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NDAA FY2016 Changes to Military Retirement

zippy

Freedom!
pilot
Contributor
This could be great, think of all the people who hit 10 years, pick up Maj, LCDR, staff or CPO then generally suck for the next decade because if they leave they walk away with nothing. It may not solve the problem entirely but having some pocket money, (even just $50k-100k ) during transition may make leaving a better option than hanging around.

Everyone in now has that same option- without taking the pension reduction. 5% of your base pay each year isn't going to make or break your TSP balance, especially when you're more junior.
 

villanelle

Nihongo dame desu
Contributor
According to this "conventional wisdom", what would you invest in otherwise? Your risk profile is determined by your asset allocation (% stocks/bonds/cash), not the type of management (active or passive) you are employing.

FWIW, I've seen very little/no financial advice that would direct a retiree to invest in 100% treasuries/other fixed income. Given that a 65 year old retiree could easily live another 20-30 years, that's a great way to run out of money. 40-50% exposure to stocks is pretty common advice.

@Maxillarious: What you should say is be cautious of investing in ETFs that are exposed to commodities, futures, and other more exotic financial instruments. These are often thinly traded, hyper volatile, and poorly understood. Investing in widely traded (low bid/ask spread) stock and bond ETFs poses no additional risk over mutual funds investing in the same stocks and bonds. For a long term investor, there is no functional difference between VTSAX and VTI (both Vanguard Total Stock Market).

It's pretty common advice (your age as a % allocation in bonds is the other standard, which I think makes more sense as it takes in to account age), but it doesn't account for having an inflation-adjusted pension. That can take the place of much of the bond portion of a portfolio because it more or less serves the same purpose.

Husband and I are planning for a 4% withdraw rate, which is all-but infallible (see FIREcalc and CFIRESim) historically. But we are also planning on staying heaving in stocks (mutual funds) rather than moving much to bonds (assuming he makes it to 20) because of the guaranteed income with a built-in inflation hedge. In fact, when he hits sanctuary, I'll likely move some of the money we have in bonds back to REITs and mutual funds, so that our portfolio is more aggressive, not less. I doubt we'll go above 20% bonds at any point after that.
 

Spekkio

He bowls overhand.
The 4% rule, if you keep money in stocks, results in 1 out of 20 people outliving their retirement funds. That's hardly infallible. Hence the advent of the '3% is the new 4%' rule - sure, go ahead and take more risk to stretch out your fund and hedge by living on less withdrawn per year.

Also, the recommendation to keep some of the money in stocks during retirement (I have never seen a recommendation as high as 50%, though, closer to 25-33%) is based on a need (or desire) to still grow the fund. But it carries risk with it as mentioned. I take the military pension in a different light, that is there is no reason to take a risk with that money at that age.
 
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BPeterson93

Soon to be Naval Aviator
This thread has taken a turn towards discussions on appropriate investment procedures, etc.

Any advice on where to start better educating myself? It's like reading another language right now.
 

webmaster

The Grass is Greener!
pilot
Site Admin
Contributor
I guess I am fairly skeptical about the future financial prospects, we have an economy limping along, and a deficit that is about to go vertical based upon our debt and entitlement commitments (debt payments, pensions, healthcare, SS, infrastructure, et al). CBO projects look grim if you take out overly optimistic GDP increases, and then look abysmal if our country credit rating gets downgraded (though honestly if we fall the world economy goes too, so I don't know if that will really happen). Regardless, I wonder what is going to happen when the government is looking for a way to fill their shortfalls they have created by withdrawing money from SS and committing more money than we are capable of supporting on welfare and entitlement programs that have expanded beyond any reasonable mandate. I personally think that if SS is solvent by the time any of us are around to take money from it, well, we will be means tested out of it (so much for all that money I have donated to the group "cause"). The next big pot of money would be 401ks and savings, other countries have already raided those of their citizens, makes me question having a completely 100% retirement plan that relies money in that bank that can be easily taxed and "borrowed". At the very least I would not be surprised if a change in the tax rules for Roth and 401ks doesn't happen in the next few years that benefits the government and lets them tap some of that wealth. Hopefully I am wrong, but the other solution, getting control of our spending and paying down the debt, well, I have very little faith in either party being able to do that.
 

