Your Military Money

In Consideration of Living Abroad

2012-01-24T02:55:00.000-08:00

Photo Credit: Dreamstime.com

The popularity of HGTV's House Hunter International program demonstrates that Americans are at least intrigued with the idea of living abroad. The images of beach-side hideaways and cobblestone streets are appealing, and all the real estate agents speak English without an accent.

Marketwatch published an article about the world's top 10 retirement locations. They go from Asia to Europe to South America. Each location offers something completely different than the American model of retirement. Here you may still be able to golf, but you're probably not going to do it every day.

Probably the best advice that you can get is that if you are considering an overseas lifestyle that you remember to be flexible, adapt to the local surroundings, and not expect to have things look, smell, or taste the way they do "back home."

Postscript: The Peace Corps recently withdrew 150 volunteers from Honduras due to a lack of local security. This suggests that Americans spending extended stays outside the country should continue to monitor US State Department travelers advisories and be prepared to move if conditions deteriorate.

New Raise...Keep It

2012-01-15T04:01:00.001-08:00

If you're an active duty military member, you just received your first paycheck for 2012. Like me you saw a raise of 1.6%. If you haven't already done so, consider contributing this increase to your personal savings program, whether that's your TSP, a ROTH IRA, or just a savings account. Over time this process of increasing your savings will lead to big improvements in your overall wealth building capability.

I have posted previously about the 8% challenge. This technique allows you to save a month's pay per year. Over a three year assignment, you can create a 3 month emergency fund that will anchor your financial life as you prepare for your next move, whether that's to a new duty station, discharge, or retirement.

Perhaps this is the year that you get on the 8% Solution, and the Government will get you started with the first 1.6%.

Happy New Year,

YMM

Max Out Your TSP in 2012

2011-12-03T06:14:00.000-08:00

We've just updated the "Max Out Your TSP" table for the proposed 1.6% military active duty pay increase for 2012. Here's the link.

Here's how you use it. In this example, a Major (O-4) with more than 18 years of service would go to MyPay.gov, select the TSP link, and select 19.8% as their monthly contribution.

Similarly, a Lieutenant Colonel with 16 years of service would contribute 18.2% of their base pay to max out their TSP for the year.

Here are a couple of notes. First, this table assumes that the Congress will approve the 1.6% increase and that the President will sign the bill into law. Second, it assumes that you will want to max out the TSP at $17,000 for the year. If you are older than 50 the max contribution is $22,500. This table does not account for the extra $5,500 catch up provision.

TSP Limit for 2012

2011-12-01T08:45:00.001-08:00

Internal Revenue Code (IRC) 2012 contribution limits — You can contribute up to $17,000 in tax-deferred money to the TSP in 2012. If you are a member of the uniformed services, you can contribute a total of $50,000 in tax-deferred and tax-exempt money. If you will be age 50 or over in 2012, you can also contribute up to $5,500 in additional "catch-up" contributions, as long as your regular contributions for the year are expected to reach the $17,000 limit. (The catch-up contribution limit has not changed from 2011.)

Source: TSP.gov

SBP DIC Offset Headlines Making Headlines

2011-11-25T05:18:00.000-08:00

If you're a military member now or a disabled retiree you have probably been watching the recent headlines about spouses of now deceased veterans having to remarry to collect benefits.

First, let's think about the Government's intent. The intent is to provide every surviving spouse a stipend in the event of a military member on active duty or suffering a duty related disability.

The minimum benefit from the VA is the Disability and Indemnity Compensation, or DIC.

For those military members who elected to pay premiums for the Survivor Benefit Program and retired due to a duty related disability, their SBP is offset by the DIC dollar for dollar. If the DIC payment exceeds the SBP benefit, then they receive only the DIC and the SBP premiums are refunded.

There is a loophole, however, that allows surviving spouses aged 57 and older who remarry to collect both benefits concurrently. The Military Officers' Association of America did the best job of explaining this situation.

There are a number of Veterans Associations who are lobbying Congress to eliminate the offset and allow surviving spouses to receive both the DIC and the SBP benefits. This will be a challenge in a shrinking budgetary environment, however noble the cause might seem.

The important thing for military members to consider is to protect their spouses from the worst possible situation. Plan on SBP or offset it with life insurance and the DIC if you have a service related disability. Don't count on any change to the current policy (except the possible end of the dual payment option for remarried spouses!)

TRICARE Supplement Policies

2011-11-11T10:51:00.001-08:00

Here's my current list of available TRICARE Supplements. Please comment on any/all of them if you have experience with the companies.

Air Force Association
American Military Retirees Association
Uniformed Services Benefits Association
Military Officers Association of America
Military Benefits Association
Retired Association of the Uniformed Services
Reserve Officers Association
TRICARE Reserve Select
Association of the US Army
Society of Military Widows
Naval Enlisted Reserve Association
AF Sergeants Association
Marine Corps Association
CHAMPVA AMRA Supplement

Federal Publishing has a chart online that allows you to compare the costs associated with the different plans.

Before purchasing a policy, TRICARE recommends that you consider several aspects of the available coverage. Check their web site for details.

Finding the right Post-Military Health Care Insurance

2011-11-11T10:28:00.000-08:00

I've been researching the private health and dental options for our family, specifically as my oldest is about to graduate from college. Fortunately, Tricare Young Adult will help us bridge the gap, but I thought I could do better than $180+/Mo, with a 20% co-pay and deductable. Turns out that unless we spring for a high deductable plan, TRICARE will be the best bet.

Also, because my son is still looking for work, we are not eligible to participate in a Health Savings Account.

There are significant differences in coverage based on your region and needs. Also, it will be more difficult if you have an existing health issue that needs to go with you and your new coverage. I'll continue to report on what I find. Please add your comments if you have health and dental coverage recommendations.

Top-Paying Post-Military Careers

2011-10-10T10:23:00.001-07:00

Here's a link to a great article about the best paying Post-Military Careers. What I like about it is the active links to the available jobs and the career overview with salary statistics. This could be valuable when negotiating a salary and benefits package.

Living Well on $40,000 a year or less

2011-10-09T13:22:00.000-07:00

There have been a number of articles written recently about how to live in America on less money. Whether it is a function of the unemployment rate, the populist counter-Corporate movement, or a back-to-basics philosophy of consumption vs. value, these articles seem be be getting a lot of attention.

There's the story of the school teacher who makes less than $40,000 a year who still has money to save for the future. Or the college graduate who plans of living in 10 cities in 10 years...just to experience them, on about $20,000 a year. US News ran a story last year about living abroad in order to live life on Social Security payments alone.

Of course all of this is relevant to a military retiree who either is planning for transition to civilian life or hopes to retire completely when their military service is complete. I recently corresponded with a military retiree who moved to Mexico to live after they left the service. This gentlemen encourages anyone interested in doing so to learn the language and adapt to the culture.

He wrote:

"Living on my pension here in Mexico wasn't difficult since rent and food is inexpensive away from the international communities; however, one needs to speak the language and respect the culture. Of course, now that I'm also getting social security, it's much easier.

If another retired AF member were to do what I did now, he or she could find an apartment or a small house for around $150 in a small community. Groceries would run around another $150. Miscellaneous costs would probably be around another $100. Since there is adequate public transportation, there's no need to buy a car--so add in another $50 a month. As for medical, one uses TRICARE Standard; however, a lot of people buy the Mexican socialized medical package which costs less than $200 a year if you're under 50, and after two years, you're fully covered. Our little clinic here in Santa Cruz Tlaxcala, Tlaxcala is quite nice and the staff is adequate for normal medical maintenance. Looking at what I've given here, it looks like a person could live quite comfortably for less than a $1,000 per month. But you would have to be ready to accustom yourself to a retired life.

I've been here going on 18 years now, and I've found the Mexican people to be quite congenial and welcoming, especially after they find out you speak their language. Of course, one needs to be outgoing, respectful, and kind and always remember that you are an outsider even if you feel totally integrated. If one finds it difficult to meet people, then integrating him or herself in Mexican culture probably wouldn't be his or her cup of tea. Interestingly enough, I've read that there are approximately one and a half million Americans living in this country. And I've found them everywhere."

For those who choose to remain in the United States, millions of American's live for less than $40,000 a year, and they don't live in crime infested ghettos. US News ran an online article recently of ten additional choices. They included:

Auburn, AL
Blacksburg, VA
Boone, NC
Cheney, WA
Mount Pleasant, MI
Murray, KY
State College, PA
Sunland Park, NM
Syracuse, NY
West Lafayette, IN

In each case, affordable housing is the key to stretching each retirement dollar. So, where you decide to be is the key to living well for less money. This issue is so important that we launched a new page to focus on the best locations for military members to consider for their retirement. Click this link to learn more.

Military Retiree Health Care Costs Go Up Today

2011-10-01T05:18:00.000-07:00

Today military retirees will pay 13% more for their Tricare For Life benefit. For the first time in a generation, the Tricare enrollment fee has gone up. The Department of Defense has been trying to raise the fee for years, but were only able to do so this year.

What did this increase cost? $60 per year for a retiree and his or her family.

Not much? No, but for those who have gone before us who have fought consistently for our benefits, it is a significant setback.

It's reasonable to say that the Government is focusing on the military as a way to cut costs. Consider joining organizations like the Veterans of Foreign Wars who are working with Congress to ensure our interests are considered.

Should we change the military retirement system?

2011-09-05T13:37:00.000-07:00

According to the non-partisan Pentagon Advisory Board only 17% of military veterans ever collect a pension for their military service. This small but vocal group is screaming to ensure that the current system is left untouched.

As a military member with more than 20 years of service, I am glad that they're fighting for the current benefits, but I also appreciate the great cost to the Nation for this plan, and the fact that many who have served, and some who have faced combat, only have basic veterans benefits and no retirement contributions. Fortunately we did gain access to the Thrift Savings plan about ten years ago, but before that we were completely left out.

