Procrastination Pays Off

I’ve had a draft version of this article sitting in my inbox for some time. It never gelled, so I left it alone. However, a blogging friend and mentor of mine, Doug Nordman, recently published an excellent article at his blog The Military Guide entitled “Don’t Buy A Home When You Leave Active Duty“. The article challenged several of my planning assumptions and acted as a catalyst to complete this post.

I consider challenges to my retirement plan a good thing. They force me to re-examine and update it as I gain more knowledge, and as facts on the ground change. As such, this article isn’t so much a riposte to Doug’s article, as it is an acknowledgment of it. It’s a confirmation that Doug’s article contained great points which forced me to re-examine my planning assumptions, but despite the challenge, my plan still passes scrutiny. It’s a healthy, Bayesian inference exercise that everyone should conduct with their plan routinely.

My Plan Re-capped

For those who haven’t read it, my Test Your Retirement Plan post is where you need to start for the rest of this article to make much sense. I know some people have read it already since it (surprisingly) ranks in the upper third of my most popular articles. As an aside, I like that post a lot. Mostly because I feel it’s one of the most helpful posts I’ve written. In it, I demonstrate how to test a retirement plan using a high powered retirement calculator. Doing so provides an intimate understanding of the potential freedom and options Financial Independence (FI) with (or without) a pension provides.

It’s important to note that the plan I test in that article is my own so please … don’t judge my beer habit. Just kidding, I totally sanitized those numbers. While I originally used my own plan because it was easier than creating an example budget just for an article, it also happens to demonstrate another point of my blog: if this liberal arts major can do it, so can you. All it takes is some diligence to track your money, write a plan, and test it using a high powered calculator. Simple, right? It’s even easier if you follow my posts from the Planning section in the order in which they were published (see my Article Index page and go to the Planning section).

Back to my main point though … for all the love of my Test Your Retirement Plan post, something I pointed out in it always perplexed me which Doug’s article brought to the fore. As I explained what the test results told me when displayed on a (downloadable) spreadsheet, I noted that:

… if you look at my spreadsheet again, you see that only 7 of my 16 calculations scored above a 90% probability of success. A 90% probability of success is my cut off point for considering an option viable. 5 of the 7 viable options were in the 23 years of military service pay band (not ideal). Only one scenario showed a high probability of success under all four pay and spending options. That was purchasing a house outright upon retirement.

I emboldened the final sentence of that quote to emphasize my point. Owning a house outright on day one of retirement is the only way that all four pay/spending scenarios in my plan worked … every … single … time. Most importantly it’s the only scenario in which a pension for 21 years of service, vice 23, worked for my retirement plan.

The calculations didn’t just pass, they crushed the probability of success. I’m talking 99% to 100% probabilities of success with average Safe Withdrawal Rates (SWRs) between .2% and 2.4% annually. My market return and inflation assumptions weren’t outlandish either. I chose a 3% inflation rate (with a 1% standard deviation) and a conservative 5% annual return for investments (with a 12% standard deviation) for all scenarios as well. That makes for an effective return of 2%, plus or minus the effects of standard deviation.

I used conservative Social Security projections as well. Based on upcoming shortfalls in Social Security, I used 75% of our projected payments. More importantly, the plan worked with as little as 25%. If you want to know why that is, check out this article by Big ERN McCracken at Early Retirement Now on what I call the Immediacy Effect.

Thus, when I compare my plan’s test results to an article like Doug’s, cautioning home ownership immediately upon retirement, I’m left scratching my head. I double checked the math, and everything was correct. Or at least as correct as any mathematical projections about the future can be. Which means if I made a mistake somewhere, it was in my underlying assumptions. As a result, all I can do is compare the main points from Doug’s article to my retirement plan to see if his insight alters anything.

Doug’s Main Points

For those who aren’t going to read Doug’s article because you think it doesn’t apply to non-military; let me re-state his points in terms mostly applicable to the entire audience. Anything italicized is a direct quote.

• Chasing the myth of the forever home
  • 11% of Americans move every year
  • Retirees from a previous career (like the military) tend to move more than they expect after retirement
  • Much of that is due to their choice of bridging career — only 1/3rd choose their actual post-retirement (2nd) career correctly on the first try
• Building a transition fund
  • Start planning for your retirement two years before it happens and build up a transition fund
  • You need to stay flexible after retirement if you plan to work again
  • Flexibility means you need money available to go where the jobs or life sends you
  • Money tied up in a forever home isn’t flexible
  • Transition funds are finite, the clock starts ticking when the full paycheck ends from your first career
• Finding a job
  • “When you’re financially independent then you can live where you want”
  • “If you’re self-employed then you might have a location-independent workflow”
  • “Until those two things happen then you should live where the money is”
  • Buying a home adds even more pressure in the job search
• Moving to the new location
  • What’s the rush to buy?
  • A post-retirement move is different than a career move
  • You have more flexibility to explore neighborhoods, rent, and transition at a slower pace than when in the military (or working)
  • Ensure you like the job and location first
• Having enough income for a lease or a loan
  • Pension income doesn’t necessarily kick in right away
  • It’s easier to convince a landlord than a bank of your future earning potential
  • Banks will question your ability to pay back a loan because you’ll be earning less (on paper at least) than you did prior to retirement
  • “Buying a home requires a 20% down payment, a 15-year loan (or even longer), and closing costs! This is a long-term commitment to a new residence.”
• Tying up thousands of dollars in a VA loan funding fee (military specific)
  • “If you’re trying to buy a home as you leave active duty, you’ll have to pay the funding fee because you don’t meet the waiver criteria”
  • “After you obtain your VA disability rating then you can apply for a refund of the fee. First, though, you’ve given away thousands of dollars from your transition fund in the hope of getting it back later.”