Spekkio

He bowls overhand.
At the very least I would not be surprised if a change in the tax rules for Roth and 401ks doesn't happen in the next few years that benefits the government and lets them tap some of that wealth. Hopefully I am wrong, but the other solution, getting control of our spending and paying down the debt, well, I have very little faith in either party being able to do that.
The Obama administration already floated this with 529 plans (which function similarly to a Roth IRA when used for college expenses). They were going to start taxing withdrawals because only 'rich' people contributed to these plans. It was, thankfully, met with fierce opposition and Obama quietly gave up on it.
 

webmaster

The Grass is Greener!
pilot
Site Admin
Contributor
The Obama administration already floated this with 529 plans (which function similarly to a Roth IRA when used for college expenses). They were going to start taxing withdrawals because only 'rich' people contributed to these plans. It was, thankfully, met with fierce opposition and Obama quietly gave up on it.
Oh, they all keep cropping up thanks to all the "bright idea fairies" in congress, on committees and "think tanks" that don't attack the problem (rampant spending and entitlements) but rather look for ways to increase revenue streams through taxation. At some point these hodge podge efforts and borrowing aren't going to cover our country's fiscal shortfalls with the way we run our broken budgeting system (in my view both parties are at fault for this). Hopefully we can tighten the belt and get realistic before going off the fiscal cliff... Who knows.
 

Spekkio

He bowls overhand.
According to this "conventional wisdom", what would you invest in otherwise? Your risk profile is determined by your asset allocation (% stocks/bonds/cash), not the type of management (active or passive) you are employing.
I wasn't speaking about anything active/passive, not sure what you're getting at there. The 'conventional wisdom' was to have most if not all of your assets in bond and treasuries upon retirement. Of course now we have lots of people retiring with meager 401(k) savings, so the advice on the web has shifted to take more risk.

However, as I replied to Villanelle, I don't see much of a reason for a mil retiree with a pension, even at 40%, to have to take this risk. If you leave half your money in stocks and 2008 happens again (which it will at some point), you will lose 25% of your retirement fund. Gone. Poof.

Moreover, keeping a mil retiree's money in an asset that is virtually guaranteed to keep up with inflation allows the retiree to withdraw 6% of his funds per year, thus increasing his annual income. Yes, that means the fund will run out by 80, but your pension won't. Use the time to pay off the house, car, etc. and $20-$22k in mil retirement (enlisted) + SS should be enough to live on past 80, let alone O-5 retirement.
 
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villanelle

Nihongo dame desu
Contributor
Play around with the FIRE calculators online, and you'll find that in most cases, 4% SWR works out. Of course most people won't be 100% securities. Also, most rational people are going to cut back a bit in a 2008 type year, which builds in an extra level of protection. I'm not planning or a bare bones, ramen dinner retirement. So if it's a bad year, I skip the 2 weeks in Europe and don't withdraw a full 4%.

To me, working far longer than necessary is a much bigger risk than having to make some adjustments on the fly in bad years. Without the pension, we'd stay heavily in bonds, but with it, I'd estimate we'll stay about about 15%.

BPeterson, check out the Mr Money Mustache blog and boards. It can be a bit cult-y at times, but there is a ton of solid information about how we can all likely retire with far, far less than the experts (who make money when we keep investing) would have us believe.
 

KTBQ

Naval Radiator
pilot
I wasn't speaking about anything active/passive, not sure what you're getting at there. The 'conventional wisdom' was to have most if not all of your assets in bond and treasuries upon retirement. Of course now we have lots of people retiring with meager 401(k) savings, so the advice on the web has shifted to take more risk.

However, as I replied to Villanelle, I don't see much of a reason for a mil retiree with a pension, even at 40%, to have to take this risk. If you leave half your money in stocks and 2008 happens again (which it will at some point), you will lose 25% of your retirement fund. Gone. Poof.

Moreover, keeping a mil retiree's money in an asset that is virtually guaranteed to keep up with inflation allows the retiree to withdraw 6% of his funds per year, thus increasing his annual income. Yes, that means the fund will run out by 80, but your pension won't. Use the time to pay off the house, car, etc. and $20-$22k in mil retirement (enlisted) + SS should be enough to live on, let alone O-5 retirement.