So, do you think we should throw out the current system and install the system that the board recommended? This would have the government contribute about 16% of your base pay to a TSP account for each year of service. You would likely not be required to contribute, but would have to opt out formally with automatic enrollments deducting about 3% of your base pay to add to the government contribution.

While you would not be able to withdraw this money until you are 59 1/2 without paying a penalty, you would be able to borrow 1/2 of the value of the account, up to a limit of $50,000 with a pay-back period of 5 years, or as much as 15 years for the purchase of a home.

I see great value in giving all veterans a benefit for their service, particularly if it installs a habit of savings right from the very beginning of their careers. On the other hand, this move fails to account for the fact that military members pay a high personal price for serving, and we are unlikely to be able to continue to work into our 60's as military members.

What do you think we should do?

SBP or Life Insurance?

2011-09-03T13:03:00.000-07:00

If you are nearing retirement you may be considering purchasing life insurance instead of taking the full survivor benefit plan (SBP). In making this choice you might be wondering how much coverage you need to make up the difference. It's an important question, so approach the subject carefully.

First, consider what you're comparing. The SBP provides the spouse of a military retiree a guaranteed income for life. Period. The amount of the benefit is based of 55% of the "base amount."

The SBP has some attractive features, including a cost of living allowance, pre-tax deductions to pay for the cost of the benefit, and a program that is, in fact, subsidized by the US Government.

So, to state a simple example, if the base amount is $4,000, the spouse would be assured of an income of $2,200 per month, or annual benefit of $26,400 per year.

The amount of life insurance you need to equal this benefit is entirely dependent on the age of the spouse when they begin taking their benefit. Because the decision to take the SBP must be made in the first year of retirement, you have to assume the worst case scenario...that the spouse begins to take their benefit immediately. Assuming that the spouse is 40 years old, and female, she will need income for 41 years. The present value of this stream of payments, assuming a 3% rate of inflation is $618,000. This amount is padded a bit because your spouse will be eligible to begin taking a reduced Social Security benefit at age 60 and the full benefit at age 67.

Still, this figure does give you a point of reference to consider when you develop your options. If, indeed you decide to reject the SBP, purchase term life insurance, and invest the difference with the goal to be self-insured, then you can compute what your investment might be worth.

The SBP premium, in our earlier example, would be $260 each month. If the life insurance costs $60/mo for 20-year term, then you'd have $200 to invest. If that investment were invested in the SBP equivalent of Treasury Bills, the investment would be worth about $62,000. If at that time the spouse needed to begin taking benefits, assuming a 4% distribution, she would only be able to take $200 per month! Even with a Social Security Benefit, the veterans spouse's ability to maintain her current lifestyle would be in serious doubt.

Could you do better than T-Bills in your investment? Sure. But remember you are comparing two alternatives with very different levels of risk. By comparing the interest rates at the T-Bill rate you get a better understanding of the risk adjusted value of the Survivor Benefit Plan.

Secretary of Defense Vows: Any retirement changes won't affect serving military

2011-08-22T04:38:00.001-07:00

Panetta: Any retirement changes won't affect serving military
By Jim Garamone
American Forces Press Service

WASHINGTON (AFNS) -- In his clearest statement on the subject to date, Defense Secretary Leon E. Panetta said today that if the military retirement system changes, it will not affect serving service members.

"I will not break faith," the secretary said during a roundtable meeting with military media representatives in the Pentagon.

Panetta's predecessor, Robert M. Gates, asked the Defense Business Board to look at the military retirement system and make recommendations. The final report is due later this month, but Panetta said he is familiar with the outlines of the proposal.

"I certainly haven't made any decisions" on retirement, he said.

"People who have come into the service, who have put their lives on the line, who have been deployed to the war zones, who fought for this country, who have been promised certain benefits for that -- I'm not going to break faith with what's been promised to them," Panetta said.

People in the service today will come under the current retirement system, which gives retirees 50 percent of their base pay after 20 years of service.

"Does that stop you from making changes?" Panetta asked. "No, because obviously you can 'grandfather' people in terms of their benefits and then look at what changes you want to put in place for people who become members of the all-volunteer force in the future."

One aspect of the retirement issue is one of fairness, the secretary said. Most service members do not spend 20 years in the military and therefore do not get any retirement benefits when they leave the service.

"They are not vested in any way," Panetta said. "The question that is at least legitimate to ask is, 'Is there a way for those future volunteers to shape this that might give them better protection to be able to have some retirement and take it with them?'"

Health care is another area that has to be dealt with, the secretary said. In fiscal 2001, the DOD health care bill was $19 billion. It is more than $50 billion now, he said, and it soars to the neighborhood of $60 billion in future years. Among proposals Congress is contemplating is an increase in some TRICARE military health plan premium payments.

"I think those recommendations make sense," Panetta said. "Especially with tight budgets, it does make sense that people contribute a bit more with regards to getting that coverage."

The Defense Department -- which is responsible for a large part of the nation's discretionary budget -- will do its part to reduce the budget deficit, the secretary said. But while Defense has a role to play, he added, Congress has to deal with the more than two-thirds of the federal budget that represents the mandatory spending.

"If you are serious about getting the deficit down," Panetta said, "you have to deal with the mandatory side of the budget and taxes."

DOD has a responsibility to look at all aspects of the budget, the secretary said, and officials at the Pentagon are doing that.

"This is not because it is necessarily going to hurt areas," he added, "because frankly, a lot of this can be done through efficiencies, a lot of it can be done looking at the administrative side of the programs: What can we do to make these programs more efficient?"

The secretary said he believes the budget crunch can represent an opportunity to make DOD a more efficient, effective and agile force that still can deal with the threats of the future.

The department also needs to ask how to provide benefits for troops and their families that will be effective at ensuring the nation always has a strong volunteer force, Panetta said.

"That's a debate and discussion that is important for the Defense Department to have, the White House to have, the Congress to have and the country to have," he said. "(We) need to have that debate about 'How are we going to do this in a way that maintains the best military in the world?'"

The Defense Department will face some tough choices, Panetta acknowledged.

"I think the bottom line is this can be an opportunity to shape something very effective for the future that can still represent the best defense system in the world," he said.

TSP Fluctuates, but your strategy should remain constant

2011-08-16T02:45:00.000-07:00

If you've been watching the stock market fluctuate over the past several weeks you're likely a bit dizzy. If you haven't been following the news, it's been a wild rides with some of the market's biggest dives and climbs in history! Want to join the chaos? Try to decide what's going to happen this week!

Or, forgettaboutit.

Previously I've written about the phenomena of pilot induced oscillation. As a primary jet instructor pilot I had to teach my students that sometimes the very best thing they can do is relax their death grip on the controls, take a breath, and focus on the horizon. By trying to predict the airplanes next move, the student pilots (and even some seasoned pilots) would over-correct, setting the airplane into increasingly dramatic ups and downs. In the worst cases I told the students to let go of the controls completely. If the aircraft is properly trimmed it will quickly return to the desired flight path. In a financial context, if your portfolio is properly weighted and diversified, if you leave it alone and continue to make your contributions over time, you fly right through these oscillations and come out the other side with either a lot more shares purchased at lower cost, or a higher account balance because of the higher stock prices (and hopefully both!)

So, relax, put the business page away, read a book and play with the dog. Put your investment accounts in the hands of seasoned professionals at TSP and good mutual funds. In other words, put your investing decisions on autopilot and enjoy the ride. As Dave Ramsey has said, the only person who gets hurt on a roller coaster the the person who jumps off in the middle.

Greatest Risk to Military Retirements: Changing the Rules After the Game Begins

2011-07-31T17:27:00.001-07:00

Despite discussions in military circles of fundamental changes to the military retirement system, the Senate is actually working towards changing the way the government adjusts retirement pay to account for inflation. Currently the government uses a pre-defined basket of commodities to gauge the growth of inflation. This basket is called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), and has been in use in the United States since 1975. Instead of sticking with the current CPI-W adjustment, the Senate has endorsed a plan to use a new method, called the "chained-CPI." This method uses economic theory that says that consumers will change their buying behavior to find substitutes for higher priced products, thus reducing demand for other more expensive alternatives. The index adjusts to account for this change in behavior instead of remaining tied to the fixed basket.

By using this method, Military Times reporter Stephen Losey reports that the military retirees COLA will go down by about a quarter-percent annually, which will result in thousands of dollars less over the life of the retiree and his or her spouse if they elect to receive the Survivor Benefit Plan.

The issue, as always, is fairness and a commitment by the United States to stand by the agreements that they made with military members who served proudly for more than twenty years. We have paid our income taxes along the way, and will continue to do so, but the government should consider paying its debts to its military service members before paying foreign nations that we may one day be forced to engage in combat.

Changing the Military Retirement System

2011-07-31T04:51:00.000-07:00

Andrew Tilghman, writing in the Military Times newspapers, did a tremendous job of succinctly outlining the proposed new military retirement system. This proposal, which is certainly not a new concept, would provide military members with contributions to their eventual retirement without requiring them to serve a 20 year career. This system, which is called "cliff vesting" provides for a benefit of between 40 and 50% of their base pay, plus cost of living adustments, beginning immediately after retiring. For those who enlisted right after high school, they could begin collecting this retirement at age 38, and collect for the next 40 years.

As Mr. Tilghman points out, 83% of veterans leave military service without serving the minimum 20 years required to draw a retirement benefit. For this overwhelming majority, the ability to receive a proposed 16% raise deposited directly into the Thrift Savings Plan would represent a significant increase in pay and recognition that military veterans contributions to National Defense should be financially rewarded regardless of the length of tenure.

This option would have a huge impact on military members who entered service in the hope of retiring at the 20 year point, as their benefit would be cut by 78%! (Mr. Tilghman notes that the amount of TSP contributions needed to duplicate the current military benefit is 75% of base pay. It should also be noted that TSP contributions cannot be withdrawn easily prior to age 59 1/2.)

