Investing

[othromas]

Brett has a great point--it's a lot easier to max out IRAs than the TSP, especially if you have two of them.

One thing to consider, though, is after you get your IRAs maxed out, your wife gets matching funds in the TSP since she's a federal employee (I'm assuming she's a civilian here--if not, ignore me), which military folks don't get.

So I would say my next step would be to weigh the pros and cons of funding her TSP first, after you get done maxing out the IRAs. The pro is every dollar you throw at hers gets your another dollar for free. The con is that if you don't balance your funding of both TSPs, she'll end up with a much larger TSP, which might cause some conflict.

Just some food for thought.

Edit: Just saw your new post. As soon as I get a little more money together I'm going to go with the Vanguard U.S. Total Market Fund (might not be exactly the right name) on the recommendation of Larry Swedroe, the author of the book I mentioned earlier in this thread. After that I'm going with Vanguard's International Total Market Fund, and those two will likely be the core of my IRA.

 

[64gunpilot]

Other than the lower cap figure, is there another benefit to choosing to max out the IRAs first? Seems like the larger amounts would grow faster? Like I said, I know nothing!

 

[othromas]

Someone please correct me if I'm off base here, but this is the way I see it. Based on the workings of the two retirement vehicles (IRA and TSP), different things happen when we retire and start pulling money out. Traditional IRAs and 401(k)s (and 403(b)s, like the TSP) are tax deferred--no tax on any interest, dividends, or anything you make off of having your capital in the retirement account while they are in the account. Also, you tell the IRS that you're investing in a traditional IRA and/or a 401(k) / 403(b), etc., and they reduce your taxable income by the amount you put in the account, lowering the amount of taxes you pay now. However, when you take money out of the traditional IRA and the TSP, it is taxed just as if the distribution came from a paycheck from a job, not at any lower capital gains rate.

This kind of sucks since most of us are hopefully going to be in a higher tax bracket in the future rather than now. Therefore, it makes more sense to go with a Roth IRA, because while your contributions do not reduce the amount of taxable income (no reduction in taxes in the present), you never pay taxes on interest, dividends, or capital gains in the future, either while in the Roth IRA or when you cash out.

Okay, bottom line: I'd say go with the Roth IRA for yourself. If your wife is going to be working as a federal employee for long enough to get fully vested in her TSP, or has already been vested completely, her matching funds outweigh the negatives of the TSP, and so she should go ahead and fund her TSP first up to the point where matching funds stop, then fund her Roth IRA. Check out this website I found this on (it's a little old; the max contribution to an IRA is $4k now) http://www.fool.com/news/commentary/2003/commentary030416.htm.

Here's a couple of other things to consider, beyond the mechanics of each vehicle. With the IRA, you have control over what you want to put in it. While the TSP has some excellent choices, it's severely limited--you can only invest in the equivalent to five indexes, or some predetermined combination of the five (the Lifestyle funds). The IRA is not limited by anything except the upper limit on contributions, and it can be comprised of any index or actively managed fund you want. Also, I don't think you can make any more contributions to the TSP after you leave the service--you can keep your money in the account until the year you turn 70.5, though.

Vanguard has some pretty good information on its website--check them out and read some of the tutorials and such. I also highly recommend The Only Guide to a Winning Investment Strategy You'll Ever Need by Larry Swedroe. It was a little dry in places but very, very informative. You're a lot less likely to sit in front of the TV watching the financial news and worrying about your investment after you read his book.

 

[Steve Wilkins]

Good point on the Roth IRAs. I retire from the military in 8 years, used 21 years as the time I figured I'd be ready to begin distribution to some degree (65). The L funds did seem a little conservative to me, but I didn't know for sure. My gut says be more agressive and put more in the S and I funds, but they appeared to be particularly volatile following 911, whereas the C fund seemed to hold it's own.

Are you planning to have a federal job after retirement from the Army. If not, once you retire, I would seriously think about rolling over your TSP (not your wifes since she would probably still be a fed worker) to a Traditional IRA. You'll have much more control of your money and will be able to invest in a lot more than just what TSP offers.

Any recommendations for specific Roth IRAs?

What do you mean? Places to set up the IRA, or recommendations for what to invest in?

