Investing for retirement (TSP, IRA)

[Whitman]

Has anyone ever invested in the Savings Deposit Program? 10% interest is massive, compared to money markets which are around 1.5% now.

http://www.dfas.mil/militarypay/woundedwarriorpay/savingsdepositprogramsdp.html

http://www.dfas.mil/militarypay/woundedwarriorpay/SDPBrochure_Mar08.pdf

[Magellan]

Quick Q: is the fly pay taxed (and what other bonus/incentive is.. bah,bas..)? if yes, i understand the advice to invest it in tsp. if no, shouldn't we be taking our tsp allocation from our base pay to lower our monthly taxable income?

If you look at your LES you can deduce that your Base Pay and your Flight Pay are your taxable income. The great thing about TSP is it is effortless saving, because it comes out automatically and you have almost* no way to spend it. TSP is pretty much the closest thing to a a 401K for military.

BAS not taxed.

BAH not taxed.

[Jughead]

your Base Pay and your Flight Pay are your taxable income.

BAS not taxed.

BAH not taxed.

All true--but, to muddy the water a bit, and for reasons not clear to me, your flight pay does not count toward your FICA or Medicare taxes....

Oh, and ACP (Bonus) is taxed for FITW, but not FICA either....

[HeloDude]

Has anyone ever invested in the Savings Deposit Program? 10% interest is massive, compared to money markets which are around 1.5% now.

I max'd out the SDP when I was on my 365. Here's the deal though: You can only put in a maximum of $10,000,you have to start it in a combat zone, and interest only grows for the time you're in the combat zone. But when you're deployed, it's definitely a good deal.

[MilitaryToFinance]

Here's the deal with gold (as it's been explained to me many time before)--gold HOLDS it value, that's all. The rising/falling prices of gold has to do with inflation, short term spikes in the economy, etc. That's why you see it fluctuate so much over time.

Someone once told me that if you had one gold coin back in ancient days, you could get a very nice tunic, robe, head piece, sandals, etc. What will one gold coin get you now?--a nice suit, shoes, etc. Grant it there are a lot more factors to look at, but it's a pretty interesting comparison.

Your idea sounds great but doesn't hold water to the facts. The idea that something "holds it's value" means that it would keep up perfectly with inflation. That is what an inflation hedge does. The numbers I put up clearly show that is NOT the case with gold. In 1980 if you had 1 oz of gold it was worth $850. Today you would need over $2,100 to buy the same amount of good as you could have bought in 1980 for your $850, but that requires TWO oz of gold as opposed to ONE oz of gold. So I'm sorry but it may sound like it makes sense your argument is factually incorrect.

[Red Fox]

I advise anyone looking to invest to be very very careful. This should be standard advice for anyone at anytime, but I believe today's market is even more risky. This belief is based on that roughly 95% of our nation's wealth is controlled (not owned, but controlled) by roughly 1% of our population, which IMHO, makes the entire market a speculative trader's market and not an investor's market. Its not just the gold market that is being manipulated. We also have a government (congress, Fed, FDIC, Treasury, etc.) that are taking unprecedented actions (like the Fed buying billions of $$$ worth of mortgages)that will have unknown unintended consequences.

About comparing the stock indexes vs gold. The data depends on where you take the data. If you compare gold to stocks from 1980 to present, then stocks outperformed. But, 1980 was also a time of high inflation and unemployment (remember the misery index?) and gold was a speculative investment. When our economy turned, the money left gold (burst the bubble) and went into stocks for a great 20 year run. If you compare gold vs stocks from 1999 to present, I think one will find that stocks were flat while gold increased threefold.

I personally believe that buy and hold stocks no longer works. I don't have faith in our economy which is saddled with growing entitlements (including mine), more than 10 trillion in debt, and a system which is more and more becoming services oriented (meaning a greater disparity between the haves and have-nots). The have's money will leave our country in a heartbeat if they perceive greener pastures outside of our country.

For the long run, I have invested in a fund that shorts the US long bond. I can't see how the 30 year bond can remain at less than 4%. Our lender nations have already started shifting out of the longer term bonds into shorter term treasury notes (less than 10 years). I believe longer term interest rates HAVE TO increase. Thus, the current bonds will lose value and shorting this market will be profitable. Also, there has been discussion of metals. I believe that all materials and material stocks will increase. That means metals, coal, agriculture, etc. If you don't trust the US dollar and want to protect yourself, you can invest in countries that have a strong commodity industry like Australia and Canada (look at a chart of their dollar vs ours).

