PSA - things I should have done....

[DanMa1156]

They also made us take a mandatory training trying to entice people to go into BRS with phony data that assumed your TSP would grow by 7% annually for 20 straight years with no economic downturns.

I’m in the 20-or-bust club.

1. I think we've established in this thread that 7% growth is a pretty conservative estimate.
2. On the other side of the coin on that same training (and the BRS calculator) is that it shows your pension going up in value annually so the spread between the two gets worse over time. In reality, it's tied to an inflationary statistic and is designed to maintain the same spending power. In the same chart, it showed your investments remaining static after retirement, which is also false. The only thing that goes away is the contributions, but the actual number in the TSP will continue to grow.

 

[Spekkio]

The 7% percent my financial advisor uses is just growth of your money but then he gives you a table that has what your projected money is per year both in today’s dollars and adjusted for historic inflation.

The table includes a set planned monthly withdrawal after your retirement. But the withdrawal figure also takes in account other retirement income you have. In my case, he plans on me having $20,000/month “income”. He has figured out my monthly projected military retirement and social security income and figured I’ll need about $14,000/month from my investments. Everything is in both today’s dollars and adjusted for historical inflation and military/social security yearly increases. So the $20,000/month “income” is also adjusted for inflation. He also includes large planned expenses. For instance I have a planned $600,000 one time expense in 2027 (first year of my retirement) for a retirement house purchase in addition to my planned monthly withdrawal.

At 7% growth, I’m projected to be increasing the value of my investments yearly with the growth exceeding my withdrawals until my death or 120 years old whichever comes first.

My 13% annual average return is based on average risk portfolio. If I had him investing at moderate or high risk, I’d have a higher annual average return. But average risk more than meets my future needs.

Based on your other posts saying that you have an income north of $300,000 annually and you are planning on a cash lump sum purchase of over $600,000 in 2027, I think that your financial profile and net worth can accept more risk than the vast majority of Americans.

Just a hunch.

 

[Spekkio]

The 7% doesn’t become BS because it doesn’t match up with your age or willingness to take risks. Your initial argument was about TSP performance during a 20 year military career. That leaves plenty of time to ride the next wave up and reallocate.

That wasn't my initial argument at all. What I said was: to get a middle class income from TSP at 59.5, you have to max contributions for 20 years assuming a 7% return from now until then. And then I said it was BS to assume that return during the last 10-15 years of the fund because other than Hal's financial advisor, there are scores of books and articles advising a risk allocation of primarily bonds as you get near retirement (the L funds do this for you automatically). You need to keep a 100% stock allocation to keep the long term average 7% returns, which incurs short term risk.

My main argument, though, is that there are other things to consider besides maximizing the number in a retirement account.

If I retire at 20 YCS, I won't make enough money to support my family of 5 with 3 teenagers, let alone afford anything beyond necessities. If I max out my retirement each year, I'll make 6 figures in my 70s when I don't need it, but be forced to work in my 40s, 50s, and 60s.

However, if I have a house paid off with all the renovations done, cars paid off, and money stashed away in a 529 for my kids, I can afford to support a family of 5 on 20-25 year retirement. The $20k I'm paying a bank each year matters. Then I can work jobs I want to work instead of jobs I have to work for the next 20 years because all my necessities and perks are bought and paid for.

In other words, expenses not incurred is the same as money earned.

I fully understand that does mean that I won't have a 6-figure income in my 70s, and that the monetary difference between these two strategies is about $300-400k spread over 25 years (assuming I live to 85). To me it's having the money when I need it, not maximizing the number.

 

[Spekkio]

1. I think we've established in this thread that 7% growth is a pretty conservative estimate...

Where are you getting your numbers?

Average Stock Market Return | Wealthsimple

The average stock return can be measured over a number of different time periods and by looking at several market benchmarks such as the S&P 500 indexand the Dow Jones Industrial Average). Find out more below.

www.wealthsimple.com

Adjusted for inflation, the S&P has returned 5.9% average annual returns over the last 20 years. It's returned 5.8% if you go back to 1966.

