I'm so freaking confused about what I should be doing!

[littletoobigformybritches]

Sorry, I didn't mention the other ING savings account where we put the $1400. We have about $17000 in there now.

The big question mark now is where we will move this year. There is a possibility that we could stay in this area, move to a middle col area or go over seas. All of which will change our financial picture drastically. If we do stay in this area, our gross for 2009 will be $201,422, which would mean we will definitely need to buy a house to get out of tax he**.

Sorry the TSP #s don't add up, that would be 15% of his taxable. The 2053 is our BAH for this area and we live on base. That will be going up to 2353 this month. What scares me is the down payment on a house is going to be more than we could put up in six months without clearing out all of our savings and then some. We could get a VA loan, but the max on that is around $420,000 I think... ideas?

[littletoobigformybritches]

OK, so I guess what it comes down to is savings vs. debt repayment. College savings for my child on hold for now, should I throw everything extra that I can at that variable SL (honestly, I'm not really that worried about the others, in that it is basically free money) or should I throw everything extra that I can into savings to build up a downpayment on a house (maintaining the $925 on the variable and maybe adding the $250 from the college savings)?

What do you think?

[jIM_Ohio]

Sorry, I didn't mention the other ING savings account where we put the $1400. We have about $17000 in there now.

The big question mark now is where we will move this year. There is a possibility that we could stay in this area, move to a middle col area or go over seas. All of which will change our financial picture drastically. If we do stay in this area, our gross for 2009 will be $201,422, which would mean we will definitely need to buy a house to get out of tax he**.

Sorry the TSP #s don't add up, that would be 15% of his taxable. The 2053 is our BAH for this area and we live on base. That will be going up to 2353 this month. What scares me is the down payment on a house is going to be more than we could put up in six months without clearing out all of our savings and then some. We could get a VA loan, but the max on that is around $420,000 I think... ideas?

15% of one income is going to TSP, but is 15% of other income going to 401k?

15% of x+10% of y is NOT 25% of x+y, but something like 12.5% of x+y.

Look at gross salary (13300) and 15% of that number is $1995.

your numbers were
401K: $1293.75
TSP: $579.29

You are just under 15% overall. Bump TSP or 401k up by $200 (if income is $1000/mo $200 is 20%, if $5000, $200 is 4%, if $10,000 2%...)

Because you had a house fund, I saw no need to create an emergency fund. 17k in house fund is enough (to me) to follow my plan.

I do agree if you were not setting aside any money, that an EF of 3 months expenses would be a priority.

[littletoobigformybritches]

Again, sorry for not being clear. The $2053 that he makes for his BAH and $202 for BAS is not taxable income.

Plus, for what little it is worth, we do plan to stay in for at least 20 and secure retirement benefits, which is what drove our decision to do 15% of his taxable income rather than 15% of his gross.

[jIM_Ohio]

Always base numbers off of gross (IMO). Because much of retirement saving will be done pre-tax, you need to factor in what you make now. If you only base things on "take home" you may miss some obvious tax savings.

For example the $580/mo you spend on child care is $6960 per year. If you pay with pre-tax money, you save $1950 in taxes. If you pay with post tax money it costs you $8900 in gross pay to spend $6960. This does not even account for state or local taxes either.

Fair that the "housing allowance" is not truly part of gross income. I could argue that the allowance then gives you a higher standard of living than if you were a civilian making same amount (correct?). If you do not save a percentage of the higher standard of living amount, then it will be tougher to maintain the standard of living in retirement.

The main goal of retirement planning is that if you spend $7370/month now ($88k per year), you need to plan for retirement based on the 88k per year income need. Right now you have 172k gross pay to provide your 88k in income. Taxes came out of the 172k to give you a net of 88k.

If you base savings on the 88k number, you would need to add taxes back in (because in retirement you will pay taxes on the distributions providing you the 88k). You need to account for this somehow.

For the most part we are debating about a 13% vs 15% savings rate for retirement... so impact will be less than some of these debates in other threads (6% vs 15%).

Your retirement goal should be to sustain the 88k in spending you have now for the rest of your life.

DH's pension might supply around 20k of this
You will need to rely on 401k/TSP to provide the other 68k and also find a way to pay taxes (it will take about 100k-110k of income pre-tax to get 88k post tax in todays tax code).

My advice is calculate everything for savings off of gross.
Then track your expenses (I see 88k per year or 7k per month) which might exist in retirement (if you buy a house this amount is lowered by 24k per year or 2k per month).
Retirement is determined when amount saved =25X your annual expenses (if you have 88k of annual expenses, you would want $2.2M today to retire). If your pension was 20k per year, that would equate to 20/4%=500k of the 2.2 M (meaning you still need to save $1.7 M in TSP and 401k to retire today).

