Being a TSP Millionaire is not as hard as you would think. One of the big problems with the TSP is how confusing it is. It has different funds than a 401k or Roth IRA would have. But that shouldn’t confuse you. It is easy to follow these three simple (but not always easy) steps … Read more
Using a HELOC to pay off a mortgage is an interesting debate.
What’s a HELOC?
A HELOC is a home equity line of credit. If you have equity in your home, you can take out a loan from your bank using that equity as collateral.
Paying off a mortgage with a HELOC is paying off a loan with another loan.
While I’m not so sure paying off a mortgage is the smartest financial move anymore (I used to believe it was), doing it using another loan certainly an idea worth exploring.
I’m going to summarize the issues in a fair and balanced slightly biased way.
So Should I?
My final answer on this is that you should not use a HELOC to pay off a mortgage. HELOCs are variable rate loans instead of fixed rate like a (good) mortgage. HELOC interest is not tax-deductible in most cases. The line of credit can be frozen or reduced by the bank at any time. Also, even if you are making lower, interest only payments on your HELOC, it eventually will revert to a principal plus interest payment that you may not be ready for.
As a military member, the largest difficulty I had was finding the best places to invest in real estate. I moved every 1 to 3 years, so I didn’t have an obvious choice. Through a lot of trial and error, I figured out a system that has worked well for me. It goes against the conventional wisdom on picking the best markets for real estate investing. That’s why it works!
How to Find the Best Markets
The secret to finding the best places to invest, especially in this advanced real estate cycle, is two things. First, you must gain a strong knowledge of the market you are going to invest in. This means you or somebody you trust needs to be your boots on the ground in that location. This will allow you to buy the right house in the right neighborhood in any city you end up choosing. Second, prioritize cash flow over appreciation. Make sure the property you buy will cash flow well, and never sacrifice that for a hope that you will get a large amount of appreciation.
Finding the Best Cities to Invest – Common Advice
To understand the significance of the advice I’m giving, I want to share the advice every other website would give you if you googled “How to choose the best city for real estate investing.”
O yeah. I’ll also tell you why those websites are all wrong.
All the other websites will tell you the most important things to consider in choosing a real estate market to invest in are items such as these:
1. Population Growth
2. Job Growth
3. Housing Appreciation
4. Low Unemployment
5. Low Rental Vacancies
These blogs will sometimes teach you how to lookup these statistics showing you which websites to use so you can pick the best markets to invest in real estate.
What do I know about long distance real estate investing?
As a military member:
I’ve moved every 1 to 3 years while investing in real estate
I currently have 20 paid-off single family homes
I’ve self-managed and used management companies
I bought 16 properties while living overseas
I read a blog post this morning that said investing long distance requires a slightly different approach than normal real estate investing.
It’s a different ball game altogether.
The secret to mastering long distance real estate investing is getting these 5 things right:
The Importance of Boots on the Ground
The Best Real Estate Agent for Long Distance Investing
Choosing a Property Manager from Long Distance
Choosing the Right Property from Long Distance
Managing Contractors from Long Distance
The Importance of Boots on the Ground
This is where I feel a lot of new investors make their first mistake.
They are neglecting the importance of having boots on the ground.
There have been good books written about long distance real estate investing and how easy it can be done using video, pictures, docusign, and aligning yourself with a great “team.”
This all sounds great, and might work for an experienced investor.
I can tell you from a practical standpoint, however, that nothing replaces the importance of having boots on the ground that you can trust in the location you are investing.
Whether it is a contractor trying to rip you off, tenant trashing a house, or just a need to respond quickly to an emergent situation at your property, there is nothing like having someone you trust that can tell you what is actually going on with your property.
The TSP Loan program lets you borrow money from your own TSP account while you are either in the armed forces or employed by the federal government.
HOW IT WORKS
When you borrow the money, it comes out of your actual TSP account. It can be any amount between $1,000 and $50,000, not to exceed your contributions and earnings from those contributions. It does not include any agency contributions (blended retirement system or BRS) or earnings from agency contributions.
As you are repaying this loan, it is repaid with interest through payroll deductions back into your own TSP account. This means that this large amount of money will not be growing tax advantaged in your TSP account during the time period you have borrowed it. You lose the opportunity for that growth. More on this later.
Keep in mind, even though you are paying interest, it’s a low, low rate and you pay it back to yourself, so it’s not really a cost to you. The interest, however, is not tax-deductible.