 

[DanMa1156]

Where are you getting your numbers?

Average Stock Market Return | Wealthsimple

The average stock return can be measured over a number of different time periods and by looking at several market benchmarks such as the S&P 500 indexand the Dow Jones Industrial Average). Find out more below.

www.wealthsimple.com

Adjusted for inflation, the S&P has returned 5.9% average annual returns over the last 20 years. It's returned 5.8% if you go back to 1966.

In a previous post I stated my data set from the S&P 500 from 1915 to 2015. From 1915 to today, with dividends it would have netted 10.24%. Accounted for inflation, that's 6.90%. I've never met a financial advisor who is quoting inflation adjusted returns, nor have I ever met a real estate investor who does either. I'd also contend that accounting for inflation over that large period of time is semi-flawed as the Federal Reserve has gotten SIGNIFICANTLY better at controlling inflation.

 

[HAL Pilot]

Based on your other posts saying that you have an income north of $300,000 annually and you are planning on a cash lump sum purchase of over $600,000 in 2027, I think that your financial profile and net worth can accept more risk than the vast majority of Americans.

True. But this started off with you rejecting the 7% annual growth figure for TSP. 7% is the historic average growth and is actually a conservative figure. It doesn't change with how much you invest or your ability to accept risk. Because....you know....history.....

 

[IwannabeaPHROGdvr69]

I’m trying to find the financial plan where I max my TSP, have an RV-8, and have property on the central coast of California ?

 

[villanelle]

Property tax is always rolled into the mortgage as an escrow. You're making up false numbers here. Renting a 3 or 4 BR single family usually means you're paying someone else's mortgage payments, including property taxes, plus some on the top to actually give them income.


Here's what you're missing: the money I've paid towards my mortgage principal can be recouped. And interest rates are so low that a mortgage on good credit is almost equal to inflation, so this is as close to a 'free loan' (0% APR purchases on cars notwithstanding) as you can get on an asset that you can reasonably expect to appreciate with inflation if you take care of it.

The money I pay in rent, however, is money flushed down the toilet. It's gone, forever.

DIY home improvement projects usually net positive cash value on resale. Yea, if you are going to hire a contractor for every little thing it gets expensive. Also gotta learn how to replace toilets, vanities, repair appliances, etc. Good thing it's the 21st century and YouTube exists. Most of these repairs take 1-2 hours and would run over $300 to have someone else do it. The larger projects can run thousands but taking a weekend to do arts and crafts yourself pays off and personally is rewarding.

Which is why it takes somewhere between 5-7 years to break even with all the other stuff you mentioned. There are several online calculators to help with this decision.

It most certainly is not. In nearly 20 years of owning a home, our property tax has never been escrowed. I don't want to give the bank a free loan for that money, even if it only earns me $3.28 in interest.

And no, renting a home doesn't mean you are paying someone else's payments. (And even if you are, assuming by "payments" you means P+I and property taxes, that doesn't cover maintenance, insurance, and other costs, plus vacanacy time and probably a PM, if we are talking about making it into an rental property). Where I live (a VHCOLA area, admitedly), a $1m home probably rents for about $4000. A $1m mortgage has a payment of about $4300 (30 year, 3.25%). so already, renting is better. And that's before any property taxes, insurance, maintenance, or anything else. That's JUST the mortgage.

And let's not forget that while yes, rent is money flushed, so too is interest. And for the first few years, nearly all of that payment is interest, so you are flushing a lot of cash there. And since your monthly expenses are more, you are flushing property taxes, insurance, etc. While the renter is investing his $300mo difference, plus ~$300/mo he isn't paying in property taxes (probably a low to very low estimate!) and another $400 he isn't paying toward maintenance. So he's got $1000 a month going into VTSAX, while the person who buys that property has paid down about $20,000. Not a huge difference (though I didn't address HOA if applicable, and insurance differences), but our renter comes out ahead. BUT, we are talking about investment properties. So we need to add in $2000/yr for a very optimistic vacancy (2 week turnaround) and $4800 for a property manager.