If inflation or higher spending increase the 88k in the future, then the 2.2 M and 1.7 M numbers increase... remember that the 2.2 M is 25X your expenses, so if you lower expenses (by buying house, removing debt...) then take 25X of the lower expense number for the target.

25X SHOULD allow for a 30 year retirement without money running out. If you want 40 years, think 33X expenses. If your family tends to die young, then think 20 years or 20X expenses.

25X= 4% withdraw
33X = 3% withdraw
20X=5% withdraw
the more you take out (as percent of porfolio) the less time the portfolio lasts. Most planning is done at 4% then moved up or down based on factors closer to retirement.

[LivingAlmostLarge]

Don't buy a house this year. If you don't move this year what are the chances of moving next year? I ask because I know people in the AF in DC and they are moving out of DC 2009. They have been there for 4 years.

It's really hard to buy a home while in the military and make money. Both people I know bought in 2005 and are losing money on their homes. They are upside down. Ouch.

And DC is a place of making big bucks. High cost of living and higher salaries than norm. Sounds like a lot but honestly I know that it doesn't go far! I live in a place just as expensive and make a bit less but without a kid. It doesn't go far after the mortgage, etc. Thus everyone I know pulls in mostly $200k+ couples. And it's still tight because homes start out at $600K+, daycare averages $1500/month, etc.

So less money even $75k mentioned earlier goes A LOT farther if you live even in a mid cost of living area. I'd kill for a home for $300-400k! You get a condo in DC for that!

Thus the money isn't that big a deal. Most couples in DC are pulling in $150k minimum. You have to survive.

But what are your future plans? Do you know where you want to settle? How long will you stay in DC? What will happen if you buy this year to get transferred next year?

I know Jim is pushing the home purchase, but with military families sometimes it doesn't make sense. The tax breaks are huge and really help with homeownership at a certain income level. I ran all the numbers and it really helped my DH and I. But we knew we were staying put for 5+ years.

I don't know if you can say the same. Which I think is where the real problem lies. I love the idea of a home for you, but if you move, will you land the same paying job?

[jIM_Ohio]

I know Jim is pushing the home purchase, but with military families sometimes it doesn't make sense. The tax breaks are huge and really help with homeownership at a certain income level. I ran all the numbers and it really helped my DH and I. But we knew we were staying put for 5+ years.

I don't know if you can say the same. Which I think is where the real problem lies. I love the idea of a home for you, but if you move, will you land the same paying job?

I pushed the house purchase because I thought the DC stay was permanent (a few posts crossed- I was typing while another post was published).

NO WAY should a house be considered for a temporary stay. However a vacation house somewhere nice could be considered if the money was right.

I would concentrate on
1) getting debt paid off
2) saving for the house
---
nothing above implies purchasing the house NOW, and I think one of my posts suggested saving now to buy later.

[littletoobigformybritches]

Touche, livingalmostlarge. Of course living in a HCOL area like DC inflates salaries, but I'd just like to add that there are many young people in this area who work for peanuts and somehow survive, so each case is different.

To clear some things up, and this is where we really get into the nitty gritty of our options, our PCS (relocation) date is some time between June and August of this year. We have a one in five chance of staying here in DC. That is scenario A. OK, under this scenario, we would be in this area for 4 more years. I think that we would be insane not to buy a house now, while interest rates are at historic lows and housing prices, even in this area, are pretty depressed. I believe that if we bought a $650,000 house for, say $500,000 in August, 2009, with 10% down, and then assume that we sell in 4 years, or 2013, when the housing market has had time to recover, we could stand to make some money on that deal. We find out this month where we will be going. If we find out we are staying here, I propose that all retirement, college and other savings and all debt advance payments stop and 100% of non-living expense income goes into savings for that down payment.

Scenario B. We have a one in five chance that we could be moving to a western state in what I would consider a medium COL area. In this scenario, I would have to find a new job and most likely take at least a 25-40% paycut. I still say that in this scenario, purchasing a house might be a good idea. A $50,000 down payment there would be more than 20% on what would probably be way more house. Still a 4 year period before having to sell.

Scenario C. We have a two in five chance of moving to Europe. In this scenario, I would probably not be working. I would probably still want to sock away 100% of the non-living expenses income in order to pad my husband's income while we are there. I honestly don't even know where to begin with this one.

Scenario D. We have a one in five chance of moving to Hawaii. Yikes, talk about a terrible economy and a HCOL area. Pretty much the same as Scenario B though.

So, for the first half of this year, I need to make some decisions. Do I
a. save every last penny for a down payment on a house and then buy in August.
b. continue retirement contributions and downgraded college savings and debt advance payment as usual and continue to save what we normally do.
c. continue retirement contributions and downgraded college savings and really ramp up debt advance payment on the variable interest SL.