That's my take.

Good luck.

Red

[Herk Driver]

I max'd out the SDP when I was on my 365. Here's the deal though: You can only put in a maximum of $10,000,you have to start it in a combat zone, and interest only grows for the time you're in the combat zone. But when you're deployed, it's definitely a good deal.

I thought interest accrues for the time you are deployed plus 90 days, but I could be wrong.

[Finance_Guy]

I thought interest accrues for the time you are deployed plus 90 days, but I could be wrong.

Your are correct HD. After leaving the combat zone or other eligible area, the account becomes dormant and stops earning interest after a period of no longer than 90 days.

It's also interesting to note that only the $10,000 ever draws the 10% interest with one rare exception as shown below for missing status. As interest accrues (say $83/month), the second month the account balance would be $10,083.00. But for that month, only the $10,000 draws interest for the next month. If in an extended deployment situation, you can request for any balance over the $10,000 be withdrawn and then invest it elsewhere since it's not doing anything for you.

But for those who don't max out to the $10k right away, the interest each month added would also draw interest up until the balance reached $10k. Make sense?

TITLE 10 > Subtitle A > PART II > CHAPTER 53 > § 1035

§ 1035. Deposits of savings

(b) Interest at a rate prescribed by the President, not to exceed 10 percent a year, will accrue on amounts deposited under this section. However, the maximum amount upon which interest may be paid under this subsection to any member is $10,000, except that such limitation shall not apply to deposits made on or after September 1, 1966, in the case of those members in a missing status during the Vietnam conflict, the Persian Gulf conflict, or a contingency operation. Interest under this subsection shall terminate 90 days after the member’s return to the United States or its possessions.

[ChkHandleDn]

Your are correct HD. After leaving the combat zone or other eligible area, the account becomes dormant and stops earning interest after a period of no longer than 90 days.

It's also interesting to note that only the $10,000 ever draws the 10% interest with one rare exception as shown below for missing status. As interest accrues (say $83/month), the second month the account balance would be $10,083.00. But for that month, only the $10,000 draws interest for the next month. If in an extended deployment situation, you can request for any balance over the $10,000 be withdrawn and then invest it elsewhere since it's not doing anything for you.

But for those who don't max out to the $10k right away, the interest each month added would also draw interest up until the balance reached $10k. Make sense?

TITLE 10 > Subtitle A > PART II > CHAPTER 53 > § 1035

§ 1035. Deposits of savings

(b) Interest at a rate prescribed by the President, not to exceed 10 percent a year, will accrue on amounts deposited under this section. However, the maximum amount upon which interest may be paid under this subsection to any member is $10,000, except that such limitation shall not apply to deposits made on or after September 1, 1966, in the case of those members in a missing status during the Vietnam conflict, the Persian Gulf conflict, or a contingency operation. Interest under this subsection shall terminate 90 days after the member’s return to the United States or its possessions.

The question I have is if we're deployed and contribute to this, can we still use this after we return from our deployment if we continue to earn hostile fire pay and fly in a combat zone? The email I received states the following w/ regards to the SDP: "Members must be receiving Hostile Fire Pay and be deployed for at least 30 consecutive days, or 1 day in each of 3 consecutive months in order to participate in the program. The way I read this is as long as I'm in a combat zone for at least one day in 3 consecutive months I can continue to use the program. Am I correct in this assumption? Basically I return from my deployment, fly a trip at least once a month downrange for at least three months, earn HFP and still use this?

[Finance_Guy]

The question I have is if we're deployed and contribute to this, can we still use this after we return from our deployment if we continue to earn hostile fire pay and fly in a combat zone? The email I received states the following w/ regards to the SDP: "Members must be receiving Hostile Fire Pay and be deployed for at least 30 consecutive days, or 1 day in each of 3 consecutive months in order to participate in the program. The way I read this is as long as I'm in a combat zone for at least one day in 3 consecutive months I can continue to use the program. Am I correct in this assumption? Basically I return from my deployment, fly a trip at least once a month downrange for at least three months, earn HFP and still use this?