Grumpus Eliminatus

As I said at the beginning of this post, Doug makes a lot of great points in his article. However, several of them don’t apply to my family’s situation. Let’s discuss the issues that don’t apply, why they don’t, and then see what’s left.

The most important aspect to understand about my retirement plan is that I intend to make my Golden Albatross count for something. I designed my plan around my pension. My pension coupled with our investments means neither Mrs. Grumpus nor I would ever have to work again … if we don’t want to. As I stated in my article on using the GRO2W model to outline a retirement plan, my Goal (the G in GRO2W) looks 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”.”

In practical terms, this translates to an ultra-conservative plan based on no more income than my military pension and retirement benefits; Social Security; and investments. In fact, I didn’t even include the potential for VA disability benefits, for which I’m a shoe-in at some percentage based on my much blogged about medical issues.

Now, how likely is it that Mrs. Grumpus and/or I would never generate anymore more income? Not very. Mrs. Grumpus is already working one day a week now, in preparation for returning to work part or full-time when I retire. But that is her choice, not a requirement to make the retirement plan work. As for me, I have the blog and another one of my hobbies that I could easily monetize as lifestyle businesses should I choose.

The important correlation to Doug’s article is that none of those money generation scenarios requires us to live anywhere specific. If they did, we wouldn’t pursue them. As Doug points out, if you’re financially independent, you can live anywhere you want. Our goal is FI by retirement, home in SoCal included. If we move during post-retirement, it will be for a completely different set of reasons …. which I discuss further below.

Finally, in an ideal world, our last duty station prior to my retirement would be SoCal — either San Diego or somewhere nearby. Doing so would allow us to accomplish much of what Doug describes in his article, prior to retirement. By that I mean we can rent upon return to San Diego, scout out good neighborhoods, schools, etc. This includes selling the condo we currently own in SoCal, and the purchase of our retirement home while we still show (on paper) a steady stream of income.

There’s certainly no guarantee we will get to San Diego for our last duty station, but if we do, it would alleviate a lot of that immediate post-retirement stress Doug describes. Alternatively, Colorado Springs is on our backup list of places to live if we are priced out of SoCal. I could try and make that our last duty station. Doing so would (again) allow us to knock numerous items off of Doug’s list prior to retirement assuming we chose to stay in Colorado.

Grumpus Analysis

Which of Doug’s considerations are left once the need for an employment-based move is eliminated by achieving FI? Well, there’s still the potential that we might want to move. After all, Mrs. Grumpus is European. It’s possible she may want or feel compelled, to move back home. A need to take care of her aging parents, or a perceived ability to provide a better life for our kids, might drive this. After all, you don’t often read about madmen gunning children down at elementary and high schools in Europe. Plus, I really like the beer over there.

What does that mean? Well, as Doug’s article alludes to, buying a house locks up a lot of capital in a non-liquid asset — which means it can’t be sold quickly to free-up cash if you need it. This means we couldn’t simply pick-up, move to Europe, and buy another house … unless we sold the one in America first. That’s the lack of flexibility that Doug’s article refers to. Jill Schlesinger routinely refers to this liquidity risk for retirees on her podcast as well. Depending on the circumstances, a move to Europe after we bought a house in America might mean we eat a loss through the cyclical moves of two separate housing markets or two exchange rates … or (gulp) both. Yikes!

We can’t afford to buy both a house in the US and in Europe. The math doesn’t work. Nor does the math work if we cash flow a house as a rental, and then rent ourselves. Or at least it didn’t work for SoCal when I ran the numbers for my retirement plan. I’d probably need to re-look at the estimated cash flow and see if Europe provided an offset which made the numbers work.

Now, rather than buy a house in SoCal upon retirement, we could probably pivot and buy a house near Mrs. Grumpus’s hometown in her mother country if necessary. Land is cheap in that part of the country, mostly because the weather sucks much of the year. Fortunately, the people are friendly and I can speak the language well enough to order a beer anywhere I go.

I would need some lead time to plan and make it happen though. Most importantly I’d have to run the cost of living difference through some calculations to make sure we wouldn’t bust our SWR. Otherwise, one of us would have to generate some sort of income. Thus, it looks like I have at least one due out from this exercise then — create and test a European backup plan. Thanks, Doug … and by that I mean “thanks for more work”. However, by doing so now, I’d at least know what the options are.

Plans Within Plans

Doug is correct that buying a house upon retirement equals a certain amount of inflexibility. The need, or desire, to quickly move to Europe after we buy a house in the U.S. would certainly challenge the flexibility of my retirement plan. However, other than the European wildcard, I can’t foresee why we’d feel pressured to move anywhere else … if we can execute the SoCal plan. I’ll need to communicate clearly with Mrs. Grumpus as we get closer to retirement and buying the house. Ultimately we’ll have to decide together in acknowledgement of the potential trade-offs.

Doug’s also correct that if a person achieves FI before/at retirement, then the inflexibility that comes with buying a house is a lot less worrisome. That’s the key takeaway for me. It’s also the main reason I trust my plan for now. The math still works. In fact, it doesn’t just work, the math works best if we buy a house. If we can achieve FI and eliminate housing payments by retirement, the likelihood of failure shrinks to a statistical improbability.

In reality, Doug probably didn’t write his article for a person like me. I took his advice to start planning for retirement two years prior and doubled it. By the time I hit my desired retirement date, I’ll probably have plans embedded within plans accounting for every conceivable contingency. In the end, it may all prove for naught, but at least I’ll be well prepared to adapt and build a new plan. Like General Eisenhower said, and I’ve quoted previously, the importance isn’t in the plan, it’s in the planning.