It is unlikely that this retirement proposal will be adopted without a battle with veterans groups and lobbyists. They will argue that educational scholarships and the Post 9/11 GI bill has provided benefits that far outweigh any financial contributions to the TSP accounts for one-term officers and enlistees. These groups will fight to retain the 20-year retirement system.

Pentagon Federal Joins Navy Federal Credit Union to put Military Member's Financial Fears at Ease

2011-07-30T09:39:00.001-07:00

Perhaps following the lead of Navy Federal Credit Union, the Pentagon Federal Credit Union has announced their own contingency plan to help bridge a gap if the Federal Government delays military pay days now through the end of the fiscal year.

"Government Default Contingency Plan

Due to the uncertainty surrounding the national debt ceiling, PenFed would like to assure our membership that in the event the issue is not resolved in August and causes a disruption in federal government payments, PenFed members who regularly have their pay direct deposited to PenFed that are military or civilian employees and retirees of the federal government, as well as Social Security recipients, will have their August deposits advanced as scheduled in anticipation of receiving the actual deposit once the debt ceiling issue is resolved."
No word yet from other military-friendly banks if they will follow suit, but I am confident that institutions like USAA will do whatever it takes to keep their members solvent during any short-term government shutdown.

Congress Votes to Increase Military Pay by 1.6% in 2012

2011-07-11T09:37:00.001-07:00

GovExec.com
July 8, 2011

House Approves 1.6 Percent Pay Raise For Service Members

By Kellie Lunney

The House on Friday approved a 1.6 percent pay raise for military personnel next year.

The chamber passed the fiscal 2012 defense spending bill (H.R. 2219), which included the pay provision, by a vote of 336-87. President Obama recommended a 1.6 percent boost for service members in his fiscal 2012 budget proposal released in February. The $649 billion defense appropriations package is $17 billion more than last year's funding level and $9 billion less than Obama's request. Of the total, the bill provides $119 billion in emergency spending for the war on terror.

All other federal employees are subject to a two-year pay freeze through 2012. Service members received a 1.9 percent pay boost for fiscal 2011.

House Appropriations Committee Chairman Rep. Hal Rogers, R-Ky., said the legislation "reflects hard decisions to cut spending." In a statement Rogers said, "In this time of financial crisis, no one should be exempt from tightening their fiscal belts -- yet with our national defense we must do so very carefully, making sure to not impact the warfighter or their mission."

The Senate Armed Services Committee recently marked up legislation that includes a 1.6 percent pay raise for military personnel in fiscal 2012.

In March, the nonpartisan Congressional Budget Office released a report that said if the government capped the basic pay increase for service members from 2012 to 2015 and set raises at 0.5 percentage points below the increase in the Employment Cost Index, it would save about $6 billion between 2012 and 2016, and $17 billion between 2012 and 2021. Currently, military salaries must be increased annually at a rate equal to the change in the ECI for private sector wages.

Radical Money Saving Ideas for Military Families and Retirees

2011-06-19T12:15:00.000-07:00

Recently I read an article regarding "Radical Money Saving Ideas" like moving to the country, raising livestock, and eating off the dollar menu.

Right.

Here are a few radical ideas that military families could try and actually have a huge impact on their bottom line.

Live car free.
Rent a smaller place, or live in on-base housing.
Shop in the commissary and use coupons wisely.
Never pay for membership in a health club.
Cancel cable, Internet access, local phone, magazine subscriptions but sign up for the local newspaper (Clip the coupons and read the local events calendars..
Get free stuff (corollary: give stuff away).
Travel by military transport (but only where you can stay cheap!)
Grow a garden.
Take care of what you own.
Give gifts of time, interest, and caring.
Avoid shopping as past-times.
Serve meat as a side-dish...three times a week (max).
Purchase necessary insurance...but don't go overboard.
Create, use, and improve your budget.
Cook. Eat less, save the leftovers.
Turn down the heat on your hot water heater and insulate the tank.
Lower the thermostat in winter, raise it in the summer, turn it off when you don't need it.
Use electric appliances like you were off the grid.
Sell the toys. You know what I'm talking about.
Don't pay for banking. Check out free options with ATM fee returns.

Post your ideas as comments.

What the Admiral is talking about

2011-06-04T08:19:00.000-07:00

You've likely seen the Military.com story quoting the Chairman of the Joint Chiefs of Staff's comments on putting military pay and benefits "on the table" in discussing lowering costs for the military. This is really nothing new, but in light of a recent agreement in Congress to increase Tricare enrollment fees for military retirees, signs that the end might be near in combat operations in Iraq and Afghanistan, and reductions in military spending ahead, political leaders may be inclined to go along with his recommendations.

If you've served in the last 30 years you've seen suggestions like this before. In the mid-80's the REDUX retirement plan was introduced, and the end of the "Final Pay" retirement calculation in favor of the "High 3 Average."

You are likely to see several measures considered over the next three to five years.

The end of the immediate collection retirement for new enlistees: Military retirees would collect their retirements similar to reservists. After a minimum of 20 years of service, the member would become eligible to collect their retirement when they turn 60.
Earlier vesting with TSP matching: The military could begin matching member TSP contributions (which they are now permitted by law to do), perhaps connected to a second enlistment, or extended active-duty service commitment. If this measure were combined with deletion of high-year tenure measures (which would allow service members to serve 40-years or more), this might replace the current retirement system.
Continued increases in Tricare enrollment fees.
Requiring military retirees with access to health insurance from another source to use it.
Reductions in access to Commissaries (or closing military commissaries all together).
Ending or significantly reducing educational benefits for officers.
Ending spouse benefits for education or job training.

While these suggestions are alarming for those currently serving, it is unlikely that they would be adopted for them. Instead, we're likely to see a more gradual shift that effects those entering the service over the next decade. If that is not the case, we'll join with organizations like the American Legion, VFW, MOAA, and others who fight for us in Congress.

Why I "Skimmed The Cream" off my TSP

2011-05-21T08:59:00.000-07:00

This week I rebalanced my TSP account. Please don't misconstrue this as a market timing decision. It really wasn't. I was just very satisfied with my returns, saw that my stock and cash allocations were out of balance, and logged in and readjusted.

I subscribe to Ray Lucia's "Buckets of Money" strategy. It is a balanced approach to investing that suggests that you calculate the sustainable distribution of an account and distribute this amount into three buckets.

The first is a spending bucket, and is conservative guaranteed income sources equal to about 8 years of distributions.

The second bucket is a more moderate savings bucket, equal to about 7 years of distributions.

The third bucket is the growth bucket, which I distribute between the C Fund (50%) and the S and I funds (25% each).

Since I am not yet retired I'm not spending the money out of the guaranteed income bucket, but am reinvesting into my growth bucket, using the value averaged approach to rebalancing the portfolio. If the growth bucket value plus the proceeds of that particular year's slice of income exceeds my target value for the year I retain the excess in the cash bucket. If it is less than the target value than I use more of the cash bucket to make up the difference, up to a personal limit of 20% of the first bucket. This allows me to buy low and sell high on a systematic basis.

In this particular example I had about $150,000 to distribute. The 4% distribution on this portfolio is $6,000.

My first bucket then is $6,000 x 8 years, or $48,000. This goes into the G Fund.

The second bucket is $6,000 x 7 years, or $42,000. I put this into the F Fund.

The remaining $60,000 is split as described above, $30,000 into the C Fund, and $15,000 each into I and S.

During the next year I will max out the contribution to the TSP, $16,500, putting all of that into the third bucket, split in the same proportion. I will also make quarterly shifts from the C-Fund into the third bucket, as if I was spending the income out of the first bucket, but only to the amount required to stay on pace to make a 8% return on the overall portfolio.

At the end of the year I expect to have about $43,000 in my first bucket, $43, 500 in my second bucket and $87000 in my third bucket, for a total portfolio value of $173,500 which provided an 8% return in my growth bucket, and an overall portfolio return of more than 4.5%.

Manditory TAP

2011-05-12T03:08:00.000-07:00

According to the May 11, 2011 issue of the Washington Post a bill has been introduced called the "Hiring Heroes Act of 2011" which would, among other things, make the Transition Assistance Program, or TAP, mandatory for departing military members.

The sponsor for the bill is Sen. Patty Murray, a Democrat from Washington. Her web site summarizes the specifics of the bill like this:

This bill authorizes ongoing services we are providing and modifies programs for veterans.

Modifies federal hiring practices to encourage the hiring of separating servicemembers and would allow servicemembers to begin the federal employment hiring process prior to separation;
Makes participation in the Transition Assistance Program mandatory for separating servicemembers;
Requires that each servicemember receive an individualized assessment of jobs they may qualify for when they participate in the Transition Assistance Program;
Requires DoL to engage with each veteran on a periodic basis to determine whether the veteran is employed or whether the veteran might be interested in further assistance;
Continues a program that provides rehabilitation and vocational benefits to severely wounded members of the armed forces;
Provides up to an additional 24 months of vocational rehabilitation and employment services to veterans who have exhausted both these benefits and state-provided unemployment benefits;
Requires the Department of Veterans Affairs (VA) to engage with each veteran who has participated in its Vocational Rehabilitation and Employment Program periodically to determine whether the veteran is employed.

Innovative Programs to Prepare Veterans to Transition into Civilian Life

This bill authorizes new programs aimed at improving the transition from servicemember to civilian employee.

Creates a competitive grant program for nonprofit organizations that provide mentorship and job training programs that are designed to lead to job placements;
Requires the Department of Defense (DoD), DoL, and VA to jointly contract for a study to identify the equivalencies between certain military occupational specialty (MOS)-related skills and civilian employment;
Allows DoD to create a pilot program to provide paid work experience with civilian employees and contractors to facilitate the transition for servicemembers that are 180 days from separating;
Requires DoL, DoD, and VA collaboration to eliminate barriers between military training and civilian licensure or credentialing for several military occupational specialties.

Service members like pilots, electricians, plumbers, and mechanics might have the opportunity to earn their civilian credentials while learning their trade on active duty. This could be worth thousands of dollars in training, and provide for significant opportunities for employment following military service.