Yes you can. Provided you have continuous months of HFP for the qualifying countries you are still eligible for SDP.

[Magellan]

Buy homes and rent them out when you PCS.

Bit of a thread revival but does this logic still hold water as an investment strategy given the events of the last few years? Because I know guys that bought a house at their UPT base are now renting it for less than what their mortgage is and they are now moving to their first "permanent" duty station and they are running out and buying another house. I just don't think being well over 300k in debt on one income making less than Captains pay is a good place to be in.

[Guest Touch & Go Rentals]

Bit of a thread revival but does this logic still hold water as an investment strategy given the events of the last few years? Because I know guys that bought a house at their UPT base are now renting it for less than what their mortgage is and they are now moving to their first "permanent" duty station and they are running out and buying another house. I just don't think being well over 300k in debt on one income making less than Captains pay is a good place to be in.

I don't know that this logic ever held water. We're quick to calculate the upside with the house being occupied, paying off the mortgage, etc. But what if the house isn't occupied? I've run some quick numbers and it doesn't take but a few months of paying a mortgage without a tenant to wipe out whatever gains you might have otherwise had. How do you keep the house marketed and occupied? What's the cost of maintenance? For the most part, these homes will be priced such that mostly military will be renting, and you may not have problems with tenants, but the moment you do have a problem, how do you deal with it if you're several states, let alone continents, away.

Here's another perspective with a return on investment discussion. Over the long-haul, you invest your money in growth stock mutual funds, you can earn 10-12 percent without taking on much risk. If I'm going to accept more risk, like rental property, along with more work, I want to get better returns out of it than 10-12 percent.

A 5% mortgage on your 200K debt is costing you $10K / year. How much can you really rent out your house for per month? $1,500 per month is probably on the very high end, but even assuming you can get $1,500, and assuming you don't have any expenses for management fees, grounds maintenance, repairs, evictions, legal or accounting advice, and assuming the house is occupied the full year, you'll clear $8,000 after your mortgage interest, or a paltry 4% on your 200K investment. Even if you include your tax savings of $4,000 (20% tax bracket, $10,000 in mortgage interest plus $10,000 depreciation on your home), you're still at $12,000, or 6%. And this is your best case scenario!

What about appreciation? Until the bubble, housing appreciated at approximately the same rate as inflation, so money tied up in a home was a hedge against inflation, but not an investment beyond that.

There are far less risky ways to get 6% return on your money.

Now, if you don't have a mortgage, and own the property free and clear, the numbers change somewhat, and in the example above, you can earn up to 11%, best case. Rental property is about getting properties at a discount, and being close enough by than you can manage the property and make sure your tenants are taking care of the place.

I don't recommend folks become landlords of houses of homes speckled across the country. Rarely are the homes selected as rental properties from the beginning. The lack of value along with a mortgage payment generally make the trouble not worth the return on investment.

[MilitaryToFinance]

Here's another perspective with a return on investment discussion. Over the long-haul, you invest your money in growth stock mutual funds, you can earn 10-12 percent without taking on much risk. If I'm going to accept more risk, like rental property, along with more work, I want to get better returns out of it than 10-12 percent.

Sorry but there is no such thing as low-risk 10-12% annual return. Period.

[LJ Driver]

Sorry but there is no such thing as low-risk 10-12% annual return. Period.

Absolutely right.

Further, consider this:

-When you buy a house, unless you pay cash for the entire thing, you're buying it on margin. It's one of the few investment vehicles that allow you to still do this.

-As a military guy, you either rent, buy, or live on base. If you rent, at the end of your assignment you walk away owing nothing, gaining nothing, losing your total paid monthly rent. If you buy, at the end of your assignment you can either sell or rent. If you sell, even if you break even you'll still make money compared to renting a place.

If you can keep a place rented most of the time, with the margin you bought the house with ultimately you'll make money if you do it smartly. A $200,000, 30 year mortgage factoring in inflation cost is ~$82000 in todays money. Naturally interest is added to that, but it's still a deal.

[matmacwc]

Make it simple.....

http://www.daveramsey.com/

[Guest Touch & Go Rentals]

Absolutely right.

Further, consider this:

-When you buy a house, unless you pay cash for the entire thing, you're buying it on margin. It's one of the few investment vehicles that allow you to still do this.

