By JLP | August 6, 2008
I have been reading your blog for about 2 months and feel that you would be a good person to ask some advice.
I am currently in the Army and have 12 years remaining until retirement. I am 33, wife is 31. My wife and I would like to save $1600/month from now until then (12years) and pay cash for a house when I retire. We do not have any debt. We move about once every 3 years so purchasing a house between now and then is not something we wish to consider. I do not want to take out a mortgage and rent the home for 12 years, either. The question is where should I put the money (account-wise)? I am already putting in 15% to the TSP (like a 401k). Should I put the extra 1600 in two Roths (her and I) and use the “first time homebuyer clause” for withdrawing penalty-free? I realize I will exceed the limits, but is that a good place to start?
I appreciate your time. By the way, great blog.
In a follow up email, I found out that MH makes about $5,587 per month. He also gets a non taxable housing allowance of $1,350 per month but we’ll leave that out of this exercise.
I ran MH’s numbers and here’s what I came up with.
Monthly savings: $1,600
Allocated to Roth IRAs: $833 (earning 8% per year or .67% per month)
Allocated to taxable savings account: $767 (earning 3% per year or .25% per month)
Here’s what the numbers could look like over the next twelve years (using the 2008 federal income tax rates and brackets):
At the end of 12 years, MH would have $116,000 sitting in his taxable savings account and nearly $202,000 in his Roth IRAs. The IRS allows Roth IRA holders to withdraw their contributions tax-free, so MH and his wife could withdraw $120,000 ($10,000 per year × 12 years), giving him a total of $236,000 to put towards a house. He would also have $82,000 in his Roth IRAs.
Another option for MH would be to pay the taxes on the interest in the savings account from sources other than the savings account. If he did that, his situation might look like this:
Paying his taxes from other sources would give him an extra $17,000 to go towards his house.
MH could roll the dice a bit and invest his taxable money more aggressively by utilizing index funds. His potential return would be better but he would also increase his chances of having less money to go towards his house. In my mind, the worst case would be that he would have to buy his house with the help of a mortgage, which as he stated in his email, is NOT his goal.
MH and his wife are in a good spot. He’ll retire from the Army at age 45 and be able to start a second career. He’ll have a nice retirement nest egg and a nice chunk of money to go towards his house. He should be giving financial seminars to all his Army buddies!