There's a small, if growing, cultural movement in this country that goes by the acronym FIRE: Financially Independent, Retire Early. But these frugal folks may not be aware that there's long been a group of folks headed toward early retirements in the U.S. -- our career military members. Serve your 20 or more, and you can retire in your 40s or 50s with a pension of at least 40% of your highest salary. Combine that with judicious investing during your career, and you could wind up fairly comfortable.
Case in point -- this Motley Fool Answers' listener whose question popped up in January's mailbag. He's built up a healthy nest egg in various accounts over the years, but with a couple of years left before he leaves the service, he's wondering if there's a better way for him to deploy some of those assets. In this segment, hosts Alison Southwick and Robert Brokamp -- and special guest Sean Gates, a financial planner with Motley Fool Wealth Management, a sister company of The Motley Fool -- offer some advice.
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A full transcript follows the video.
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This video was recorded on Jan. 29, 2019.
Alison Southwick: Our next question comes from Rob. "I am 51 years old and about two years away from retirement. I am a single man, currently, with no dependents and I have been investing about 30% of my income. I have $300,000 in my tax-deferred thrift savings plan account, $400,000 in my Roth TSP, $150,000 in a Roth IRA, and $300,000 in my brokerage account.
"My TSP accounts are equally split among three index funds, CSI, and the brokerage account is split about 50-50 between index funds and a handful of individual stocks. I also expect my pension from the military will be approximately $4,000 per month and that my mortgage will be paid off in the next few years.
"What would you recommend I do with these funds upon retirement to maintain a healthy lifestyle, not extravagant by any means, that will allow me to travel occasionally, volunteer my skills and time for a cause, and still leave a healthy sum to charity, school, church, etc. when I die? How should I invest them? Should I combine the accounts? Am I on track for a healthy 30-plus year retirement?"
Sean Gates: Such a good question! You should also see a financial advisor. We're open at Motley Fool Wealth Management, a sister company of The Motley Fool. And actually my first response would be, "Man, I want to see your statements. You're single? Show me your statements, sir!"
Southwick: Sean, you are not single, so...
Robert Brokamp: But he's open-minded.
Gates: This touches on a number of things that I run into all the time and I would say the big piece that you're missing, that would help someone answer it, is how much you want to spend in retirement. You listed all of your assets. I don't know how much you're going to spend. If you want to spend $30,000 a year, you're probably fine. You can do whatever the hell you want.
Most people that I run into, especially people who have been following The Fool for a while, are in better shape than your average bear. Better to the standpoint of they actually could have a very healthy lifestyle on their goals, because their goals are usually modest. So without knowing much more about your situation, I'd say you're probably fine, but we could certainly get more into the weeds.
I would also say one of the things that I fear you've missed, as well, is your savings strategy seems a bit wonky. I'm presuming that you have a decent income and you probably made the calculus that you wanted to save after-tax to Roth money because that's the most tax-efficient growth that you can get. But you also find yourself at a young age with a military pension of being able to retire well with that sort of pension, and you also get to dictate your income in retirement before you turn on Social Security and before you turn on your RMDs.
And so it might make more sense to save pre-tax rather than Roth now, claim the immediate tax deduction that that affords you, and then start harvesting income in between the years that you retire and turn on your various income sources. Again, this is setting yourself up for the best success in retirement that people often forget to ask about.
Brokamp: He asked about what to do with the accounts, too. The TSP [the thrift savings plan] is basically a 401(k) for federal employees, and all their funds have these letters. He has the CSI. "C" is basically common stock in the S&P 500, "S" is small cap, "I" is international. It is an extremely low-cost, very efficient plan. For most people who are in the TSP, I don't see a reason to move out of that unless you want to be able to use some more of that money to buy individual stocks.
This addresses a lot of questions we receive when someone has left their employer and want to know what to do with their old 401(k). One, you even have a choice to leave it there, and sometimes you don't. They're going to kick you out, eventually, and it's better if you take the initiative to move it.
No. 2 is costs. We talked about the previous person with the horrible plan. You would definitely want to move out of that if you can.
And then No. 3 is options. Again, in the TSP you just have index funds and you might be perfectly happy with that, but if you want to have other options, you would move it out of the plan. For him it's probably fine to leave the money, but for other people who ask what to do with old 401(k)s, those are things to consider: costs, options, and other choices that you might want.
He also asked about a 30-year retirement, but he's planning to retire in his early 50s, so he really should plan on a 40-year retirement.
Gates: Absolutely. And one other thing we didn't touch on is the investment plan. Here, again, it's such a unique perspective because if you're in as good a shape as I think you are, one of the benefits of financial planning that people don't appreciate is that if we run the projection specific to your situation, it's very likely that you could choose what you want your investment plan to look like.
You could just stay in cash -- just raw cash earning you 2% -- and probably meet your financial goals, but you might die with less money than you would want. Or you could be very aggressive and die with a lot more money, but you open yourself up to near-term risk and how you handle that. You could choose anywhere along that spectrum, but it's up to you and what you value. Do you want to die with a lot of money or do you want to have a more luxurious life now and maybe be able to sleep better at night? These are just conversations that are worth having for a lot of folks that don't know where to turn.
Sean Gates is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The information provided is intended to be educational only, and should not be construed as individualized advice. For individualized advice, please consult a financial professional.
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