Just as you begin your military career getting the basics in place, you should start your path to financial independence with the basics too. Being in the military, you are in a special position to save a much higher percentage of your monthly salary for retirement due to free housing (or BAH), medical care, college, and a slew of other benefits your civilian counterparts often lack. Here’s a basic strategy to help make the most of your circumstances while you can.
Figure out your monthly expenses.
A good rule of thumb in regards to how you spend your paycheck is the 50/30/20 rule, which we go into detail about in THIS blog post. Essentially, the rule says 50% of your salary should go to expenses, such as housing, food, utilities, transportation, and any other necessities. The other 30% can be ‘discretionary’ spending, money you use however you see fit, such as entertainment, hobbies, and vacations. The 20% that is left should go into savings. But considering your overall expenses are much lower in the military, you should be able to put more than 20% into your retirement accounts. Your personal savings rate will be the best determiner of your retirement fitness.
Before you start socking a good chunk of your salary into retirement plans, however, you should first save for 3-6 months and set that money aside as a ‘rainy day fund’. You never know when you’ll have to make an emergency trip home or when your car will suddenly, inexplicably, break down.
Start plugging as much as you can into the TSP and an IRA.
The government will match up to 5% of your TSP contributions (100% on the first 3% of what you contribute and 50% on the last 2%), so it is always recommended that you contribute up to the matching limit. After that, you should look into an Individual Retirement Account at the same time in order to fuel more vehicles for saving. An IRA is completely separate from the TSP, and invests money into a wide variety of assets, such as stocks, bonds, and CDs, depending on your risk tolerance. You can contribute up to $20,500 in your TSP and $6,000 into an IRA (or $27,000 and $7,000 if you are age 50+).
We always recommend contributing to a Roth IRA as opposed to the Traditional, one so that your money will grow completely tax-free. You have the same choice between Roth and Traditional with your TSP by the way. Anything the government matches will always go into the traditional bucket, but we recommend making your contributions to the post-tax Roth TSP.
Once you have these basics covered, and if you have a partner and plan to have children, begin family planning. You should start saving for college as early as possible. If you don’t plan on using your GI Bill for yourself, you can pass on those benefits to your dependents, whether they be a spouse or children, thus saving you some big bucks! An IUL is also a viable option to help your kids save for college, especially if you start one when they are at a young age. This is a form of insurance that ties your premium to a market index, allowing it to grow in value. You can then take a loan out against the growing cash balance, to use for college (or anything else your kids may need). A bonus is that the IUL (unlike 529s or other college savings plans) does not count towards FAFSA when it comes time to apply for financial aid.
Now you’ve laid the groundwork and you can start systematically building wealth by utilizing all potential investment vehicles and growth accelerators. You can set up automatic deductions from your basic pay into all of your selected savings plans and consult with a financial advisor as to how aggressively you want your money to work for you. A financial planner can determine your risk tolerances and make adjustments to your portfolio based on your long-term goals and objectives.
Due to your sacrifices, it’s completely possible to retire after 20 years on your military pension alone, but only through careful planning. Each additional year you stay in also leads to an increase in your yearly pension. And once you reach the age of 59.5, your retirement plans will be accessible to you. Most Americans will have to toil until they are well into their 60s, as most don’t have access to such generous pensions and retirement plans, so you may as well take advantage!
It’s extremely important to put a plan in place as soon as possible and stick with it. As we love to say, most people don’t plan to fail, they fail to plan. So, while you are in the military, your expenses will be relatively low and you have access to retirement plans unique to military members and government employees. We are financial advisors who are experts on the nuances and complexities of the government retirement system. Let us help you start maximizing your military benefits today. Just click the button below to find out more.