A long term investor (retirees are long term investors) with a diversified portfolio that didn't panic and bail in 2008 was made whole again and then plenty more in the subsequent stock market boom of the last 6 years. This has pretty much been the case throughout the history of the stock market. It goes down, it comes back up. Over long periods of time, it's almost always an upward trend. As @villanelle pointed out, a 40-50% (or even more maybe?) allocation to a stock index fund is a prudent risk to take for someone with an inflation hedged pension. 25% drop? No biggie, ride it out. A 100% allocation to XX year treasuries is a recipe for inflation to eat your portfolio up as you draw it down, leaving you dependent on Uncle Sugar for that pension check to survive. Bad plan. Only TIPS are guaranteed to keep up with inflation.
 

Spekkio

He bowls overhand.
Play around with the FIRE calculators online, and you'll find that in most cases, 4% SWR works out. Of course most people won't be 100% securities. Also, most rational people are going to cut back a bit in a 2008 type year, which builds in an extra level of protection. I'm not planning or a bare bones, ramen dinner retirement. So if it's a bad year, I skip the 2 weeks in Europe and don't withdraw a full 4%.

I did and I am telling you that 95%, while I agree is "most," is not "virtually foolproof." A 1 in 20 chance of going broke is a big gamble to take. So the solution is to withdraw 3% instead...great, so reduce your standard of living in retirement to compensate for risk.

Now yes, in your case with O5 retirement you don't need the TSP, so if it goes broke you are fine. If it takes a hit you can ride it out. You are playing with house money. An E7 retiree on 40% base pay is not, nor is someone whose sole income is from retirement accounts. If they take a hit they have to withdraw money to live, and they'll never recouperate. Besides, what if it's not 2008, what if it's 2001-2003 with 3 years of double digit losses?

A long term investor (retirees are long term investors) with a diversified portfolio that didn't panic and bail in 2008 was made whole again and then plenty more in the subsequent stock market boom of the last 6 years. This has pretty much been the case throughout the history of the stock market. It goes down, it comes back up. Over long periods of time, it's almost always an upward trend. As @villanelle pointed out, a 40-50% (or even more maybe?) allocation to a stock index fund is a prudent risk to take for someone with an inflation hedged pension. 25% drop? No biggie, ride it out. A 100% allocation to XX year treasuries is a recipe for inflation to eat your portfolio up as you draw it down, leaving you dependent on Uncle Sugar for that pension check to survive. Bad plan. Only TIPS are guaranteed to keep up with inflation.
When you are withdrawing 4% a year, it will take far longer to 'ride out' a year like 08. Not only that, there could be multiple years of stagnant growth. You are understating the risk of a retiree leaving that much exposure to stocks. The stock market doesn't have a linear trend, and all these calculators that use average growth rates lull people into a false sense of security. As I mentioned several posts ago, 100x.9x1.24 =/= 100x1.07x1.07, and this disparity gets worse when you are withdrawing the money to live.

In fact, since you made me look it up, the new wisdom is to shift bond heavy early in retirement and back to stocks over time to hedge against this very phenomenon.
 

villanelle

Nihongo dame desu
Contributor
I wasn't saying that with any allocation 4% is foolproof. No one should have 100% securities, unless they have some other factor at play. A COL-adjusted pension counts as that other factor.

A 4% SWR still has a zero failure rate in any period in modern history, with appropriate allocation (which would *not* be 100% securities, barring Something Else at play) . If you don't think 4% is safe, that means you not only think that the period in which you are retired will be worse than average, but worse than anything that has ever happened in modern history.

I don't think I'm understating anything, as I've said quite clearly that the only reason I'd consider 4% on a largely stock portfolio is if we have a large COL-adjusted pension. With a regular pension or when retiring on investment accounts, it would be very stupid.

For a 30 year retirement, starting *any* year since 1926, a 4% SWR would have been successful (again, not based on 100/0 asset allocation, since I'd never suggest that for most people). Many years, it would have been wildly low--sometimes by half-- but never would it have not worked. Sure, it doesn't include 2008 because we don't have 30 years of data to see. But it does include some other pretty bad years to retire, like 1929, given sequence of return considerations. And it still worked every. single. time. And that's without any adjustments like skipping the Grand Tour in 1930 when things weren't looking so great.

SWR-by-year.jpg
 
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