To be eligible for a TSP loan, the following must apply:
Employed by uniformed services or federal government
In pay status
Only have one outstanding general purpose loan and one outstanding residential loan from any one TSP account at a time
Have at least $1,000 in your TSP account not counting agency contributions and earnings
Have not repaid a TSP loan of the same type within the past 60 days
Not had a taxable distribution of a loan within the past 12 months unless it was the result of your separation from Federal service
The 1031 exchange (26 U.S. Code 1031), otherwise known as a like-kind exchange, or Starker exchange, is one of the most important tools for a real estate investor. I’ve seen too many military members not aware of this rule.
I’ve actually talked with military members who have sold their investment properties and had no idea they could defer the capital gains through this exchange. I don’t want this to happen to anyone.
Let’s get clear on it!
When you sell real estate, Uncle Sam wants it’s cut of your profits.
There are only two ways to avoid paying the profits, or capital gains, on a real estate sale.
The other exception is for real estate investors, which we are focusing on with the 1031 exchange.
The 1031 exchange got its name from the section of the IRS tax code it comes from. This is the section that allows for a like-kind exchange that defers the tax liability of the sale into the next asset.
Keep in mind, the 1031 exchange, or “like-kind” exchange used to apply to items other than real estate. As of December 2017, a tax reform law that passed limits exchanges to only real estate.
You may also hear the exchange called a Starker Exchange named after T.J. Starker, who successfully sued the U.S. government in 1979.
Before that, the exchange of real estate actually had to be simultaneous. Now, you can typically have 180 days between the sale of the property and the purchase of the replacement property.
Thanks Mr. Starker!
8 CRUCIAL RULES
First, we need to understand what type of real estate can be substituted for what.
You may not have to pay tax on all or part of the gain from the sale of your main home. This is where you live most of the time. A main home can be a:
Actually, everybody can get this break on capital gains on the sale of a home under certain circumstances, but military members get an additional benefit that makes it much easier to meet the requirements.
WHAT IS THE CAPITAL GAINS TAX?
Cars, stocks, and bonds are capital assets. A home is also considered a capital asset because it is a significant piece of property. When you sell it for more than you paid, it’s called a capital gain.
When you sell a stock for more than you paid, you’ll need to report that to the IRS and pay taxes on the capital gain. Primary homes get excluded from this as long as it fits certain criteria called the ownership and use test.
OWNERSHIP AND USE TEST
To be eligible for excluding capital gains on your primary residence, you must be the ownership and use test, as outlined in Publication 3 – Armed Forces Tax Guide. You will be eligible for the exclusion if, during the 5-year period ending on the date of sale, you:
Owned the home for at least 2 years (the ownership test)
Lived in the home as your main home for at least 2 years (the use test)
If you don’t fully meet these two tests, you still may be eligible for a partial exclusion. See IRS Pub. 523 for more details, and consult a smart tax advisor.
This is commonly explained as you have lived in your primary residence 2 of the last 5 years.
HOW MUCH CAN YOU EXCLUDE?
It seems like it should be unlimited, right?
Dream on. The USGOV would never allow that!
You can exclude up to $250,000 of capital gains if filing single / $500,000 if filing jointly.
This exclusion is allowed each time you sell your main home, but generally not more than once every two years.
WHERE MEMBERS OF ARMED FORCES GET AN ADDITIONAL BENEFIT
Maybe you’ve made some of these mistakes military members make.
I made a few of these mistakes myself, but I’m still here today doing relatively well.
Let’s see how you measure up.
1. GOING INTO DEBT
I want to use a few other phrases to signify what kind of mistakes get military members or families in trouble.
It’s living large when you haven’t made that money yet.
Spending money you haven’t earned. Otherwise known as… Keeping up with the Jones’s.
The funny thing is, the Jones’s are going into debt to keep up with you too!
Here are some things that will really put you into debt:
Buying or renting much more house than you need…
I see it time and time again in the military. A married couple with one newborn buying a 4000 sq ft property. Not sure what they will do with 6 bedrooms and 4 baths!
You want to be well off? Get the smallest property that will fit your needs. (Awww, that’s no fun!)
Having a new house custom built…
But it’s so nice to have a big house built to your specifications. You deserve it!
Big houses need lots of things to fill them up. They just don’t look right without expensive furniture and nice cars. They are also expensive to heat and cool. Good luck!
New or expensive cars…
Whatever you do, don’t buy a new car. On top of that, don’t ever fall for that crap where you think you are getting some special benefit through military car sales. You are still overpaying and getting KILLED on depreciation the day you put the first mile on it.
I like buying used cars with one previous owner and low mileage. Ideally, you pay cash for it.