So yeah, buying that house ends up costing a lot more than renting it. And no, those aren't made up numbers. That's my neighborhood. In San Diego, the house we own (because we were suckers who bought into the "owning rental properties is the path to wealth!" mantra and didn't sell when we moved) rents for about $3000/mo and would sell for about $600,000-625,000 (or a $2600-2700 mortgage payment, P+I only) and probably close to $600/mo in property taxes (we pay nearly that and prop 13 keeps our taxes lower than they would be for a new buyer, so again, that's a low estimate). So before a PM's fees, insurance, HOA, and maintenance, for a new investor, the renter has $1000 more in his pocket each month than his landlord.

And I don't think most people can DIY a new roof or refrigerator. And if they have the kind of job that moves them away from the home they own, they can't DIY the running toilet or the vanity replacement or anything at all.

 

[IKE]

It most certainly is not. In nearly 20 years of owning a home, our property tax has never been escrowed. I don't want to give the bank a free loan for that money, even if it only earns me $3.28 in interest.

And no, renting a home doesn't mean you are paying someone else's payments. (And even if you are, assuming by "payments" you means P+I and property taxes, that doesn't cover maintenance, insurance, and other costs, plus vacanacy time and probably a PM, if we are talking about making it into an rental property). Where I live (a VHCOLA area, admitedly), a $1m home probably rents for about $4000. A $1m mortgage has a payment of about $4300 (30 year, 3.25%). so already, renting is better. And that's before any property taxes, insurance, maintenance, or anything else. That's JUST the mortgage.

And let's not forget that while yes, rent is money flushed, so too is interest. And for the first few years, nearly all of that payment is interest, so you are flushing a lot of cash there. And since your monthly expenses are more, you are flushing property taxes, insurance, etc. While the renter is investing his $300mo difference, plus ~$300/mo he isn't paying in property taxes (probably a low to very low estimate!) and another $400 he isn't paying toward maintenance. So he's got $1000 a month going into VTSAX, while the person who buys that property has paid down about $20,000. Not a huge difference (though I didn't address HOA if applicable, and insurance differences), but our renter comes out ahead. BUT, we are talking about investment properties. So we need to add in $2000/yr for a very optimistic vacancy (2 week turnaround) and $4800 for a property manager.

So yeah, buying that house ends up costing a lot more than renting it. And no, those aren't made up numbers. That's my neighborhood. In San Diego, the house we own (because we were suckers who bought into the "owning rental properties is the path to wealth!" mantra and didn't sell when we moved) rents for about $3000/mo and would sell for about $600,000-625,000 (or a $2600-2700 mortgage payment, P+I only) and probably close to $600/mo in property taxes (we pay nearly that and prop 13 keeps our taxes lower than they would be for a new buyer, so again, that's a low estimate). So before a PM's fees, insurance, HOA, and maintenance, for a new investor, the renter has $1000 more in his pocket each month than his landlord.

And I don't think most people can DIY a new roof or refrigerator. And if they have the kind of job that moves them away from the home they own, they can't DIY the running toilet or the vanity replacement or anything at all.

Can't like this enough. There's no replacement for actually doing the math, in the right context (location, family size, etc.) I can't tell you how many people say things like "rent is flushing money down the toilet" or "after 20 you're working for half your pay," and it's just an empty adage.

 

[Spekkio]

It most certainly is not. In nearly 20 years of owning a home, our property tax has never been escrowed. I don't want to give the bank a free loan for that money, even if it only earns me $3.28 in interest.

And no, renting a home doesn't mean you are paying someone else's payments. (And even if you are, assuming by "payments" you means P+I and property taxes, that doesn't cover maintenance, insurance, and other costs, plus vacanacy time and probably a PM, if we are talking about making it into an rental property). Where I live (a VHCOLA area, admitedly), a $1m home probably rents for about $4000. A $1m mortgage has a payment of about $4300 (30 year, 3.25%). so already, renting is better. And that's before any property taxes, insurance, maintenance, or anything else. That's JUST the mortgage.