The compulsory TAP is a positive step, since military commanders will be required to free their departing members time to participate. Most of the reports I hear about the program are positive, and when I complete the program, I'll give you a follow up report.

Way Ahead

Congressional bills come and go. This one is supported by many veterans groups, including the American Legion who have significant influence. The effort is timely following the successful raid on Osama Bin Laden's compound and the successes in Iraq and Afghanistan. Continue to monitor this site and the news on this bill, and I recommend that you contact your elected officials to support this effort.

Long Term Care Insurance Open Season

2011-05-07T06:11:00.000-07:00

For the first time in years, the Federal Long Term Care Insurance Program is in the middle of its open season. This means that it is easier than at other times to get into the program, and only requires minimal personal medical information to allow underwriting.

The web site is http://www.ltcfeds.com.

Now, do you need long term care insurance? That's a tough question. Active duty military members may not need it, and Veterans do have access to facilities at a reduced rate, but the younger you are the less it costs.

House of Representatives Considers Military Benefits for 2012

2011-05-05T02:46:00.000-07:00

On the military benefits front, this week the House of Representatives considered two significant issues for military families and retirees.

The first was a proposed 1.6% military pay increase. This is 0.2% larger than last year's increase, and suggests that Congress understands that the seeds of inflation have been planted through Federal Reserve policies to increase the money supply.

The second was a proposal to freeze Tricare Prime enrollment and other fees for working age military retirees for 2012. This is a very big deal since the Department of Defense has been trying to increase the enrollment fee for this group for years. All military members should thank the veterans groups that do such a great job protecting our benefits, and should consider sending a note to their representatives in Congress requesting their support for this benefit.

Source: Stars and Stripes

Military TSP participation Rises

2011-04-30T08:43:00.001-07:00

Reviewing the announcement from Government Executive discussing the TSP, I took note of the military participation rate, quoted at 49.5% of active duty military personnel. This compares with 84.9% of government civilian personnel who usually receive matching contributions to their Thrift Savings Plan Accounts.

Military members are not eligible for matching funds, but as I've mentioned in this space previously, it takes 20 years of active service to be vested in this retirement plan. Military members, particularly junior personnel who are not yet certain if they will remain in the service for at least 20 years, should take the positive step today of saving a portion of their military pay in the Thrift Savings Plan.

Why is the participation rate so low? The first factor is that you actually have do take a few steps to sign up for the TSP. Federal Civilian employees are automatically enrolled and must opt out. This simple change dramatically increased the participation rate, of course. The automatic enrollment is a low 3% of pay, but this modest savings can grow as the pay increases come over time.

I have posted previously about adding the annual cost of living increases to the TSP savings. As many of you know we received a 1.4% increase last year and the President has suggested a 1.6% increase for 2012. If you added those increases to the 2010 initial deduction of 3% of military pay, you'd be at a respectable 6% of the initial sum within 3 years. If you continue to use this technique over time, you'll find that you have a significant retirement account as you leave the military whether it is after a 4 year tour, or a 30 year career.

Military Members Dodge Political Bullet

2011-04-14T06:28:00.001-07:00

We were all relieved that the Government avoided a shutdown this week and that our paychecks will be normal on Friday. Many military families felt panic that should be considered a financial warning signal. If you were afraid you weren't going to be able to feed your family or make the rent because your paycheck was restricted this month, that's a good indication that your emergency fund it too small.

I've previously written about the "8% Challenge" which recommends that your save 8% of your pay for a year in a cash account to build up your emergency fund. In a year you'll have a month's pay saved. In three years you'll have a three month cushion.

Let this experience guide you, and on Friday, put 8% of your military pay in your savings account.

The 8% Challenge

2011-03-28T18:36:00.000-07:00

I've written before about ways to set aside your emergency fund, including account types to use that allow you to access your money in an actual emergency, but that also set up "speed bumps" that make you think twice before you actually use the money.

Now I'd like to focus on a technique that you can use to set up a 3-6 month emergency fund while tackling your other goals. It's a simple tool that you can use to save over the course of a single 36-48 month assignment while serving on active duty.

It's called the 8% challenge, and it's very simple. Just set up an allotment from your military pay of 8% of your pay and put it into a savings account that permits check writing, but put the check book into a safety deposit box or a fire resistant box with your other personal papers. In the course of a year you'll save one month's pay (after tax). In three year assignment you'll have a three month emergency fund. Do that for two assignments and you'll have a six month emergency fund.

I recommend you also maximize your Roth IRA while doing the 8% challenge. If you can save more than that you can get pre-tax savings by contributing to the Thrift Savings Plan.

Once you have your emergency fund fully funded, revisit your retirement savings, or consider other goals such as saving for a new home, college savings for the kids, or a dream vacation.

The 8% challenge also teaches you the power of patience and goal setting, and by automating your savings using an allotment you'll ensure that you actually do pay yourself first.

Are you confused about the IRA Options out there?

2011-03-26T06:21:00.000-07:00

If you feel like you need an encyclopedia to decipher all the retirement account options out there, I recommend you visit Mr. Thousandaire's YouTube video on the Roth IRA. In just under 8 minutes he'll break down why the Roth IRA is such a strong method of maximizing returns and minimizing taxes. Take a look!

Retirement Hot Spots for Military Members

2011-03-13T04:06:00.000-07:00

Charles Schwab's "On Investing" magazine this month offered a roll up of retirement city options. What was interesting to me is that it used a combination of different sources to create the graphic comparison of different options, including CNBC, CNN Money, the AARP Magazine, and CBS Moneywatch.

They highlight the following cities:

Burlington, Vermont
Asheville, North Carolina
Fort Myers, Florida
Austin, Texas
Tucson, Arizona
Honolulu, Hawaii
Palm Springs, California
Portland, Oregon
Fort Collins, Colorado
Ann Arbor, Michigan

The categories they use are cost of living, population, percentage of population over age 65, median home price, and average temperature.

So, what's a sampling of hot spots specific to military members? I've highlighted some reports from Military.com on this topic, but here's my current list:

Las Vegas, Nevada
Tucson, Arizona
San Antonio, Texas
Papillion, Nebraska
Fort Walton Beach, Florida
Charleston, South Carolina
Cary, North Carolina

I also checked in with RetirementLiving.com to see if there had been any changes to the list of states that do not tax military retired pay. Their update is dated Jan 2011 and is reprinted below:

Retired Military Pay
Some states provide special tax benefits to military retirees. Others simply follow the federal tax rules. The states that do not tax retired military pay are: Alabama, Alaska, Florida, Hawaii, Illinois, Kansas, Kentucky*, Louisiana, Massachusetts, Michigan, Mississippi*, Missouri*, Nevada, New Hampshire, New Jersey, New York, North Carolina*, Ohio, Oregon*, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin and Wyoming.
(*With conditions)

I'm interested in your nominations for great places for military retirees to retire. Please comment with your favorite.

James Glassman's New Tale

2011-03-06T07:35:00.001-08:00

Eleven years after "Dow 36,000" comes Jame's Glassman's new book, "Safety Net" takes a decidedly different approach to saving for the long term. in a business section front page story in the March 6, 2011 Washington Post, Glassman, speaking in the first person, says that he has reached the conclusion that times are different now, and investors must take a much more conservative approach to investing, perhaps only exposing 50% of their investable net worth in the stock market.

Ray Lucia, syndicated talk show host, has remained consistent over the years, saying that discussing "percentages of net worth" is less interesting than matching investments to needs. You wouldn't put money into stocks today to pay for your son or daughter's college next fall. In the same way, as a 30 year old, you wouldn't save 401K money in bank CDs paying less than 1% interest.

I have tried to "Bucketize" my TSP portfolio (as Mr. Lucia describes it) by setting up a 15 year sustainable fund of stable money (4% of net) into the F and G funds, and the rest in the C, S, and I stock index funds. (Note: Mr. Lucia has expressed some concerns about the value in the F Fund (bond index fund) in potentially inflationary times ahead.) In this way I've met the "Safety Net" intent by not exposing 100% of my investments to the stock market, but staying sufficiently exposed to take advantage of the opportunities for growth that are surely ahead.

In the end I believe that Mr. Glassman, who is a brilliant economist, was infected with the exuberance of the roaring 1990s, and his earlier book signaled the end of a season for stocks. I'm confident that Mr. Glassman may have signaled the end of another season with "Safety Net."

Military Paychecks Likely Not Effected by Government Shutdown

2011-02-26T10:07:00.001-08:00

With the Federal Budget in flux and stories on the front page of almost every newspaper in America, military families might be wondering if they'll see a paycheck in March if there is a shutdown. According to press reports you can sleep easy.

According to an Associated Press Report:

"Fewer than half of the 2.1 million federal workers subject to a shutdown would be forced off the job if the Obama administration followed the path taken by presidents Ronald Reagan, George H.W. Bush and Bill Clinton. And that's not counting 600,000 Postal Service employees or 1.6 million uniformed military personnel exempt from a shutdown."

Veterans might have a different experience, however. The same report stated that there may be delays processing VA benefit requests such as new applications for the GI Bill benefits. Probably most emotionally charged, VA benefits for funerals for veterans could be delayed. Military.com reports:

"... the Department of Veterans Affairs office responsible for burying veterans will close up shop if the cash stops coming, putting a halt to the internments of thousands of deceased vets."

While it is likely that most active duty families will see only minor disruptions in benefits, now is a great time to consider your emergency fund. Have three to six months of expenses stored away would likely reduce any stress you might have about the government's turbulence.

President Proposes 1.6% Pay Increase

2011-02-21T07:28:00.000-08:00

According to the Military Times Newspapers, President Obama has proposed a 1.6% pay increase for military members in 2012. This comes as a relief to many who had heard that military members would be included in a pay freeze of government pay. The President's proposal would also make pay increases automatic in line with government statistics on the average increases in civilian pay. This would ensure that military members no longer have a large gap in compensation with their civilian counterparts, which was once more than 13%.