Vacationing while overseas…
You are stationed in Germany, and there are LOTS of 4 days weekends, so you are hitting a different country on each one. You are in Japan, and it’s the perfect gateway to Southeast Asia. Everybody will be filling their Facebook and Instagram feeds with travel while stationed overseas.
Don’t overdo it. Take advantage of existing geography and vacation in areas around you that you. Try to drive there instead of flying, and try to Airbnb instead of hotels.
The VA Loan is a mortgage that helps veterans finance the purchase of homes with good loan terms and interest rates that are typically better than what you would see on other types of mortgages.
VA home loans aren’t made by the VA itself, but by private lenders such as banks, savings and loans associations, and mortgage companies. VA guarantees the loan if and when the applicant is approved.
People often say the VA guarantees loans, but that’s not accurate. Actually, the VA guarantees a portion of the loan. This still gives lenders a lot more comfort in lending, because if you stop paying, there is a higher chance they won’t lose any money on the deal.
For loans over $144,000, the maximum guarantee amount is 25% of the 2019 VA county loan limit. For most counties in the U.S., this amount is $484,350. For high cost of living areas such as Honolulu or even certain parts of Denver, the amount is $726,525.
What’s the Most I Can Borrow?
There actually is no limit. The issue is, are you trying to avoid a down payment?
In most cases, if you don’t exceed the county loan limit, then you can get that loan with no money down (Yay!).
Once you surpass the county loan limit, the lender will want a down payment from you because the VA will not provide a guarantee for that portion of the money.
I want to be clear about this, because it’s confusing.
If you wanted to borrow $800,000 for a house in Honolulu, you might be required to put up a down payment on a VA loan, but it won’t be as big as you think.
You wouldn’t be responsible for the down payment on the entire amount, just for a down payment on the amount exceeding the county loan limit.
$800,000 want to borrow
$726,525 county loan limit
$73,475 amount exceeded county loan limit
The lender may ask you to make a 20% down payment on $73,475, which works out to be about to be $14,695.
That’s way cheaper than paying 20% on $800,000 which is $160,000. Ouch!
So buying a really expensive house (even a 4-plex) in Honolulu or a similar HCOL area with a VA loan may not be possible with no money down, but you might be able to do it with a small down payment.
You CAN, but that doesn’t necessarily mean you SHOULD. There are many factors to consider. Often, expensive rental properties in HCOL areas do not make great rentals, and I recommend against them for military members.
I’m sharing several TSP allocation strategies for 2020.
The strategies I talk about in this article below are:
S&P 500 Index Allocation
Total Stock Market Index Allocation
Warren Buffett TSP Allocation
Dave Ramsey TSP Allocation
Paul Merriman TSP Allocation
Total World Stock Market TSP Allocation
Balanced Index Fund Allocation
My Rich on Money Personal Portfolio Allocation
The Thrift Savings Plan is a defined contribution plan for United States civil service employees and retirees as well as for members of the uniformed services.
It is the rough equivalent of a 401k for military and civil service employees.
I’m not here to tell you which TSP investment strategy is best, that’s a fool’s errand. Giving this type of TSP advice is impossible.
The only way to do that is to go into the future, see how things turn out, and then tell you which TSP allocation would have been ideal.
I will, however, give you the tools to make an informed decision about the best TSP strategy for you with some good food for thought.
Several of these TSP investment strategies are recommended by well-known money gurus such as Warren Buffett and Dave Ramsey. The Dave Ramsey TSP allocation recommendation is a widely-searched google term.
I’ve added every TSP investment option I could find that will work with the available funds as well.
TSP ALLOCATION OPTIONS 2020
Below is a list of different potential TSP allocation strategies for this year you could use. I’ve pulled these from various sources and as I discover new ones, I will update this. Please send me your recommendations with supported documentation.
By the way, did you know the TSP recently drastically changed it’s withdrawal rules? It’s now much easier to withdrawal money.
Make sure you maximize all your TSP benefits. Click here for a free comprehensive E-guide that has everything you need to know about the TSP.
The S&P 500 Index
This is the asset allocation I used most of my working life.
When I opened a Roth IRA in 1999, I called my bank and asked to put it in the S&P 500. At the urging of an investment advisor (I’m not a fan of most), I put it in an aggressive growth fund instead. In 2000, it lost half its value.
From that day forward, I decided S&P 500 would be the way I invest. I had read before that Warren Buffett said something to the effect of, if you don’t have time to look at stock charts and read finance news all day long, you are better off investing in the S&P 500 index and never touching it.