-As a military guy, you either rent, buy, or live on base. If you rent, at the end of your assignment you walk away owing nothing, gaining nothing, losing your total paid monthly rent. If you buy, at the end of your assignment you can either sell or rent. If you sell, even if you break even you'll still make money compared to renting a place.

If you can keep a place rented most of the time, with the margin you bought the house with ultimately you'll make money if you do it smartly. A $200,000, 30 year mortgage factoring in inflation cost is ~$82000 in todays money. Naturally interest is added to that, but it's still a deal.

These are big ifs.. just ask the scores of home owners in the local area where I'm at who 1) can't sell their houses and break even and 2) can't get the houses rented because other desperate sellers are selling at a discount. I know a guy who recently retired from the Air Force and won't accept a GS job in another state because he'll lose $20K on his home. So instead, he's going to stay in the local area, earning less money hoping the home will recover in the meantime.

If I rent and walk away from a house after three years, I have no risk. I don't have to worry about selling the house at a loss, or try to find renters that won't tear the place up.

Also, you can't gloss over the cost of interest. The $200K, 30-year mortgage will cost you $386,511 plus property taxes by the time you're done (5% interest). Selling at $300,000 won't clear your cost of the property. Let's assume you have perfect renters and the house is never vacant. So, $1,500 per month for 30 years gets you $540K. Plus your selling price of $300K gets you $840K. It looks pretty good until you have to subtract the $386K you spent, capital gains taxes on the sale, property taxes, home repairs, management fees, etc. Even if you don't exclude all those, you'd clear approximately $454K (840 - 386). I don't expect you'd get even close to that over a thirty year haul when you add all the other factors.

It turns out you can get about the same return by investing $200 per month at ten percent interest ($452K). For those of you suspicious about earning 10-12 with relatively low risk, consider the stock market, which has earned an average of 9-10% during any period of 25 years or longer. You don't have to push it too much to get 10-12% if you're willing to commit to a long period of time--some American Funds, for instance, along with many other growth stock funds do this routinely.

I'm not saying don't be a landlord. I am suggesting the money isn't there if you're going to do in on heavy margin or with the $200K home you'd live in. Money is made when you buy the house at a discount and don't have to pay a bank for the privilege. Also, your costs and stress go down and tenant quality go up, generally reducing risk, if you're going to be a landlord of homes you have in the local area rather than spread across the CONUS.

Let me know if something is missing in my math. BTW, I'm a big fan of Dave Ramsey. I know the stuff I've said here and earlier defies conventional wisdom, but unless I've missed something, the numbers seem to bear it out. Is there anyone out there who has made a significant amount of money by being a landlord on homes you have scattered across the country? I have yet to meet one--the stories I hear are of agitation and frustration.

Edited June 18, 2010 by Touch & Go Rentals

[schokie]

Also, you can't gloss over the cost of interest. The $200K, 30-year mortgage will cost you $386,511 plus property taxes by the time you're done (5% interest). Selling at $300,000 won't clear your cost of the property. Let's assume you have perfect renters and the house is never vacant. So, $1,500 per month for 30 years gets you $540K. Plus your selling price of $300K gets you $840K. It looks pretty good until you have to subtract the $386K you spent, capital gains taxes on the sale, property taxes, home repairs, management fees, etc. Even if you don't exclude all those, you'd clear approximately $454K (840 - 386). I don't expect you'd get even close to that over a thirty year haul when you add all the other factors.

Consider this in an even shorter period of time, say 2.5-3 years. I'm paying a mortgage now, and most of my payments are going towards interest (loan payment standard). Very little progress has been made on the principal. Now you factor in real estate agent fees and closing costs. So in this short 3 year period I have to have my house value appreciate at least an amount equal to the interest I've paid plus realtor fees plus closing costs, minus the amount I've put towards my principal. Even if I can sell by owner I'm looking at a $5-6K appreciation on a $200K house just to break even. In today's current market in my area, most homes are DEpreciating by 3%, not increasing by 3%.

Most people in my area have been able to rent for an amount close to their mortgage payment, but then you've got to factor in property management fees and frustration.

Maybe 3-5 years ago buying and selling every fees years was a great idea, but I'm not a fan of it now. There's a lot to be said for the pride of ownership and not having to deal with a landlord, so I'm not complaining. I'm just not going to make this an investment vehicle.