Creating a real Emergency Fund

2011-02-21T06:42:00.000-08:00

One of the most difficult things for many military families to do is establishing an emergency fund of cash. It's often easier for them to put money into retirement accounts because the money is "untouchable." It seems that day to day life is full of "emergencies" that drive us to tap into our hard earned reserves.

The fact is that most of the time these are not actual emergencies, but deviations from our planned expenditures. The lawn furniture was "on sale" or the flat screen was "on clearance" and there goes the emergency fund.

To combat this situation, consider purchasing savings instruments that are more difficult to cash in easily, but still offer you the ability to access your money in actual emergencies.

1. Bank CDs. Certificates of Deposits are short-term loans you make to your bank. They are tied up for various maturities depending on how long you're willing be without immediate use of the money. While these instruments are paying very low interest right now, they achieve the goal of keeping your emergency fund safe and accessible in actual emergencies. If you must get to your money before the maturity date, you often sacrifice the low interest rate return. (Check with your bank to understand the early redemption penalty.)
2. Money Market Mutual Funds. These funds are sold through banks, credit unions, and brokers and offer you continuous access to your money without sacrificing the interest. The mutual fund will give you a debit card and checkbook. Put these in a safe place, and only use this access in actual emergencies.
3. Savings Bonds. US Treasury Savings Bonds offer us the advantage of government insured bonds with no cost to purchase. Savings bonds must be held for 6-months before they can be redeemed, so they provide you a barrier to immediate use. I bonds currently pay almost no interest, but if we see inflation beginning to appear, these bonds will keep pace with that rate.
4. Roth IRA. If you think you can't save enough to fully fund your Roth IRA because you have to save money for your emergency fund first, you might be able to kill two birds with one stone. According to Ray Lucia, a nationally syndicated radio and television talk show host, Roth IRA contributions can be taken out tax and penalty free. Only gains in these accounts are subject to tax and penalty. (Rules are slightly more restrictive for Roth conversion accounts, so check with your accountant or a tax professional before you make a move out of your IRA).
5. TSP loans. This idea goes along the same lines as fully funding your Roth IRA instead of splitting contributions between the IRA and a separate emergency fund. In this case you save as much as possible in the Thrift Savings Plan, and then borrow money from it (you can withdraw 1/2 of the value of the account up to $50,000 as long as you pay it back in 5 years.) The pitfall in the civilian sector is that such loans must be paid back within 60 days after you terminate employment for any reason (like being laid off). When times are tough you might find yourself out of work at the same moment as you are experiencing an emergency! In the military, however, with set enlistment and established "Dates of Separation" the risk is much lower. (At the same time, these are interesting times for military members, particularly those with either 20+ years of service or less than 4. I have had colleagues receive notice that their services were no longer required within just a few months of their retirement dates. This technique is most appropriate for mid-career officers and NCOs.

In each of these examples, the objective is to create minor obstacles to liquidity in order to ensure that the money will be available for actual emergencies. They also provide opportunities for long term savings that will benefit you years into the future.

Think it can't be done? Well, they've done it!

2011-02-12T09:11:00.000-08:00

I've been watching NetworthIQ.com for several years. I was initially attracted to is as a way to grade myself according to the example of others progress. Then it was just entertaining. (Some of the regular contributors should be stand up comics.)

If you're considering retiring on a military pension but wondering if it can be done, than wonder no longer. A contributor at NetworthIQ posted their experience of doing just that. The contributor, whose screen name is "Cheers" writes :

"Dual retired naval officers with 2 children -- one in high school, one in kindergarten!! I retired at age 41, my husband at 46."

It's a great story of a dual military-couple who both make it all the way to retirement still married and who can look forward to a long future together without having to worry about money.

The real critical quote, however is this one:

"In retirement we have transitioned from living below our means to now living within our means."

If you get into the savings habit early, then you'll be ready for the transition. In fact, it's likely that you'll feel strange spending your income instead of saving it.

Most people don't know what they need in retirement. That's why having a budget and reviewing it periodically can help. Instead of guessing what your "number" is, you'll know.

Congratulations, "Cheers" on your service to your country and your retirement. You give the rest of us a great deal of hope for success!

Tax day this year is April 18th

2011-01-23T12:04:00.000-08:00

If you're planning to procrastinate your tax filing this year, you can take an extra weekend to finish up the paperwork. That's because this year Friday April 15th is Emancipation Day in the District of Columbia, and because of a little known Federal Law, the tax deadline cannot fall on the same day as this holiday. For that reason you have until Monday, April 18th to file.

For more tax information, go to IRS.gov.

Taxslayer.com Offering Free Tax Filing to Military members

2011-01-22T17:50:00.001-08:00

Again this year, Taxslayer is offering free tax filing service to active duty military members. I've used this service for five years and have been very happy with the results. Give them a try and pass the word to others.

I Just Rebalanced My TSP Account...and Maybe You Should Too...

2011-01-22T12:30:00.000-08:00

I'll be honest, it wasn't an easy decision to make. I'd watched my Thrift Savings Plan account double in value after a perilous decline in 2008. I'd been true to my "stay in the market" philosophy, and it had paid off.

And now I was moving some of my TSP account into cash.

Was I market timing? Heck no. I don't believe in it.

Was I getting nervous? Nope, sleeping like a baby.

Did I think the market had topped out.

I think we'll keep going up...in the long run.

So why was I rebalancing my account? A lot of it has to do with Mr. Ray Lucia. His syndicated radio program (and free webcast) has been talking a lot lately about managing expectations and "scraping the cream off the top" after this great run up in stock prices. He's also been a proponent of "value averaging" where you take money out of your long term investment portfolio when you exceed your targets, and add it back when you undershoot your goals.

I had exceeded my expectations by a factor of about 5, and thought it was time I take some money off the table.

So, I calculated what I could start taking out of my account if I stuck to a 4% rate of withdrawl, and moved 15 years of money into the TSP G and F funds. The rest of my nest egg I left in the C, S, and I funds, stock funds that will continue to fluctuate with market conditions. Next year at this time I'll review the stock portfolio performance, and if it exceeds my target rate of return, I'll scrape a little more off the top. If it underperforms, I move money out of the G and F funds and add it to the stock funds.

In this way I'll buy low and sell high, even if it isn't what I want to do at the time.

Stay tuned to see how I do...

Want to buy real estate as an investment? Try REITs!

2011-01-08T09:11:00.000-08:00

As the real estate market melted down I became increasingly interested in getting into the market. Like many other military members, however, I really wasn't in a position to buy residential real estate and I didn't have the money to buy commercial properties...directly.

I looked for other options, and Ray Lucia, one of my favorite financial commentators, was singing the praises of real estate investment trusts.

Similar to mutual funds, REITS pool the investments of many in order to buy real estate. You can buy traded REITS and exchange traded funds investing in real estate through discount brokers. An example is the iShares Dow Jones Real Estate ETF (IYR).

That's exactly what I did. My investment in IYR has gone up more than 83%. Note that the year to date return is 21% (Jan 7, 2011).

Big Changes to Post 9/11 GI Bill

2011-01-08T09:00:00.000-08:00

Tom Philpott, who I have quoted many times, writes a great summary of the changes to the Post 9/11 GI bill in his blog. People like me, who are already benefiting from the transferability provision, saw a reduction in our stipend in December as the end of the first semester resulted in an immediate stop. We normally collect about $1,900/mo for living expenses. This was reduced to just over $1,000 for the month.

The reality, of course, is that our expenses were fixed for us. My son's rent must be paid whether school is in session or not.

That said, we are still very thankful to the people of the United States who support military veterans with this very generous benefit.

For all the details on the many changes to the Post 9/11 GI Bill, go to the VA website.

ROTH TSP Option Slips to 2012

2010-12-04T05:25:00.001-08:00

While not a surprise, it's disappointing that the TSP will not likely offer the ROTH TSP option until 2012. According to the Federal Times Newspaper the program will have to work out accounting and technological hurdles in 2011 in order to prepare for the roll out of the ROTH option in 2012. What's a shock to me is that the plan will spend $8 million in postage to advertise the plan! They should just reach out to blogs and Facebook!

Six Ways in Increase Your Financial Literacy

2010-11-26T09:29:00.000-08:00

My USAA magazine arrived in the mail today, which made me consider how a person learns about personal finance issues. I studied business as an undergraduate, and while that education does help understand a little about the time value of money and compound interest, it didn't teach me much about budgeting, setting goals, tax planning, or real estate. Most of that I learned in other ways, either through additional education or through the school of hard knocks. I should also mention that through my parents I learned that personal finance is just that, personal and private. I knew that we didn't have a lot of money, but we had enough.

So, with that in mind, I offer you six ways to increase your personal financial literacy.

Take a class. Really, if you want to get serious about learning this stuff in an organized way, you should take a class. One option is through a local community college or public school district. In my area, for example, the Arlington VA Adult Education Center offers classes in personal budgeting, investing, managing debt, and estate planning. These classes are low cost and taught be instructors who are not peddling annuity or other financial products. Another way to take a class is online. The University of California, Irvine, for example, offers an introductory course in the Fundamentals of Personal Finance.
Become a Volunteer Income Tax Assistant. The IRS offers 40 hours of instruction each year to volunteers who help others to prepare that income taxes. The program is described on the IRS web page. I did this as a second lieutenant, and it taught me things early on that really made a big difference later in my life.
Read a book each month on personal finance, but be careful what you read. Not all books on this topic are created equally. Some instructed people in 2005 to borrow the equity out of their homes and invest in the stock market through a life insurance program! That would have been terrible guidance, and was certainly self-serving from the perspective of the author. The best books provide a broad overview of the topic covered and give general guidance for things you should consider before making a decision on an individual product. I've put together a list of my favorites on Amazon.
Follow a financial pod-cast. There are free audio recording through services like iTunes and Business Talk Radio.net. My favorites include Ray Lucia, Dave Ramsey, and Brian Preston. It's also good to listen to a variety of voices. Mr. Lucia and Mr. Ramsey, for example, have a much different perspective and their callers are very different, but they share common themes of personal responsibility, common sense, and the importance of focusing on a strategy.
Take advantage of USAA's Educational products. While USAA casts the net broadly, the professionalism and value of the companies educational materials are first rate.
In an internet full of personal finance blogs written by amateurs, it's always valuable to go to sources that are at least monitored by professionals. As you've read here, FINRA's site, SaveandInvest.org, provides military members tips on purchasing a car or home, budgeting, investing, and the basics of investing.