Actually, here’s exactly what he said in 2013 in his letter to shareholders:
“Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power…I have good news for these non-professionals: The typical investor doesn’t need this skill…In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners…but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”
Additionally, instead of investing his wife’s inheritance in Berkshire Hathaway stock, he plans to invest it in the S&P 500 index.
That should tell you something.
If it’s good enough for Warren, it’s good enough for me.
To mimic a full investment in the S&P 500 index, just invest 100% in the C fund.
Instead of just investing in the largest companies that make up the S&P 500, you invest in those plus mid and small cap companies as well. This index encompasses the entire U.S. stock market (as the name suggests!)
Financial Independence Retire Early (FIRE) enthusiasts will swear to the superiority of this index to the S&P 500, and suggesting considering anything else is heresy!
It’s clearly more diversified than the S&P 500, and small caps have been known to outperform large caps over the long term, albeit with potentially a little more volatility.
Over long periods of time, the total stock market index fund and S&P 500 had similar performance, and it would be hard to say for sure which will outperform in the future.
In my opinion, you are doing great with either one.
80% C and 20% S will closely mimic this popular index.
The Warren Buffett TSP Allocation
image from moneycrashers.com
While I mentioned earlier I got my idea for an all S&P 500 index allocation from something Warren Buffett said in a newsletter, he actually has more specific instructions I want to address here.
I talked earlier about how he had a plan for how the money left for his wife would be invested. I said he would invest in S&P 500 index instead of Berkshire Hathaway, but that’s only part of the story.
He also has a plan to throw bonds into the mix to smooth out the ride a little bit, which is a common investment strategy. The amount of bonds you throw into the mix will dampen the volatility, but will also limit your upside potential during booms as well.
In the same newsletter in 2013, he talked about his specific advice to his trustee on how to invest the remaining money that will be left to his family:
“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund…I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”
As luck would have it, this is easy to mimic with the funds offered in the thrift savings plan. 90% C fund and 10% F fund.
Dave Ramsey TSP Investment Advice
I’m a huge fan of Dave’s book Total Money Makeover. His baby steps for getting out of debt are legendary!
He also has TSP investment recommendations on how to invest in the thrift savings plan. His caveats are typical of Dave’s approach to money.
In typical Dave fashion, he suggests that you first pay off all your debt besides your primary residence before you begin long term investing and have an emergency fund of three to six months of expenses as well.
He has two sets of recommendations. One slightly more aggressive than the other.
Paul Merriman is a successful advisor on mutual fund and index fund investing. He’s an accomplished author, speaker, and is well known for then ultimate buy-and-hold portfolio.
This portfolio is comprised of index funds and has an amazing track record. Unfortunately, due to the various types of funds held in this portfolio, it is impossible to mimic with the TSP funds available.
If you are curious, I wrote an article about this how to invest in this portfolio:
He explains that most notably what is missing from the TSP funds is value funds, which is a key component of his strategy to boost typical index fund returns.
He does make specific recommendations for TSP owners using what is available to us.
He has 3 separate recommendations based on your risk tolerance, conservative, moderate and aggressive.
With all three of these portfolios, the equity part of the portfolio is split the same way:
50% in S, 25% in C, 25% in I.
With the aggressive portfolio, the entire amount is invested this way. The conservative and moderate portfolios have a portion of the total invested in the F and G funds. This portion is not exposed to the risk of the stock market, as the C, S and I funds are.
His advice is that, generally, younger investors can afford to be more aggressive, and as you get older, you become more conservative, but this is a generalization and everybody’s situation may differ.
The conservative portfolio is 18% G and 42% F, and the rest in S, C and I at 50/25/25.
The moderate portfolio is 12% G and 28% F, and the rest in S, C and I at 50/25/25.
Attached is a graphic from his website outlining exactly how to do this strategy.
Here is the link to his article on TSP recommendations:
Make sure you use these allocation strategies to make the most money in your TSP.
Total World Stock Market Portfolio
This portfolio mix is a tsp investment strategy modeled loosely after the Vanguard Total World Stock Index Fund (VTWSX).
It will allow you to have exposure to stock markets around the globe, including the United States and developed foreign markets.
The weakness of this portfolio compared to the Vanguard one is exposure to emerging markets. The I fund currently only has developed economies, and not emerging markets. There supposedly is a plan in place to change the I fund in the future to include emerging markets, but it hasn’t happened yet.
The Vanguard fund I am modeling after has roughly 60% of the portfolio in U.S. stocks, and the rest are international. To model this portfolio, use 48% C and 12% S to make up the U.S. stock market, then use 40% I for the rest.
The 48/12 mix comes from splitting 60% into an 80/20 mix to achieve the Total Stock Market Index.