[MilitaryToFinance]

It turns out you can get about the same return by investing $200 per month at ten percent interest ($452K). For those of you suspicious about earning 10-12 with relatively low risk, consider the stock market, which has earned an average of 9-10% during any period of 25 years or longer. You don't have to push it too much to get 10-12% if you're willing to commit to a long period of time--some American Funds, for instance, along with many other growth stock funds do this routinely.

I'm sorry but I just can't let this go. The stock market, even if you're buying the Wilshire 5000 broad index fund, is not a low-risk investment. High quality bonds, US Treasuries and CD's are low risk investments. Good luck earning more than 4% these days on safe investments. Sure I'm heavily invested in the stock market because I'm still young and have a long timeframe. But try to tell the people who are retiring now that their stocks are a low risk investment. You know, those people who lost 50% of their portfolio value in 18 months. I have no problems with a diversified portfolio balance including equities, bonds and real estate but part of the reason we have these bubbles and busts is unrealistic expectations. You should not expect to make 12% year over year without taking on significant risks. To think otherwise is just building up unattainable expectations.

[Guest]

A 5% mortgage on your 200K debt is costing you $10K / year. How much can you really rent out your house for per month? $1,500 per month is probably on the very high end, but even assuming you can get $1,500, and assuming you don't have any expenses for management fees, grounds maintenance, repairs, evictions, legal or accounting advice, and assuming the house is occupied the full year, you'll clear $8,000 after your mortgage interest, or a paltry 4% on your 200K investment. Even if you include your tax savings of $4,000 (20% tax bracket, $10,000 in mortgage interest plus $10,000 depreciation on your home), you're still at $12,000, or 6%. And this is your best case scenario!

Check yourself.

You are calculating a return based on $200k. That $200k is leveraged with $40k if he put 20% down. Run your $8-12k returns against the $40k, not the $200k and you're looking at 20-30%/yr.

[Guest Touch & Go Rentals]

I'm sorry but I just can't let this go. The stock market, even if you're buying the Wilshire 5000 broad index fund, is not a low-risk investment.

Hello! We may differ on what we might call a low-risk investment. I'm sure each of us have a different tolerance for risk. I spent a few seconds looking on-line for a definition, but didn't look very hard and gave up. Nonetheless, perhaps its best quantified by comparing it to other activities. Again, I'm emphasizing the importance of investing over a long period of time...

• $790K - $125 (chosen because this was the amount which would have maxed a traditional IRA in 1974) invested monthly for 40 years at 10% (I'm using the more conservative value of the average annual stock market growth over every 25 yr period, including these last few years where we have suffered significant losses--again, I don't think you have to push much to get 12%)
• $395K - $125 invested monthly for 40 yrs at 10% and then lose half (using your claim of losing 50% value) during the last month of investment
• $87K - $125 invested monthly for 40 yrs at 10% and then lose 89% (amount lost between Sep 3, 1929 and Jul 8, 1932)
• $147K - $125 in a 4% (your definition of safe investment) every month for 40 years
• $ 5K - $125 stuck in a mattress every month for 40 years

So which option is less risky? We might suggest the mattress or the CD is "safe," but this doesn't adequately capture the opportunity lost with that money when appropriately invested. When you invest for a long period of time, even losing half the money in a short period of time, while devastating, still leaves you in a better position than if you had left in in a CD or money market account, which are typically "guaranteed" investments. While an 89% loss of your investments (the total lost in the initial years of the Great Depression) would leave you worse off than a 4% investment, investing at 12% up to the point of the loss would still accommodate an 89% drop and be ahead of the 4%.

I grant that money which was intended for college or planned for retirement was gone in a short period of time, and it was a shock to many families, however, it was only a setback of slightly more than 7 years (assuming a consistent average of 10% growth). In fact using 10% average annual return, anyone who had invested at least 12 yrs and 8 months would have broken even. To do better than the 4% CD, they would have had to invest for a period of 19 yrs and 2 months (the amount of monthly the investment has no bearing on these two "break even" analyses). Of course, if you can get an average of 12%, the time span for breaking even reduces.

Given these numbers, I don't know that it's reasonable to call 4% "low-risk" for a long-term investor. By investing at 4%, he is missing tremendous opportunity even in the light of some of the worst possible conditions. Someone who doesn't have a long time to invest and needs to guarantee the principal for use in 5-yrs? Well, that's not an investment, and it should be parked in a CD, savings account, money market, or checking account.