And let's not forget that while yes, rent is money flushed, so too is interest. And for the first few years, nearly all of that payment is interest, so you are flushing a lot of cash there. And since your monthly expenses are more, you are flushing property taxes, insurance, etc. While the renter is investing his $300mo difference, plus ~$300/mo he isn't paying in property taxes (probably a low to very low estimate!) and another $400 he isn't paying toward maintenance. So he's got $1000 a month going into VTSAX, while the person who buys that property has paid down about $20,000. Not a huge difference (though I didn't address HOA if applicable, and insurance differences), but our renter comes out ahead. BUT, we are talking about investment properties. So we need to add in $2000/yr for a very optimistic vacancy (2 week turnaround) and $4800 for a property manager.

So yeah, buying that house ends up costing a lot more than renting it. And no, those aren't made up numbers. That's my neighborhood. In San Diego, the house we own (because we were suckers who bought into the "owning rental properties is the path to wealth!" mantra and didn't sell when we moved) rents for about $3000/mo and would sell for about $600,000-625,000 (or a $2600-2700 mortgage payment, P+I only) and probably close to $600/mo in property taxes (we pay nearly that and prop 13 keeps our taxes lower than they would be for a new buyer, so again, that's a low estimate). So before a PM's fees, insurance, HOA, and maintenance, for a new investor, the renter has $1000 more in his pocket each month than his landlord.

And I don't think most people can DIY a new roof or refrigerator. And if they have the kind of job that moves them away from the home they own, they can't DIY the running toilet or the vanity replacement or anything at all.

You keep going back to investment properties. I'm not even talking about that. I'm talking about the fact that renting an equivalent place that I own for 40 years would cost $1.2M. Buying the place and paying it off in 10 years, including maintenance, interest, taxes, and principal costs $500k, and property tax thereafter costs $180k. I can recuperate about $350k of it if I sell.

Renting would literally cost me almost a million dollars.

I got it that you and your husband can rent a 1BR on the cheap for the rest of your lives and probably come out on top. The equation changes with children.

 

[Spekkio]

In a previous post I stated my data set from the S&P 500 from 1915 to 2015. From 1915 to today, with dividends it would have netted 10.24%. Accounted for inflation, that's 6.90%. I've never met a financial advisor who is quoting inflation adjusted returns, nor have I ever met a real estate investor who does either. I'd also contend that accounting for inflation over that large period of time is semi-flawed as the Federal Reserve has gotten SIGNIFICANTLY better at controlling inflation.

I would argue that quoting returns from 1915 is completely irrelevant to anyone on this board.

Additionally, I don't dispute your personal claim, but if we're talking long term investments it would be very silly not to factor in the time value of money.

 

[villanelle]

You keep going back to investment properties. I'm not even talking about that. I'm talking about the fact that renting an equivalent place that I own for 40 years would cost $1.2M. Buying the place and paying it off in 10 years, including maintenance, interest, taxes, and principal costs $500k, and property tax thereafter costs $180k. I can recuperate about $350k of it if I sell.

Renting would literally cost me almost a million dollars.

I got it that you and your husband can rent a 1BR on the cheap for the rest of your lives and probably come out on top. The equation changes with children.

Okay. I think those numbers still show that unless maybe you are buying a house you will live in for 10+ years, renting is likely better.

But the reason I keep going back to rental properties is that this thread is about investments, and I believe the original comment to which I responded was about owning properties in various places, which by definition kind of means they aren't primary residences. So I'm basically talking about owning properties one rents out, either after living in them for a few years and then moving away, or buying them specifically as rentals.

Oh, and I mention a $1m property, renting for about $4000 and you call that a 1 bedroom, rented for cheap? Um...??? :lol We don't live like paupers or ensigns. We live in homes large enough for a family with kids, with plenty of kid families as our neighbors. And no, the equation doesn't change with children, or with family homes. Math is math. And this math is almost always scalable, because rents change with size just as mortgages do. If a studio apartment rents for $1000 and costs $$250,000, the relationship between the numbers is nearly identical to that $4000/$1m place. That's how math works. But, again, $1m/$4000 for a 1br "on the cheap"? Bwahahahahahaha!