How would you suggest that people learn the language of personal finance? Next time, we'll talk about financial coaching.

Your car could cost you a million dollars

2010-11-20T15:47:00.001-08:00

If you're at all like me, one of the first things you want to do once you enter active duty is buy a new car. While this is definitely an exciting proposition, you've got to use your head on this one.

Say you have your heart set on the Ford Mustang GT. Your first thought is to buy a brand new one from the local dealer. You can pick up this one for about $34,000 (before tax, title, and license charges). Or, you can go for a gently used 3 year old GT for less than half that amount, about $16,600.

Compare the payment: 48 mo. 1.9% on the new vehicle, 6.9% on the used one.
New: $736
Used: $396

Now, here's where it gets interesting. If you take the $340 per month that you save by buying the used car, and you put that in your Roth IRA for the 48 months, and you invest in a typical growth stock mutual fund, when you retire 40 years later you'll have...are you ready...

$1,500,000! (40 years, tax free, 12% rate of return, Yahoo! finance calculator.)

Now, think about a lifetime of purchasing brand new cars or substituting low mileage used cars and investing the difference. Think about it.

Eating on $25 a week

2010-11-15T03:17:00.001-08:00

I've written several times about small food budgets. It's one thing to live with an intentional, low food budget, and quite another one to be forced into a meager existence. The Illinois Food Bank Association is sponsoring a public outreach, challenging participants to live on $25 a week or $3.50 per person per day. For military families, here are a few things to consider.

Shop at the commissary. I've said it over and over again, but you will save 30% on your groceries if you use your commissary.
Plan ahead. Don't shop impulsively. Use a menu planner and online sources to link major meals to follow-on meals. An example is a whole chicken. It can be roasted for dinner, leftovers for lunch, and the bones and scraps turned into soup for the next day.
Avoid prepared and processed food.
Less expensive cuts of meat can be marinaded to make them more delicious.
Use coupons thoughtfully. You may pay more for the same item because the cost is higher even with the coupon. Also, do you really need 10 cans of tomato sauce? If so, then by all means...
Watch out for items in the checkout lane. The grocery stores pack the checkout areas with high margin, impulse choices that will bust your budget if you're not careful.
Grow your own fresh herbs.
Frozen orange juice; add your own water and you'll save money.
Use a home water filtration system instead of bottled water.
Frozen/canned vegetables you eat are better than fresh vegetables that you throw away.
Watch the prices! From time to time chicken, pork, or beef prices will spike for various reasons. Read the news, comparison shop, and be a little flexible on the protein choice for your dishes.
Go meat-less three times a week. Substitute beans or lentils for protein.
Desserts should be occasional.
Minimize snacking. Don't snack while watching television, playing cards, or doing some other activity. Enjoy the snack, then go back to the movie. Don't eat out of the bag! Pour a measured serving into a dish.
Cook to feed your family, not The Army! If you need four servings, but make eight, take the first four and put them away for leftovers. Then serve dinner. It'll avoid waste and overeating.
Drink a glass of water before every meal.

No Cost of Living Increase in Retired Pay

2010-11-02T19:06:00.000-07:00

Like social security, there will not be a cost of living increase for 2011 according to a report today in the Air Force Times Online website. Ask just about anyone and they'll tell you that their personal expenses are rising, but the metric that the government uses to indicate rising inflation remains flat.

As the story points out, many retirees are still enjoying a significant boost that they received based on the 2009 5.8% increase during a temporary spike in oil prices. For the last two years the benefits have remain unchanged, even while active duty military salaries have increased.

So what does this mean for those who are still serving on active duty? It indicates that you need to commit yourself to a personal savings plan. You can't rely on the government to cover increases in your personal cost of living. They're using averages which guarantee that they don't directly reflect your wants or needs.

Begin by saving this years raise, at least 1.4% of your base pay, and allocate it to your Thrift Savings Plan. If we get a ROTH TSP option this year, apply it to that account. When able, increase your allocations with your goal of putting in the full $16,500 per year. You can use the table posted in my previous post to calculate the percentage of your base pay that you need to allocate monthly to max out your contributions.

In time you'll be able to offset flat years of no-COLA adjustments with gains in your personal retirement savings. You'll call the shots on how much you want your monthly pay to increase, and take advantage of tax deferred growth along the way.

Max Out Your TSP in 2011

2010-10-26T20:24:00.000-07:00

I've downloaded the proposed military pay table for 2011 and added the calculation to determine what percentage of your basic pay you need to allot to the TSP to max it out in 2011.

Here is a link to the table.

An 8 year O-3 would allot 25.2% of his or her basic pay. A 14 year E-7 would allot 35.1%.

Think this is unlikely? Certainly if you've lived on 100% of your pay to this point. But, on the other hand, if you live on two incomes or if your accustomed to living below your means, this might be possible for you.

I welcome your comments on this chart and the idea of maxing out your TSP in 2011.

Note: If we get the 1.9% increase, I'll upload the new chart. This is the worst case scenario for 2011.

ROTH TSP Update

2010-10-23T06:49:00.000-07:00

What about the ROTH TSP? The TSP web page continues to tell us that the ROTH option will be available in 2011, but is sparse on the details. The ROTH will be ideal for low income military members in 2011, but if the contributions are allowed only late in the year it'll be tough to get the maximum allowable amount into the accounts in time. The most you can contribute is 100% of your base pay.

If your goal is to contribute the maximum amount to ROTH IRA ($5,000 single/under 50 years of age) and ROTH TSP in 2011 ($16,500 if under 50) in equal monthly installments, begin by contributing $1792 to the ROTH IRA each month. (Add an extra $417 /mo. to max out your spouse's ROTH IRA.) You'll get the IRA fully funded for 2011 in about three months. If we still don't have the ROTH TSP details by then, you can set this same amount aside in a future spending account. Once the ROTH TSP opens, you can put up to 100% of your base pay into the account, and live out of your future spending account.

This plan is ambitious, but if you want to put as much money as possible into the ROTH option, this is a way to do it. Keep monitoring the TSP webpage or YourMilitaryMoney.com for breaking news about the ROTH TSP option.

Congress Still Struggling with 2011 Raise

2010-10-23T06:38:00.000-07:00

Congress is not in session right now, but when they get back they'll still be battling over the military budget for 2011. Fortunately for us, the continuing resolution will keep our paychecks coming in as always. What is unknown, right now, is if active duty military members will receive a 1.9% or a 1.4% increase in their base pay in 2011. The Military Times family of newspapers reported that the Department of Defense will begin the calendar year paying the lower amount, and then retroactively increase the pay if the higher amount is approved.

So, for planning purposes, I'm banking on a 1.4% increase in pay, and will update the 2011 TSP allotment to contribute the full $16,500 by the end of the calendar year.

More on that soon!

Your returns will not be linear

2010-09-27T20:09:00.000-07:00

I have a serious beef with the financial calculators you find online. You plug in how much you have or how much you're saving each month, how long you'll save the money, and an interest rate, and the calculator tells you how much you'll be worth. Now, this works ok if you commit to an investment plan and stick to it. But, if you're like most people, you change your mind, follow the latest trend (like gold now or tech stocks 10 years ago), and turn your financial life into a roller-coaster ride.

Your net worth-growth will not be linear. You'll have lean years (2008) and rich years (2009), and your accounts will ebb and flow. If you've got a huge gainer, wait a bit and it'll return to lower price later. If you're familiar with dollar cost averaging, as you add money to your investment plan you add more shares when the prices are low and purchase fewer shares when the prices are high. Over a period of years if you stick with your plan you'll see rates of return in line with the market averages, and that's what all these financial plans are based on.

Will You Join the Recovery?

2010-09-12T08:45:00.000-07:00

If you're tracking the TSP results over the past 12-months you've seen a significant increase in the S-Fund, which tracks the performance of small and mid-sized companies. It's likely that these small companies will be the first to experience the significant change in the economy and begin to grow. If you wait to make sure that this is for real you might miss your opportunity to join this recovery and enjoy the ride.

Now, please don't read this as a market-timing recommendation. I am a firm believer that military members, with long time horizons, should be in the market all the time. My concern is that some military members have avoided contributing to a personal IRAs or the Thrift Savings Plan because of negative headlines online and in the newspaper. I hope to reassure others in uniform that our economy, and our Nation, will emerge from this challenging time stronger, with small business owners and entrepreneurs leading the way.

We Just Don't Save Enough

2010-07-24T05:35:00.001-07:00

For military members, many will leave the service after 2-8 years with little or no savings to show for it. Consider the following figures.

"An increased percentage of workers report they have virtually no savings and investments. Among RCS workers providing this type of information, 27 percent say they have less than $1,000 in savings (up from 20 percent in 2009). In total, more than half of workers (54 percent) report that the total value of their household's savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000." (March 9, 2010 - EBRI.com)
"Overall, the participation rate (in the Thrift Savings Plan) for Active Duty members was 36.9 percent in February (2009) compared to 36.3 percent in January (2009)." - (TSP Governing Board Minutes, February 2009.)

Between frequent PCS moves, deployments, and life expenses common for those in their twenties and thirties, retirement savings can seem like the last thing to think about instead of the first.

If, however, you begin to allocate just $25 a week to your Thrift Savings Plan, if you earn 8% interest, you'll have over $13,900 in your account after 8 years of service. If you left the military, but continued to make the same savings for the next 30 years, you'd have more than $287,000!

Consider contributing a few bucks to your TSP right now. Add your raise in January for some painless investing. You'll be glad you did!

