Military member portfolio suggestions/2020 game plan review

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TSPballer
Posts: 13
Joined: Tue Oct 08, 2019 8:45 pm

Military member portfolio suggestions/2020 game plan review

Post by TSPballer »

Emergency funds: Covered

Debt: $112,000 left on mortgage @ 3.25%/$800 a month

Tax Filing Status: Single

Tax Rate: 22% Federal, 0% State (no state income tax on military earnings in AR)

State of Residence: AR

Age: 30

Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: 40% of stocks

Current portfolio = $190K ($37K cash)

Current retirement assets:

Taxable = $79,540
0% cash
100% individual equities (top 3 are AAPL, FB, V @ 35%, 22%, 13% of taxable portfolio)

Thrift Savings Plan = $56K ($19,100 Trad, $37,200 Roth)
55% C Fund
23% S Fund
22% I Fund

Roth IRA = $16,794
50% VEMAX ($8,397) @ .14% ER
50% VWIGX ($8,397) @ .45% ER

Contributions

New annual Contributions @ allocations listed above
$19,000 to Roth TSP without match (stayed on legacy retirement)
$6,000 to Roth IRA
Remainder of savings outside of EM to go into taxable @ 100% VTWAX @ .10% ER

Questions:

Hello fellow BHs! I just wanted to get a few sets of eyes on my game plan going into 2020.

About me: Full time 2d Lt in the Air National Guard. I've always been a saver/investor but recently found out I was doing it all "wrong" since discovering the BH method. Hence the heavy taxable account balance in individual equities. Although it's done well for me, I'll slowly be selling off those equities at pretty nice gains and move them into tax advantaged accounts.

The game plan moving forward in to be in a majority of low cost index and active funds with solid diversification. Being military, I'm having to work within the confines of the TSP. I'm looking at the following:

60/40 US to international

US TSM with tilt to SM/MC = 70/30 C Fund/S Fund

Total International with tilt to EM = 70/30 DM/EM (included VWIGX in DM)

Additional savings outside of retirement accounts will go into taxable @ 100% VTWAX for the sake of simplicity

Rationale: High level of job security allows me to take on a bit more risk. After a lot of reading, I like tilting to SM/MC and EM. I like the actively managed VWIGX simply because I don't have much knowledge of business worldwide. I have a high level of trust in VG and fully believe that they employ professionals far beyond my capabilities that may be able to find quality companies on the international stage. The fact that they can do this at a reasonable ER and with stellar past performance made this selection a no brainer for me.

Rationale behind all Roth everything is the fact that my income is artificially low in the eyes of Uncle Sam due to being in the military. Add in the fact that I pay $0 in state income tax makes it an easy decision for me at this time. I have a marriage on the horizon and we will likely use her accounts to take advantage of current year tax savings.

Edited to add: yearly income will be approx $75,000
ExitStageLeft
Posts: 1984
Joined: Sat Jan 20, 2018 4:02 pm

Re: Military member portfolio suggestions/2020 game plan review

Post by ExitStageLeft »

Looks like a solid plan. I'm pretty ignorant of Roth TSP options for military , but if your top federal bracket is 22% you're pretty much in that valley where there is no strong tax argument to go one way or the other. In that case go with what makes sense for other reasons.

I shifted away from a small cap tilt a few years ago when I became a Boglehead. Couldn't say if your strategy is better, but you're not that far off from total stock market anyhow. Keep saving like you are and you'll do great!
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Googliebear
Posts: 119
Joined: Fri Aug 24, 2018 10:20 pm
Location: Williamsburg, VA

Re: Military member portfolio suggestions/2020 game plan review

Post by Googliebear »

First, thank you for your service! Second, keep at it and your biggest financial problem in retirement is how much tax you'll be paying.

Here's a couple of thoughts:

Your taxable investments are certainly overweight for the size of your current portfolio. But you seem to be selling off those investments. You may already know the general rule of thumb of asset allocation, but in case you don't, the rule is to not have more than 4% of your investments in any one stock. I personally would keep some money in a taxable account just in case you would like to retire prior to 59 1/2, since you won't be able touch your Roth IRA's, TSP, or 401K's until after that age.

If for example you leave $80K in taxable, it should grow to about $500k by the time you turn 55 at an average 8% market return. If you happen to be married at 55 and tax law is as it is now (not likely), you could sell up to $78,750 ($39,375 if you remain single) and pay zero taxes on those sales which could fund a pretty good early retirement.

This strategy gives you options when you're older. I certainly wouldn't add to this bucket, but I wish I had invested more in a taxable account at your age for this very reason. If I had, I'd probably be retired by fifty.

Also, if you ever decide to separate from ANG and take some time off before rejoining the civilian work force, giving you a low income for the tax year you may consider doing a Roth Conversion at that time to roll your traditional TSP over to your Roth TSP as well as sell some of those taxable investments to reset your cost basis.