You should not expect to make 12% year over year without taking on significant risks. To think otherwise is just building up unattainable expectations.

I think there is an important difference between "making 12% year over year" and average APR of 12% over a long period of time. I do not expect 12% every year--those who expect that will get themselves into trouble using tomorrow's expected gains to leverage money today (we made these assumptions with housing and got into a housing bubble). However, if you let the money alone, history shows growth stocks bring 10-12% APR. I don't know what the market will do tomorrow or next year and do not presume upon it, but I do know history shows a reasonably steady growth rate of 10%/year over at least a 25 year period, and I think it's reasonable to use that as a planning factor.

Edited June 20, 2010 by Touch & Go Rentals

[Whitman]

It's all about liquid. There are always buyers for stocks. But, take a look around and see all the homes for sale and tell me what paying two mortgages does to your ROI. In this unstable market, I would much rather have cash. That way when a good deal comes along you are in the position to capitalize. Most of the profit is made on the buy, not the sell.

[LJ Driver]

Check yourself.

You are calculating a return based on $200k. That $200k is leveraged with $40k if he put 20% down. Run your $8-12k returns against the $40k, not the $200k and you're looking at 20-30%/yr.

This is my point also. Ultimately you are making the money from a $200K investment from an initial investment amount of only $40K. That's the power of buying on margin. Now clearly, if you get upside down it's not so great, but that's the risk you choose to take, or not.

[Guest]

It's all about liquid.

Not sure what you mean here.

But, take a look around and see all the homes for sale and tell me what paying two mortgages does to your ROI.

The discussion is about your return when someone else (renter) is paying at least one of your debt obligations. This also points to an over supply which presents buyers and investors with real opportunities.

In this unstable market, I would much rather have cash. That way when a good deal comes along you are in the position to capitalize.

Is this what your original statement "it's all about liquid" is referring to?

Cash (or an interest bearing equivalent) does allow you to capitalize on opportunity. That opportunity exists in real estate today for those with cash. You seem to be saying you want cash but you don't want to capitalize on the opportunity or you don't believe there is an opportunity. the risk is you hold your cash and jump back into the market after the opportunity has passed.

Most of the profit is made on the buy, not the sell.

Not quite. The actual rule of thumb you are referring to is buy the margin and any market appreciation is gravy. Real estate investment initial purchase margins of 20% or greater is the generally accepted trigger. Opportunities abound right now if you have the cash (like you said) and/or can get the credit.

[Whitman]

Not sure what you mean here.

The discussion is about your return when someone else (renter) is paying at least one of your debt obligations. This also points to an over supply which presents buyers and investors with real opportunities.

Is this what your original statement "it's all about liquid" is referring to?

Cash (or an interest bearing equivalent) does allow you to capitalize on opportunity. That opportunity exists in real estate today for those with cash. You seem to be saying you want cash but you don't want to capitalize on the opportunity or you don't believe there is an opportunity. the risk is you hold your cash and jump back into the market after the opportunity has passed.

Not quite. The actual rule of thumb you are referring to is buy the margin and any market appreciation is gravy. Real estate investment initial purchase margins of 20% or greater is the generally accepted trigger. Opportunities abound right now if you have the cash (like you said) and/or can get the credit.

Rainman, I'm not debating the opportunities out there right now in real estate. It's a great time to buy in parts of the country, just not for me. I'm just pointing out that other investments offer more liquidity. I can make a few clicks and my stock or mutual is sold, whereas a home may take 6-9 months to sell. It's really a matter of preference and ones situation. FWIW, I've always like Warren Buffett's quote "be greedy when others are fearful, and fearful when others are greedy".

[Guest]

Rainman, I'm not debating the opportunities out there right now in real estate. It's a great time to buy in parts of the

country, just not for me. I'm just pointing out that other investments offer more liquidity. I can make a few clicks and my stock or mutual is sold, whereas a home may take 6-9 months to sell. It's really a matter of preference and ones situation. FWIW, I've always like Warren Buffett's quote "be greedy when others are fearful, and fearful when others are greedy".

Noted. You were mixing your personal preferences into the investment analysis.

BTW, if you followed Buffet's credo you would be in real estate right now.