slack in the budget for big expenses like a house. If our reader manages to land a job paying $80k as they’re expecting, that job plus the pension will be able to cover their living expenses and and have $36k left over every year, but after taxes it doesn’t leave anything left over for a housing fund.

Conclusion

So our reader has done a lot of things right, and they have a lot of good options to choose from, but they are at a crossroads.

They could either:

1. Continue on their current trajectory and retire in 9 years.
2. Bring their spending down to $82k and retire when they leave the military in 3 years
3. Buy a house for $486k, bring their spending down to the national average of $62k, and retire in 3 years

So that’s what the math tells us MF’s options are. What he actually does it up to him.

What would you do if you were in our reader’s position? Let’s hear it in the comments below!

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