As for the other investment buckets, continue maxing out every Roth IRA, Roth TSP, Health Savings Account you can to safe guard your future wealth from future tax rates which most likely will be much higher for someone with as much wealth you're sure to have.

Lastly, if you can manage to get a majority of your wealth in tax free accounts (Roths, HSA's) making your taxable income in retirement extremely low you may not even have to pay any income taxes on you're social security. But, you will need to plan accordingly while your young as you are to make it happen. This may be a challenge if you remain single and receive a pension as a military retiree.

https://smartasset.com/retirement/is-so ... me-taxable
ExitStageLeft
Posts: 1984
Joined: Sat Jan 20, 2018 4:02 pm

Re: Military member portfolio suggestions/2020 game plan review

Post by ExitStageLeft »

Googliebear wrote: Fri Oct 25, 2019 8:20 pm ...
I personally would keep some money in a taxable account just in case you would like to retire prior to 59 1/2, since you won't be able touch your Roth IRA's, TSP, or 401K's until after that age.
Your point is well made, but for the TSP it is a little different in that the funds can be accessed if one separates from federal service at age 55.
https://www.fedweek.com/tsp/tsp-early-w ... alty-myth/
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Googliebear
Posts: 119
Joined: Fri Aug 24, 2018 10:20 pm
Location: Williamsburg, VA

Re: Military member portfolio suggestions/2020 game plan review

Post by Googliebear »

ExitStageLeft wrote: Fri Oct 25, 2019 8:42 pm
Googliebear wrote: Fri Oct 25, 2019 8:20 pm ...
I personally would keep some money in a taxable account just in case you would like to retire prior to 59 1/2, since you won't be able touch your Roth IRA's, TSP, or 401K's until after that age.
Your point is well made, but for the TSP it is a little different in that the funds can be accessed if one separates from federal service at age 55.
https://www.fedweek.com/tsp/tsp-early-w ... alty-myth/
:oops: Thanks for keeping me straight.
Fishing50
Posts: 498
Joined: Tue Sep 27, 2016 1:18 am

Re: Military member portfolio suggestions/2020 game plan review

Post by Fishing50 »

We're 2yrs from Fishing at 50, military retirement with a military pension and no need to work.
Here's a few comments that might help:

With reliable income and significant taxable assets, military members needs less emergency fund. Use credit card to pay for the emergency, and you have the option of diverting taxable investing to the credit card bill until the emergency bill is paid alleviating the need to sell assets to pay the bill. You can consider having taxable dividends paid in cash, which provides cash quarterly to pay bills or invest as the asset allocation dictates.

Use $6K of the cash for 2020 Roth IRA contribution on the first trading day in January.

Get the $30K cash invested in VTSAX (Total Stock Market) or VTIAX (Total Intl Stock Index) which are very tax efficient with favorable tax treatment of dividends, capital gains if necessary, and foreign tax credit. We'll probably keep a 6 figure holding in IWB (Russell 1000) forever because it is 2/3 capital gains, low expense ratio, and tax efficient. We take dividends in cash to spend or invest with other dividends for larger lot sizes.

Consider your all investment accounts as 100%.

Current portfolio = $190K
$79,540 is 42% taxable assets would be great in well diversified, low cost index funds, possibly held forever. We considered selling IWB a couple times in lifetime, but rather than paying capital gains we found cheaper options to buy a house and cars.

19% cash
16% C Fund
7% S Fund
6% I Fund
4% VEMAX ($8,397) @ .14% ER
4% VWIGX ($8,397) @ .45% ER

Your only 14% intl, and you desire 40%. Seems like you should buy VTIAX in taxable with the cash, and make 2020 Roth IRA contribution to Intl, and switch TSP contribution allocation to I Fund until you reach allocation. After you reach allocation, begin S Fund contributions to increase SC. At your age and balances, you can more easily use contributions to maintain allocation rather than TSP interfund transfer to rebalance. Keep EM/MC/SC tilts in tax advantaged accounts to avoid unexpected, taxable capital gains distributions.

Your contribution priorities are almost perfect:
1. $6,000 to Roth IRA because contributions can be withdrawan for any reason, if necessary.
2. $19,000 to Roth TSP without match (stayed on legacy retirement)
3. Remainder of savings into taxable. I recommend 2 separate funds instead of VTWAX total world index, so you can control US/Intl allocation as well as tax loss harvest.

Roth TSP is great at your age and tax bracket because military pension will fill the lowest tax brackets in retirement. Traditional TSP might be better when tax rates revert to previous rates in 2026.

Study tax loss harvest. For international we use, VTIAX, VFWAX (FTSE World, Ex-US), and VTGMX (Intl Developed markets). After 2018 tax loss harvest, we're stuck with positions in VTIAX and VTGMX. Our taxable investing was low this year due to a PCS move, so we were unable to tax loss harvest in 2019.
1yr from military pension. 80 equites / 20 bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. | Gone Fishing At 52yrs old!
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