Any ideas?

[momof1in150]

As a REALTOR in Newport, RI I can't tell you how many military families are stuck because they bought a house that they cannot sell right now. You can't predict the housing market and unless you are going to be in the house for 5+ years you won't gain enough equity to see it in a "typical" market, I am NOT talking about the craziness of 3 years ago.

[noppenbd]

In any of your scenarios I think you should stop paying down debt so aggressively right now. You cannot "unpay" the debt if you find out you need a big down payment. On the other hand if you decide that a house is not in your future you can apply the extra savings to the debt at that point.

In a volatile situation, liquidity is your friend, meaning stashing as much cash as you can.

[Like2Plan]

DH's pension might supply around 20k of this
You will need to rely on 401k/TSP to provide the other 68k and also find a way to pay taxes (it will take about 100k-110k of income pre-tax to get 88k post tax in todays tax code).

Jim,
The OP's income will change dramatically over the next 15 years. In the case of her DH: he is most likely an O-3 currently and if he stays in the military for a 20-22 year retirement he will most likely retire as an O-5 or an O-6. The military system is up or out. If he gets passed over for promotion(you have a couple of chances), then he has to get out of the military. (If he went to the academy that is not a likely scenario). There are 3 types of pay increases: one is longevity (every 2 years, there is a bump up), another is promotion and the third is an annual cola. Point is, the retirement will be worth far more than what you are estimating--currently and O-5 earns about double what an O-3 earns base pay wise. link to military pay tables

Most likely the op's DH will start a second career after retiring in his early 40's. It is hard to predict what kind of income they will be replacing at retirement --especially with the OP off to such a good start at such a young age...

[LivingAlmostLarge]

Ohh lots of scenarios. I vote for the stashing cash. It sounds like you want to buy in most of the scenarios except for moving to Europe. I don't know if it's wise or not, talk to a local realtor where you live currently or where you will be moving to. Real Estate is local.

But yeah starting salary for a bachelor's in DC is like $50-60k. At least in CA, NY, Boston it is. According to local surveys. And with a science degree you are looking at $60-70k. Then coupled up at 22? That's $100k minimum not including bonuses, etc. So in HCOLA wages are extremely high. But living expenses are NOT cheap as you already mentioned a $500k home.

And it's NOT worth $650k if you only pay $500k. It's only worth $500k because that is what someone is willing to pay for it.

[littletoobigformybritches]

I think the majority is for stashing the cash, at least for the next 6 months, and then going from there. Thanks, everyone for your input and ideas.

Not that I feel that I must justify myself but, I have a lot of friends here in DC who would be interested in finding those 50-60K jobs you're talking about being so common...The reality is that there are basically 3 types of employers in the DC area (and yes, I know this is generalizing, I don't even work for one of these three) Government, Law Firms and Non-Profits (and undergrads are basically making copies at the Law Firms). The starting salary for a 4 year degree around here, at least from an anecdotal perspective, is more like 30-40K. Another little tidbit about this area is that there are MANY singles who are well into their late 20s. It is just not that common to get married at 22 anymore...people look at me like I have three heads when I tell them that I'm married and have a one year old and I'm 25. I don't know about the rest of the areas that you mentioned, but DC is unique in this regard, I believe.

[jIM_Ohio]

I would not stop retirement contributions under any housing circumstance.

Regardless of what pension might or might not be... the tax deduction is significant on 401k and TSP, and if you stop retirement to "save", when will you actually "save" for retirement?

Fund longest term goals (retirement) first.

[LivingAlmostLarge]

Engineers, science degrees start out higher, even teaching starts out at $42k DC Teaching Fellows - About the Program - Teacher Salary and Benefits in DC . Business, accountants make around $50k. And I am one of those DINKs who have tons of friends already 30 and still single in DC, NY, SF, LA, and Boston areas. So they are making great money. Yep not many are married, median age is something like 28/29. But still if you are single and you are 25 making $85-100k it's the same thing.

Working for the government the starting is at least $40-50k. Enlisted military no, but officers? Make decent salary when you count it part of it is non-taxable and they get the BAH.

What do your friends do? Are they college graduates? What are their "careers"? My cousin is a tv report with a degree in communications and she lives in a LCOLA and makes $35k starting out right after she graduated in May 2008. Another cousin makes now around $50k at 26, in a LCOLA as well working for Costco in their ordering department. Her brother about to graduate May 2009 has a job offer of $70k in accounting but it's the bay area. He has been working making $25/hr right now.

Most people I know make a good living, especially in HCOLA. Starting out in 1999 I made $35k at 20 with a bachelor's. I worked for 4 years and doubled my salary during that time, if I didn't leave to go back to graduate school.

Incomes are commesurate with where we live.