A Mobile Retirement with Style

2010-07-04T21:36:00.000-07:00

While not the plan for our family, another option that some military retirees choose is full-time life on the road in large motorized recreational vehicles. One such couple is Larry and Connie Farquhar who publish U.S. Military Campgrounds series of travel guides for military members and retirees. They've also outlined their personal story on their web site, http://www.happy-wanderers.com/. Their story is unique, and the web site is very informative because they share their budgets from 2005-2009, giving us real insight into the costs associated with this lifestyle. In short, it's very inexpensive.

Planning for the ROTH TSP

2010-06-22T07:18:00.000-07:00

We don't have any new information about the ROTH TSP option that was approved last year and is supposed to go into effect in 2011, but we're beginning to plan ahead in case it gets implimented as scheduled. The question for so many will be, should we contribute to the ROTH TSP or stick with the pretax variety.

What are the differences? Well, if you contribute to a ROTH IRA today, you are investing money that you've already paid taxes on. The earnings you eventually withdraw from that IRA can be withdrawn tax free. Some theorize that if the government gets into a bind, they might retroactively begin taxing ROTH accounts, but that is a remote possibility. (See this Marketwatch Story.)

Today's TSP, however, sets aside a portion of your military pay and puts it into a tax-deferred account. It grows without taxes being taken out until the money is distributed, and distributions must begin when you reach age 70-1/2. This benefits you in two significant ways. First, you defer paying taxes now, increasing the amount you have to invest. Second, you defer gains on your investments, such as capital gains and dividends. Over time your balance should grow nicely.

So, if given the option of the ROTH TSP or traditional TSP which should you choose? The ideal choice for most military members is the ROTH TSP. While you pay taxes on your income today, you'll avoid future taxes and required minimum distributions later. In addition, withdrawals from a ROTH IRA account are not currently factored into your income for purposes of deciding if your Social Security benefits are taxable. If that wasn't enough, contributions to a ROTH IRA, and likely the ROTH TSP as well, can be withdrawn from your account prior to age 59-1/2 as long as the account has been open for 5 years.

So, for all these reasons, I recommend that today you fully fund a ROTH IRA before contributing to the TSP. Once you've allocated $5,000 to a ROTH (plus an additional $5,000 for a spouse if married), then contribute up to the maximum in the TSP, 0r $16,500 for 2010. If you can save more than that, consider purchasing a tax favorable mutual fund, such as an indexed fund. Because these funds rarely turn over their portfolios, there are rarely capital gains taxes to be paid because of "churning."

Next year, because of the investment choices and flexibility available in ROTH IRAs, I recommend that you contribute the max to your ROTH IRA before contributing to the TSP. When you do contribute to the TSP, choose the ROTH TSP, and focus your investments on the C, S, and I funds. You'll be glad you did in about 30-40 years!

Time to Add Money to Your TSP

2010-06-21T05:01:00.000-07:00

The year is almost half over, and it looks like the recession might be coming to an end. Interest rates are near record lows and some real estate markets are beginning to recover. If interest rates begin to move north, bonds will become much less attractive and will drive money to stocks and real estate.

So, have you been adding money to your TSP account faithfully since the beginning of the year. You can contribute $16,500 this year (2010), but if you've waited until now to begin contributing, it'll take a pretty significant slice of your pay to get there from here. Even so, why not go to Mypay.gov and sign up to have 15% of your base pay deposited into your TSP account. Over time you'll end up with a significant nest egg. Consider contributing to the C, I, and S funds with the majority of your account balance and then enjoy the ride.

Congress struggles with 2011 Military Pay Increase Amount

2010-06-01T04:56:00.001-07:00

According to Air Force Times, the U.S. Senate approved a pay raise of 1.4% at the end of May, less than the 1.9% recommended by the House Armed Services Committee, but in line with the recommendation by the White House and the Pentagon. Regarding pay increases, Secretary of Defense Robert Gates has said that the personnel costs were consuming a large portion of the budget, and that the proposed pay increase significantly exceeded the rate of inflation. Over time, the .5% difference will mean billions of dollars in additional costs to the DoD for retiree entitlements.

What does this mean to military members? An O-3 with 8 years of service will see an extra $75 in his/her paycheck next January. If the full 1.9% is approved, it'll be closer to $100. Add either amount to your TSP contribution and forget about it.

Automate your Health Insurance

2010-05-26T06:38:00.000-07:00

Don't let your TRICARE coverage lapse! According to the TRICARE media center, you can sign up to have your annual enrollment fee deducted from your retirement payments or by electronic funds transfer from your checking account. Either option will ensure that your enrollment is up to date and doesn't lapse. This should give you peace of mind as you enjoy your retirement.

Predeployment Financial Checklist

2010-05-23T03:12:00.001-07:00

A recent Air Force Times story reported the difficulty family members sometimes have after their military member is injured while deployed. As a commander, I had to help deployed members on multiple occasions to reestablish pay, replace lost ID cards, and gain access to bank accounts and other personal information. I have also seen the heartbreak of a deployed fatality turn into a personal financial disaster when wills and beneficiary information have not been properly updated.

With those things in mind I offer this checklist of predeployment financial items.

Update your will and your virtual Record of Emergency Data (vRED).
Make sure your accounts have your spouse or beneficiary listed as the survivor beneficiary, particularly on individual retirement accounts.
Give your spouse a special power of attorney for the following items: ID cards, base access, vehicle registration, and changes to bank information.
Call your creditors and tell them that you're going to deploy. Because of the Servicemembers Civil Relief Act, you'll be able to lower your rates, or even break your leases if necessary.
Put your accounts on automatic pilot. Set up automatic payments for your fixed expenses. If your utility company will allow levelized billing, sign up for it so that you can simplify your monthly budget.
Build a financial information binder with your account numbers, addresses, and details. A great template for what should go into the binder is available from the US Navy Web page.
Ensure that all dependent ID cards will not expire during the length of the deployment plus 3 months. (Deployments get extended every day!)
Have "THE TALK." Sit down with your spouse and use the binder to discuss the family budget, your spending plan during the deployment, and how you'll ensure that all the bills get paid on time. If the military member is usually responsible for the bill paying duties, work through this process with your spouse for at least a month before departing so that they understand who needs to be paid and when.

This is just the beginning of the issues to consider. Armed Forces Crossroads has an excellent guide. USAA also has a free guide for deployment preparation.

During your spin up for deployment you may also find that your spouse doesn't want to discuss financial issues because of their own fears about the separation. You may want to involve a counselor in the weeks leading up to the departure to ensure that they understand the situation and to minimize their fears. Finally, some spouses who normally are not responsible for the financial aspects of the family may have a tendency to let their guard down during a deployment. They may overspend, or they might be the victims of scam artists who pray on family members. By taking the time to properly prepare for deployments, you can reduce stress and improve communications before, during, and after the deployment.

The "Simple Living" $90 budget (or less!)

2010-05-21T22:05:00.000-07:00

Last post I described some ways of controlling and leveling living expenses in retirement. I reviewed Paul Terhorst's ideas about simplifying your life, cutting fixed costs, and maximizing your fun. When his book, "Cashing in on the American Dream" was written, he recommended that early-retirees live on what is now $90 a day ($50 in the late 1980s). Given that low figure, how realistic is this?

Well, let's consider a single, 44-year old retired E-7 living in Reno, NV. He just retired after 24-years of service. According to the DFAS calculator, his benefit is about $80 per day. During his career, TSgt (USAF-Retired) Jones saved $100 each month in a taxable investment account. This account is worth about $60,000 today (at an 6% rate of return.) He also saved 15% of his pre-tax pay in his TSP account beginning in 2002. That account is valued at $60,000. TSgt Jones owns his 2004 car outright, and does not maintain a credit card balance.

On the advice of a financial planner, TSgt Jones calculates that he can take a 4% distribution from his investments each year for life, or $4,800 per year/$400 per month.

So here's the summary:

Liquid Net Worth: $120,000
Monthly Retirement Pay: $2,425
Investment Income: $400
Gross Income: $2,825
Taxes: $300
Net Income after taxes: $2,525 or $84 per day

So, what chance does TSgt Jones have to live well in Reno on $84 per day? I used Dave Ramsey's Zero-Based budget to estimate how he might spend his money. The quick budget breaks down like this:

Charity: $250
Savings: $150
Housing: $800
Utilities: $200
Food: $200
Transportation: $ 250
Clothing: $100
Medical/Health: $125
Personal: $200
Recreation: $250

Now, does this make sense for Reno? Let's start with housing. Is $800 reasonable for a single person to pay for housing? TSgt Jones decides to use his VA home loan to purchase a 2 bedroom townhouse. Using the Yahoo! Finance comprehensive mortgage calculator, he discovers that he can spend $100,000 for his home. He searched Realtor.com to find a 2 bedroom, 2 bathroom home for less than $100,000. He finds more than 150 properties to choose from, and picks a 6-year old end unit with a garage for $80,000. He asks the seller to pay the closing costs, and the offer is accepted! His payment for that house is $778 per month on a 15-year mortgage.

As for the other expenses, TSgt Jones is saving his transportation budget (after paying fuel and insurance costs) for the purchase of a replacement vehicle when the time comes. He does his grocery shopping thoughtfully, using a good list and limiting his prepared food purchases. He eats in restaurant's only periodically, spending his time hunting, fishing, traveling, and volunteering in his community.

Possible? YES! Easy? Maybe. Someone with a larger family, childcare expenses, or other financial responsibilities will have to plan more carefully before retiring completely on their military retirement.

If you are a military retiree who either lives on their retirement or who disagrees with my example, please comment. I'd love to learn more about your experience.

Fixing your expenses

2010-05-15T17:05:00.001-07:00

In his book "Cashing in on the American Dream" Paul Terhorst recommends simplifying your life and living on a fixed amount of money per day. His target is about $90 per day (adjusted for inflation since the book was published) per person. So, with that target in mind, how can a military retiree fix their expenses? Here are a few thoughts.