Balanced Index Fund Portfolio
This portfolio is meant to mimic the Vanguard Balanced Index Fund Admiral Shares (VBIAX).
It is a way to have access to the entire U.S. stock and bond market. It has far less volatility than the Total Stock Market Index by using bonds to smooth out the ride. The balance of this portfolio is 60% stocks, and 40% bonds.
This can be accomplished through 48% C, 12% S, and 40% F.
Obviously, you could adjust the stock/bond ratio to meet any level of risk that you would like.
Three Fund Portfolio
This is a favorite among Bogleheads (Those who love Vanguard and its founder Jack Bogle).
This fund is comprised of 1/3 each of the following:
Vanguard Total Stock Market Fund
Vanguard Total International Stock Market Fund
Vanguard Total Bond Market Fund
This fund is broadly diversified, but heavily weighted in large cap stocks. Remember, the I fund lacks the exposure to emerging markets that the Total International Stock Market Fund has, so the thrift savings plan version won’t be identical until the I includes more countries and emerging markets.
To mimic the Total Stock Market fund, I split the 33% in an 80/20 C/S split. This is where I get my weird percentages from.
A way to closely mimic this portfolio is: 27% C, 7% S, 33% I, 33% F.
My Current TSP Allocation for 2020
There are literally thousands of people who google “Rich on Money TSP Allocation” every millennium.
Until now, nobody has ever known how the brilliant mind of a master invests.
I like the idea of being a little heavier weighted on the mid-cap stocks as opposed to being just all S&P 500. Of course, I’m going against Warren Buffett’s philosophy.
Not sure how wise that is!
I used to have international sprinkled in there at 10%, but I gave up on it. There is enough international exposure between C and S IMHO.
Here it comes…
The Rich on Money worldwide dominance TSP portfolio
50% S / 50% C
Best TSP Fund for 2020
The question “what is the best TSP fund for 2020?” or “what is the best TSP fund?” gets asked all the time.
It’s a fundamentally flawed question.
If you are asking which TSP fund is best, you may think that jumping between funds at the right times depending on cycles, economic data, politics, etc. will yield you superior returns.
You may also believe that experts scouring the market for data and gifted chart readers have some way of knowing which funds should outperform in the near future.
I’m here to tell you, people with those abilities do not exist.
There are many that make a fortune on Wall Street writing blogs, and doing news segments claiming this unique gift. When they are right, they get huge kudos and bonuses.
When they are wrong, they explain why the market didn’t do what they thought, and make a new prediction. Eventually, they stop getting away with this and fall out of favor.
Their successful predictions, IMHO, are largely attributable to luck. Just because they were right this time, doesn’t mean they’ll be right next.
This concept is difficult to explain in a few paragraphs. If what I’m saying makes a little sense to you and you’d like to know more, read the following article:
There is no best TSP fund in 2020 or any other year. There are good TSP allocation strategies that should work if you follow them consistently over a long period of time (that means decades).
That’s what I gave you in this article.
Changing strategies or funds often is a recipe for low returns.
Most of these TSP allocation strategies should work well if you regularly contribute to your thrift savings plan, ensure you are getting matching if it’s offered, and stick with the same TSP investing strategy over the long term.
I would caution against jumping back and forth between TSP investing strategies every time you find something bright and shiny. Many people erode their long term returns by “dancing in and out of the market.” (Warren Buffett)
To understand all this TSP advice, it helps to know the five core funds inside the TSP and what they consist of. This is important in understanding how they are used in building TSP investing portfolios.
TSP INVESTING GUIDE – THE FUNDS
The G fund contains short term U.S. Treasury securities with no exposure to the risk of the bond or stock market
The F fund is an index of world-wide government, corporate, and mortgage-backed bonds
The C fund is equivalent to the S&P 500 index.
The S fund is an index of mid and small-cap stocks not included in the S&P 500.
The I fund mimics the MSCI EAFE Index of international stocks in 21 developed markets excluding the United States and Canada.
The L funds are professionally managed investment funds tailored to a specific time horizon.
Now we dive into each one a little more in depth before going into our TSP investment strategies:
The G Fund – The Government Security Investment Fund
Pros: No volatility and backed by full faith and credit of the U.S. government
Cons: Can barely match the inflation rate; rate based on prevailing interest rate, which is currently low
This unique investment is only available for TSP investing. It’s rate is equal to 10-year treasuries, but their liquidity and protection from interest rate fluctuations is superior to 3-month T-bills.
The interest rate resets monthly and is based on the average of U.S. treasuries with a duration of 4 year or more.