When you run the numbers in most markets in the US, renting is better when you take into account ALL costs associated with owning, and you plan to invest the difference. I'm sorry you don't like that. But I gave two very specific examples in my post, with specific numbers. You have some vague lump sums so no one else can run the numbers. (And of course there's the fact that very, very few people pay off a house in 10 years.)

As for your numbers, since you didn't give specifics I can't really comment on most of it, but you don't calculate the opportunity costs of not having the difference invested monthly in the market for those 40 years, starting with the first investment in month one.

 

[Jim123]

I'd counter that when you rent you are paying municipal taxes (and HOA fees, upkeep, etc.) but in the sense that whatever number you write on the rent check each month is based on supply and demand. If you were the owner-resident in the same dwelling, then each of those costs (as well as the mortgage payment) is also driven by supply and demand.

All of those factors go into the invisible gonkulator of the marketplace that the invisible hand of the marketplace uses to figure out... what you pay for rent, and whether it's a better deal for the landlord or for the tenant.

(All the other details we're discussing back and forth, those things can definitely skew that calculation too.)

 

[Spekkio]

Okay. I think those numbers still show that unless maybe you are buying a house you will live in for 10+ years, renting is likely better.

But the reason I keep going back to rental properties is that this thread is about investments, and I believe the original comment to which I responded was about owning properties in various places, which by definition kind of means they aren't primary residences. So I'm basically talking about owning properties one rents out, either after living in them for a few years and then moving away, or buying them specifically as rentals.

Oh, and I mention a $1m property, renting for about $4000 and you call that a 1 bedroom, rented for cheap? Um...??? :lol We don't live like paupers or ensigns. We live in homes large enough for a family with kids, with plenty of kid families as our neighbors. And no, the equation doesn't change with children, or with family homes. Math is math. And this math is almost always scalable, because rents change with size just as mortgages do. If a studio apartment rents for $1000 and costs $$250,000, the relationship between the numbers is nearly identical to that $4000/$1m place. That's how math works. But, again, $1m/$4000 for a 1br "on the cheap"? Bwahahahahahaha!

When you run the numbers in most markets in the US, renting is better when you take into account ALL costs associated with owning, and you plan to invest the difference. I'm sorry you don't like that. But I gave two very specific examples in my post, with specific numbers. You have some vague lump sums so no one else can run the numbers. (And of course there's the fact that very, very few people pay off a house in 10 years.)

As for your numbers, since you didn't give specifics I can't really comment on most of it, but you don't calculate the opportunity costs of not having the difference invested monthly in the market for those 40 years, starting with the first investment in month one.

I will reiterate that there are several online calculators for this, and even without aggressively paying down the principal the crossover point is 5-7 years.

You're ignoring that property appreciates with inflation. A $300k home purchased in 2010 is worth $400k today, which equates to $80k of equity profit on a $60k down payment making the minimum monthly payments (133% ROI).

Housing is a basic need. I was up front about that two pages ago. I don't care about your real estate tycoon drama, and no one intelligent calls their primary residence an 'investment.' We're talking about which option cost less.

 

[Pags]

I will reiterate that there are several online calculators for this, and even without aggressively paying down the principal the crossover point is 5-7 years.

You're ignoring that property appreciates with inflation. A $300k home purchased in 2010 is worth $400k today, which equates to $80k of equity profit on a $60k down payment making the minimum monthly payments (133% ROI).

Housing is a basic need. I was up front about that two pages ago. I don't care about your real estate tycoon drama, and no one intelligent calls their primary residence an 'investment.' We're talking about which option cost less.

So wait, you're willing to say "7% ROI on sticks" is bunk in one breath but then basically say that house value will always go up? Plenty of people got pinched hard by that in '08.

Also, I find it interesting that one of the assumptions your argument is based on is "pay off a home in 10yrs." That's not something most people do unless their home is their only investment, they bought WELL within their means, or they got super lucky and bought before an area blew up. It's also a hard thing to do if you're not homesteading somewhere. It's much easier to do if you buy a place and then love in it for 30yrs.