 

[Steve Wilkins]

Someone please correct me if I'm off base here, but this is the way I see it. Based on the workings of the two retirement vehicles (IRA and TSP), different things happen when we retire and start pulling money out. Traditional IRAs and 401(k)s (and 403(b)s, like the TSP) are tax deferred--no tax on any interest, dividends, or anything you make off of having your capital in the retirement account while they are in the account. Also, you tell the IRS that you're investing in a traditional IRA and/or a 401(k) / 403(b), etc., and they reduce your taxable income by the amount you put in the account, lowering the amount of taxes you pay now. However, when you take money out of the traditional IRA and the TSP, it is taxed just as if the distribution came from a paycheck from a job, not at any lower capital gains rate.

Correct. You'll get taxed at the percentage for whatever tax bracket you fall into that year. Most likely, you won't need as much money and will end up in a lower tax bracket than when you are full speed ahead in your career making the $200K+ per year.

 

[Brett327]

To piggyback on other's comments, I'm a big proponent of Vanguard. Of all the various mutuals I own, Vanguard has consisyently been the best performer. Case in point, their Emerging Markets fund (VEMIX) is up ~27% since november and has been fairly consistent historically - food for thought.

Brett

 

[Brett327]

I have a few questions to add for the forum:
1. If I am maxing out both mine and my wife's roth IRA AND 10% of my TSP, would an annuity be another retirement investment I should do as well, or should I not even bother.
2. What is the difference between investing in bonds and investing in a bond fund...from what I understand about half your portfolio (between 40-60% depending on the interest rates) should be invested in bonds...wold that mean to put half my money in a bond fund or into specific bonds?

Unless you're getting up there in the years (like A4s ), or are unbelievably risk averse, 50% allocation in bonds seems way high. A bond fund is analogous to a mutual fund.

Brett

 

[Steve Wilkins]

I have a few questions to add for the forum:
1. If I am maxing out both mine and my wife's roth IRA AND 10% of my TSP, would an annuity be another retirement investment I should do as well, or should I not even bother.
2. What is the difference between investing in bonds and investing in a bond fund...from what I understand about half your portfolio (between 40-60% depending on the interest rates) should be invested in bonds...wold that mean to put half my money in a bond fund or into specific bonds?

Who is telling you this bullsh!t?

1. Annuity. Get it out of your vocabulary. You're way too young for an annuity.

2. Bonds. Why? How close are you to retirement age (65)? What would it mean to put half your money in bonds? Well, it would mean the amount you build up fore retirement will be significantly less than what is possible.

 

[Steve Wilkins]

so at my age I should probably have 10-15% in bonds then increase the percentage ever ten years or so....? so at age 97 like A4s I will have a 100%bond allocation!

Nooooooo! Good god man. Why the infatuation with bonds? How old are you?

 

[Steve Wilkins]

I am currently being farily aggressive right now

 

[Steve Wilkins]

Dump the bonds. IMO, you are about 15-20 years too young for them (unless you've got 500K+ to sock away). Of course, ignore me if you are completely risk averse (which I understand). If it makes you too nervous to have all your money in equities, then by all means put some money in bonds. I'm just saying that I think you're too young.

 

[Steve Wilkins]

i don't have any bonds right now, but I have been putting money into a bonds fund for the last month

...then you have bonds

 

[Steve Wilkins]

you have an emergency fund?....are you debt free?

 

[KimberlyD]

Very few people (and unlikely, young naval officers) need whole life insurance.

Bad gouge.

My Dad (a once young Naval Officer now retired) thought he was good w/ just SGLI. Now he's retired fr the Navy, in a 2nd career & he still has 2 teenage daughters (gotta love sea time for spreading out your kids!) & a wife to provide for. He's 53 years old. For $50K in term life insurance, he's paying $170 per month, don't even want to chance what he would pay for whole. The VGLI & SBP buy ins that are offered now would be great but w/ his cost share to buy in (since he's been out a long time) would make it prohibitively expensive.

I bought life insurance 2 years ago, just before our youngest was born. My husband & I have combos of term & whole life insurance. We bought w/ a company that accepted a Navy physical. We got good rates & felt pretty good ab ourselves (having learned fr my Father's mistake). Right after our daughter was born I was diagnosed w/ Type II diabetes & HTLV, a precursor to lymphoma type cancers (came up in a blood donation to the ARC). I am now uninsurable at the grand old age of 25 BUT b/c we bought before this, we're okay & we even bought w/ a rider that states we can purchase more at healthy rates.

I will agree that life insurance should not be an investment vehicle BUT even healthy young Naval Officers & their spouses need an insurance plan that will follow them throughout their lives, whether separation fr the Navy occurs as part of natural retirement, medical retirement or just a decision to pursue a different career path.

 

[Brett327]

I think what Steve was implying is that you shouldn't get life insurance as an investment.

Brett