Friday, January 13, 2012

Retirement Planning

In the Army you are required to go to mandatory classes. The system is set up so that every soldier receives training. Whether or not you pay attention or gain any benefit from the training seems to be secondary to the fact that you were there. They are looking for numbers. Numbers are reported up the chain of command to satisfy a high ranking officer's excel spreadsheet.

A few months ago I was required to attend a class on personal finance. This was a one day, eight hour class covering topics such as insurance, credit cards, budgeting, loans, and of course investing (yay!). I had to drink caffeine to stay awake through most of it. I've had budgeting, credit cards, and insurance figured out for a long time. Those topics no longer interest me. These are the basics that need to be met before you can get into investing and retirement planning. When the sub-course on investing finally was presented it immediately piqued my interest.

Most of the training was focused on the TSP (Thrift Savings Plan) which is the military equivalent of a 401(k), however the instructor did cover stocks and bonds although very broadly. The instructor compared streams of retirement income to legs on a chair, which I thought was interesting. The more legs you have the sturdier your chair will be. If you only have one or two legs retirement could very well be wobbly. What happens if you lose one of those legs? If you have three it would make a stool. If you have 4 or more it will make a chair, the sturdiest, safest, and most comfortable.

My Retirement Chair:

Leg #1 Pension:  I expect to receive 50% base pay in retirement. The bad part is that my salary won't be very high, the good part is that I can start collecting at any age. No waiting for 65. This pension has yearly COLA adjustments. The pension is the main benefit of a military retirement and probably the only reason anybody would spend 20+ years in a thankless, physically demanding, and dangerous job largely spent away from home.

Leg #2 Stock/Bond Income:  My portfolio of stocks held in ROTH IRA and taxable accounts. Currently I only hold dividend stocks but would be open to bonds in the future. The goal here to increase my income stream while being tax efficient. I need to be able to beat inflation which is why my strategy is dividend growth. Compounding income at its finest.

Leg #3 TSP (Thrift Savings Plan):  The Federal government's version of a 401(k). I do not like the TSP, it only has 5 funds to choose from. 4 of them are broad index funds. The advantage is that the expense ratios are very very low. For example the C fund (S&P 500) is only .025%. SPY is .09% and it would be hard to find a public fund much lower. I'm ideologically opposed to mutual funds/ETF's, I only do the TSP because I get a match and it's tax deferred. I have my TSP parked in the G fund which will never lose principal and pays interest roughly equivalent to a 10 year treasury bond. I plan to roll this over to a traditional IRA when I exit the military. Actually I'd like to roll it over now, but cannot.

Leg #4 Social Security:  This is the leg that worries me the most. I'm paying into it so I better be able to collect. We'll see.

When I'm older I may get an inheritance from my family. I want to retire on my own without help so I don't think about it too much. If I had a normal job I'd be interested in owning a couple rental properties. Unfortunately I will be moving every 2-3 years. Real estate isn't feasible for me.

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