As you see from the title, this post is a continuation of a previous post on the method I use to conduct financial planning.  If you haven’t read the first post I suggest you go back and do so.  The content below will make more sense if you do. I would strongly suggest you read my article on the need to track your money as well.  Without that knowledge you will not be able to make many of the calculations I discuss below.

If on the other hand, you are continuing from Financial Planning (Part I), and you’ve read my Track Your Money post, it must be because you are ready to build your financial plan.  So let’s get to it.

Please note this post is not like any of my others.  It is more of an example of how to do something, and less of an article about something.  It looks long on paper but in reality a lot of the content is bullet points.  Some of those bullet points link to various blogs and websites to help expand your knowledge on certain topics I mention, since I cannot cover it all in this article.  I might expand on certain sections of this planner with future posts.  For example, I might show you how to make the calculations find your Gap number, as opposed to simply listing out the formula.  We will see.  Now on to the building the plan through the GRO2W method.

THE GOAL: Your goal is what will motivate you through this planning process and inspire you to execute your plan.  I would suggest keeping it simple and specific.  Vague goals are not achievable.  At the same time do not simply put “retire with one million dollars in the bank” as your goal.  As you will come to find out, by stepping through the GRO2W planning process you will have a much better idea of what your “retirement number” is  –  and I would be surprised if it is one million dollars.  More to the point, money is not the motivation in and of itself.  Money is the tool to achieve your goal.  It is a means to an end.   So for someone like me whose main motivation is to spend more time with my family, my goal would look something like this:

“Retire from the military in San Diego at no more than XX years of active service in order to spend more time with family, live a fuller life, and focus on experiences.  I intend to do this by providing my family of four the ability to live on my military retirement pay, the other benefits associated with military retirement, the proceeds from any other wealth I am able to accumulate while on active duty, and never return to what I consider “full-time work”.”

My motivation

REALITY: This is one of my favorite parts of the GRO2W model, a healthy dose of reality.  While your Goal should represent your aspirations, the Reality section should anchor those aspirations firmly to the realm of not just the possible, but the probable.  It should be a sober assessment of what it would take in general terms to reach your Goal.  It might list the risks associated with your Goal, or failing to achieve the Goal.  It does not require the specificity that some of the following sections require, but it may prove helpful to bracket the problem as you see it.  So again, using my case as an example, a Reality statement would look something like this:

“Retirement at the XX year mark means retiring on approximately USD XXXXX gross (2016 rates) per year. Nothing to scoff at, but not an amount that would allow for carefree living when many of life’s major expenses (like college for our two children) remain ahead of us.  This will be difficult in San Diego but potentially easier in other top military retiree locations like Colorado Springs or Tucson.  Adaptive and continuous planning will be required while still on active duty.  Flexible execution will be required once retired.  For instance, I may need to go back to full-time work for short periods if the economy slows down and investment values plummet.  Alternatively, I may want to consider a lifestyle business which generates enough money to alleviate the need for large withdrawals from investments.  Continuous tracking of money flows both in and out of accounts will be required decades into retirement with spending tripwires set at low thresholds.”

Gonna have to watch the Benjamins

Sounds like a lot of work right?  And here you were thinking you would be drinking Mai Tais and golfing all day.

With all that said, from here on out the writing associated with your plan is mostly done.  It is time to start getting into the cold hard facts and numbers to see what the Obstacles and Opportunities are to achieving your Goal.   If you do not do so already, begin tracking your spending.  Again, see my post on tracking your money if you have questions as to why and how you should do this.

OBSTACLES.  At this point your planning document turns into a list of … you guessed it … obstacles to achieving your Goal.  My list looked something like this:

1. Debt
   1. Commercial ($X)
   2. School loans ($X)
   3. Medical ($X)
   4. Car ($X)
2. Major Life Expenses
   1. Mortgage ($XXXK)
   2.  Schooling
      1. Nursery / Pre-K: Currently $XX x 52 weeks = $XXXX
      2. Primary school: 2016 – 2019 = 3 x years of private primary school up to $XXK p/y
      3. University x 2 = $XXK
   3. Medical / Dental
      1. TRICARE Dental Insurance premiums costs in retirement = $1,307.76 (2016)
         1. Expect to go up in old age
      2. TRICARE Health Insurance premiums costs in retirement = $565.20 (2016)
         1. Expect to go up in old age
   4. Cars ($0 debt)
      1. 2010 HONDA  = 53,000 Mi.
      2. 2014 FORD  = 30,000 Mi.
   5. Life insurance
      1. Will I need it?
   6. Taxes in Retirement
      1. 21 years of service = 53.2K + Investment income (2016) = $2,892
         1. Federal = $1652
         2. CA State = $1240
   7. 23 years of service = 60 K + Investment Income (2016) = $4,221
      1. Federal = $2,672.50
      2. CA State = $1,548.52
3. Discretionary Spending in Retirement.
   1. How much $$ we need in retirement = Lifestyle + Location
   2. What type of spending life do we want to have? Consumer? Frugal?
   3. Where do we want to live? Military retiree system a must.
4. How much investment money will we need to withdraw to live per year in retirement?
   1. What is the gap number?
   2. How much will we need amassed in our investments?
   3. How will the Economic cycle at retirement impact these calculations?
   4. What if that is not enough?

OPTIONS: The Options section is not much different than the Obstacles section.  For each obstacle, you should list options for solving or mitigating them.

1. Debt – no action needed.
2. Life’s Major Expenses
   1. Mortgage ($XXXK). Payoff at or before retirement.
      1. Considerations:
         1. In order to retire in 3 years (XX yrs of service) payoff = $XXXXX/year
         2. In order to retire in 5 years payoff = $XXXXX/year
         3. 2014 – 2016 average savings: $XXXXX+ $XXXXX + $XXXXX = $XXXXX/year
         4. Avg Saving rate per year (2014 – 16) as percentage of income = XX%
         5. How much more can we save?
            1. Extreme frugality = Savings of 50% or more a year.
            2. Spouse on board? Yes, to 40% or so.
      2. Options
         1. Serve longer than 5 years until house paid off
            1. Added benefit: In High 3 model each year over 20 equals an extra 2.5% in retirement pay calculation.
            2. Only an option if homesteading in San Diego.
         2. Save more
         3. Generate extra income
   2. Schooling
      1. Nursery / Pre-K = will only need to pay in 2017 – 2018
      2. Primary School
         1. 2016 – 2019 = can cut cost by %50 through Grants
         2. 2019 onward = public schools in San Diego
      3. University = GI Bill + 529s + California VA Benefits (if domiciled in California)
         1. CA VA Benefit Plan B for dependents of disable rated veterans. Dependent must not have earned income over the previous year’s FED Poverty rate.  2015 = $12,331
   3. Medical / Dental Costs
      1. Build assessed medical and dental premium costs into retirement budget
   4. Cars ($0)
      1. Drive cars until they fall apart
      2. Buy pre-owned only moving forward (devaluation impacts original owner, not us) and pay cash
      3. Downsize to one? Yes, possible with electric bike
   5. Life insurance
      1. Obtain term life insurance for Spouse before retirement =  5 years worth of expenses to cover spousal home duties
      2. Me  =  May not need insurance if I take the survivor benefit for military retirement pay = $3466.13 p/y
3. Discretionary Spending in Retirement.
   1. How much discretionary $$ we need in retirement = Lifestyle + Location
   2. Considerations
      1. Discretionary spending 2013 – 16  (based on Europe prices) = $XXXXX p/y avg
      2. Locations
         1. San Diego Area (-10% from Europe cost of living)
         2. Tucson Area (-32% to 42% from Europe cost of living)
         3. Colorado Springs Area (-35% to 45% from Europe cost of living)
4. Investments.  What is our gap number? How much investment money will we need to withdraw to live per year in retirement?
   1. Gap amount =  (fixed expenses + discretionary spending) – fixed income (i.e. retirement pay and (when eligible) social security)
   2. Amount needed for retirement = Gap number x 25
   3. Other considerations:
      1. The 4% rule
      2. Understand Sequence of Returns risk
      3. Do it yourself.
      4. Low cost (<.05% ) ETF or mutual funds
         1. TSP and Roth TSP extremely good in this regard.
      5. Maximize growth.
      6. Risk vs. reward?
         1. Economical cycle dependent.
      7. Minimize tax implications.
      8.  Dividends?
         1. Is it even possible to create enough in a low-interest-rate environment?
5. What if that’s not enough? Create other income streams
   1. “Given a 4% withdrawal rate, if you earn just $1000/month or $12000/year that’s the equivalent to having saved another $300,000 towards retirement!” — Can I Retire Yet?
   2. Side job or gig doing something I love.
   3. Selling XXXXX?
   4. Create a lifestyle business. What work is required fits into your lifestyle.
      1. Spouse option?
   5. Rental income
      1. Pay off mortgage? Convert Condo to permanent rental income?
      2. Condo rental estimate: $XXK/year over a 40 year period
      3. Affects mortgage payoff calculations above.
   6.  Annuities
      1. Some people advocate. I do not.  If you have a pension, it acts as an annuity
      2. Purchasing additional annuities?
      3. More negatives than positives
   7. Social Security. Don’t count on all of it!
      1. Some but not all available for Gen Xers. Approximately 75%.
      2. Early, Full or Delayed? Know what each of those terms means and entail.

WAY AHEAD: This is the part where you build your action plan based on the knowledge you gained by surveying your Obstacles and Options.  Remember your Goal!  Your Way Ahead should get you to that Goal.   If you are married or have a long-term partner, that person must be on board with the Way Ahead.  Hopefully, your planning efforts up to this point have not been accomplished in a vacuum, but if your spouse or partner have not been involved, walk them through your efforts so far.  If you have older children who understand money issues, get them involved too.  The decisions in this plan will affect them as well.  If you need any motivation for going through with this, I suggest reading The Millionaire Next Door.  It is an excellent book and although roughly 20 years old, still relevant to anyone looking at personal finance issues.  (**Please note Grumpus Maximus is an Amazon affiliate.  See Disclosures page for more details.**)

1. Pay down all commercial debt
   1. Snowball effect
   2. For military members we get extra help from numerous places with debt reduction — check out this section from the Military Guide Blog.
2. Save
   1. Build your emergency reserve for unforeseen expenses.
      1. About 46 percent of Americans said they did not have enough money to cover a $400 emergency expense
      2. 3 to 6 months for the military is more than enough.
3. Invest  — Use your Gap number as the goal.
   1. Educate yourself.  Read The Simple Path to Wealth or the Blog‘s stock series. (**Amazon affiliate link.  See Disclosures for more details**)
   2. Mad Fientist is also a good resource.
   3. Signal and the Noise chapter on the futile attempts to beat the stock market inspired me to take action.  (**Amazon affiliate link.  See Disclosures for more details**)
   4. Learn the difference between stocks, bonds, mutual funds, ETFs, and annuities.
   5. Understand the pros and cons of investment vehicles such as taxable investment accounts, 401Ks, 403Bs, IRAs, Roth IRAs, 529s, TSP, and Roth TSP.
   6. Create an investment strategy suitable to your goals and risk appetite.
   7. Execute and monitor.  Find a good investment platform.  Adjust as little as possible but when necessary.
      1. Vanguard
      2. Robo-advisors
4. Plan for retirement.  Read materials from people who have already retired.
   1. Get your mindset correct.
   2. Know your benefits — especially retiring military personnel.
   3. Test your plan and your numbers.
      1. Find a good set of retirement calculators
      2. Simulate retirement spending for a month.  Is it feasible?
5. Create other income streams if your Way Ahead does not pass your test.  Add the numbers back into the Way Ahead, test again, and see if it helps.  If so, start work now to build those other income streams!
   1. Rental Income
   2. Side gig or job
   3. Create a Lifestyle Business
   4. Freelance or consulting
6. “Retire” once you’ve achieved your goal.  Congratulations on obtaining Financial Independence.