Buy a home. Military member should consider purchasing a home after 5-years of service and pays the home off using a 15-year loan. In this way the new-retiree has a paid-for home to live in or to sell in order to finance their retirement home. Since housing amounts to between 25-35% of the typical family's budget costs, reducing this fixed cost to taxes, insurance, and utilities will dramatically reduce their daily expense for housing, usually to single-digits depending on the property taxes where you live. (Savings: 15-20% of your budget)
Conserve energy. You can save money by upgrading appliances to more efficient models. When you installing Energy Star rated appliances you can save 20% or more on your energy bills according to the US Government's Energy Star web site. Homeowner can also receive tax credits for energy saving upgrades, especially ones that integrate renewable energy sources such as wind, solar, and geothermal. By reducing your dependence on your local utility to provide energy to your home, you protect your monthly budget from fluctuations. (Savings: 20% or more of your utility budget)
Shop at the Commissary with a list. If you've been stationed overseas anytime in the last 20-years you've heard the AFN "infomercials" for how to shop at the commissary. The spots are over the top, but the messages are real. If you buy your groceries at a Commissary and plan your purchases wisely, a military family can save more than $3,000 each year (Militaryonesource.com). (Savings: 30% or more of your grocery budget)
Drive a low-cost-of-ownership vehicle. Paul Terhorst advises retirees to sell their cars and use alternate means of mobility, but this isn't very practical for many in the United States today. If however, you buy a car with a low-cost vehicle, you will save every day that you drive it. Intellichoice provides a list each year of the lowest total-cost-of-ownership vehicles by class. (Savings: 10-15% of your transportation budget)
Buy the government sponsored long-term-care insurance. If you end up in a long-term-care facility, your Tricare benefits will eventually stop paying the bill. With a healthy military lifestyle, you're actually more likely to need long-term care that those who live sedentary ones. With daily costs already in the hundreds-of-dollars-per-day range, you've got to plan ahead to keep you in the lifetime range of $90/day. A great option is the Federal Long Term Care Insurance Program (FLTCIP). At age 60, for about $8 per day, you can have an inflation-adjusted benefit for 3 years. That gives you (and especially your spouse if married) a good level of protection as you get older. (Savings: varies with life expectancy)
Shop wisely. We live in an information-rich world, and with personal computers and smart-phones, we have an incredible ability to comparison shop. (There's an application for your iPhone that let's you scan a bar code on an item in a store and compare it to prices in the area.) The key is to minimize impulse purchases and stay informed of price changes and sales on items you're looking for. (Savings: 5-10% on discretionary spending for clothing, entertainment, dining, and recreation)
Bank smartly. If you're paying a fee for banking services you might be able to do better. USAA offers superior rates on banking products and insurance. Also, you can go to Bankrate.com to compare rates on savings, certificates of deposit, and loans. (Savings: 1-3% of total budget)
Maximize your fun. By traveling off season, taking advantage of Military Recreation Centers, and space-available flights, you can stretch your recreation budget. (Savings: 40% off your recreation budget)

(Note: Use this inflation calculator to see how inflation reduces buying power over time.)

Can you live on your military retirement?

2010-05-05T05:49:00.001-07:00

I've written before about the possibility that you could retire on a military retirement never worry about a job for the rest of you life. The fact is, of course, that if you work your budget based on your income you actually can live on that income alone, especially because your military retirement pay includes a cost-of-living adjustment, or COLA.

Let's look at an example. Lt Col Jones is married, 46 years old, is about to retire after 24-years of service and currently serves at Dyess AFB, Texas. Here's the summary of his pre-retirement benefit.

Base Pay: $8198.40
BAH: $1,788
BAS: $233
Total Compensation: $10,209
Col Jones plans to retire this July. He enters his information into the DFAS calculator to obtain his retirement benefit. He passed on the REDUX retirement, ensuring full retirement benefits including the full COLA benefit.

His benefit is $4,661 per month (before taxes). DFAS estimates his after tax pay at $3,961 (15% tax bracket).

Col Jones must decide is he will elect to take the Survivor Benefit Plan. This is basically an insurance policy that would pay Col Jones' wife up to 55% of his benefit ($2564/mo) for the rest of her life if Col Jones dies before her. The current cost per month for this is $166 (Base amount * 6.5%).

In addition, Col Jones must pay the Tricare Prime enrollment fee. He'll pay $460 per year for the first year (according to the TRICARE web site.) He'll start deducting that amount monthly for the following year's enrollment fee, or $39 per month.

So Col Jones net pay is:
Retired Pay after taxes $3,961
Less SBP ($166)
Less TRICARE ($39)
Total Net Pay: $3,756

Col Jones and his wife own their home in Abilene outright. They purchased the home in 1990 after they'd been on active duty for 5 years. They used a 15-year mortgage when they purchased the home, and so the note was paid off in 2005. From 2005 until today, they continued to make mortgage payments into a separate account for a renovation and remodel that they plan to do after he begins his terminal leave in May.

Total Payments: $1,400 x 60 months at 3% interest: $90,505

Throughout his career, Col Jones contributed 15% of his salary to savings, using IRAs, taxable accounts, and after 2002, the Thrift Savings Plan. He invested in stock mutual funds and averaged 8% on his portfolio. This nest egg is now worth about $250,000.

Col Jones's children are enrolled in Texas public universities, which are reasonably priced, and he was able to sign up for the Post 9/11 GI Bill to help them with their college expenses.

Col Jones and his wife decide to spend $40,000 on their home renovation, and put the remaining house-fund money into a savings account for emergencies.

They visit a financial advisor who suggests that they can allocate their retirement nest egg to take a 4% distribution annually, and can use the IRS tax code 72T election to begin taking withdrawals from their IRA accounts without penalty.

So, they elect to take a withdrawal of $10,000/year, or $834/month, from this account. They pay 15% in taxes on this, and net $708 each month. Added to their net retirement pay of $3,756, Col and Mrs. Jones have a budget of $4,464 to work with to decide if they can fully retire or if they should continue to work.

Since they are going to stay in Abilene their housing expenses will remain low. They decide that they can live comfortably on $4,000 each month, and move the remaining $464 of post-tax money into their taxable investment portfolio.

Using the links in this story, you can work your own scenario to see if you too can retire on just your retirement income. The numbers are very different if you retire to a high cost area like Washington, DC, Los Angeles, or San Francisco. It also make a significant difference if 25-35% of your income is going to housing, or if you can pay off your home before you retire, like Col Jones and his wife did. They'll pay just 10% of their income on their housing expenses (taxes and utilities).

Finally, your pay grade at retirement will, of course, make a significant difference in your ability to retire early. The budget for a retired E-7, for example, with the same 24-years of service, would be closer to $2,000 per month before deductions for the SBP and TRICARE. His or her standard of living would be significantly different that the example of the Jones.

Eating Well on a Small Budget

2010-04-16T01:45:00.001-07:00

The average military family's food budget is a significant monthly expense. We've mentioned here before how important it is to use the commissary to reduce your expenses. According to DeCA's website, the average family saves more than $3,300 a year by shopping at the commissary. If you link commissary shopping to careful menu planning, you can really save a lot of money. A recent AP Story challenged two professional chefs and a food editor to create a shopping list for a family on food stamps. The budget, about $70 for a week, was difficult for the three panelist, but that money would have gone a lot further at a commissary. The DeCA website has tools to help you with your shopping trip. They have recipe sections, links to coupons, and weekly specials that save even more money.

Is it worth the effort? Well, if you could save the average $3,300 and invested that over a 20 year career in your Roth IRA, you'd bank more than $175,000!
(You can check my math by using the Yahoo! Personal Finance savings calculator. I used an 8% annual rate of return in a 0% tax rate.)

Another Home Run for SaveandInvest.org

2010-04-15T00:56:00.000-07:00

If you're a military member just starting out, or if you've been on active duty for awhile but just haven't really spent time trying to figure out the financial parts of your service life, FINRA's webpage, SaveandInvest.org has a valuable publication that you should definitely take some time to review. Their booklet, called "Money and Mobility" is a "comprehensive resource to help you prepare for deployments and duty station changes." More than that, it helps with budgeting, investing, how to avoid scams, and who you can trust for financial advice. It's definitely worth the time to take a look, and it's free.

Tax Help For Military Families

2010-04-06T14:08:00.000-07:00

I just finished our taxes and filed electronically using Taxslayer.com. I've used Taxslayer since 2004 and haven't paid a cent to use their outstanding service. The web site gets better every year. The instructions are easy to understand, and having the ability to use the prior year's information where applicable saved me about 30 minutes this year.

Taxslayer has always been free to military families. It's a great service, and I encourage you to give them a try. This year they helped me with the forms needed to claim the exemption from taxes when I sold savings bonds to pay for college expenses. The program knew that I had entered information about these costs from the other forms I had completed, and in just a few additional clicks all the necessary forms were filled out. This included all the reports about our rental home too, including depreciation and expenses.

After finishing the federal form, Taxslayer asked me if I wanted to complete my state return. I said yes, it asked me 5 questions, and my California return was done ($0 charge, $0 tax since I've been stationed outside of my home state for the entire year.)

Last year I received my refund in about a week. I'll let you know when I get mine this year.

If you're struggling with tax forms and you're currently on active duty, log in and give Taxslayer a try. I know you'll be glad you did.

Getting Ready for PCS Season

2010-04-01T04:31:00.000-07:00

Like many other military families we're PCSing this summer. This is our 10th PCS move in 20 years, so I think we've learned a few things about them. Here's my list.

You'll see a lot of cash in your direct deposit account. Between your dislocation allowance and your advanced temporary lodging allowance, you're going to see a significant boost in your checking account balance. If you take advance pay, you'll even see more cash.
You're going to spend more than you think. If you're planning on buying a new television set with surround sound, don't head to the big box store quite yet. You'll have a lot of move-related expenses. Consider the cost of establishing new services, connection deposits, even hanging up new curtains, there are lots of expenses.
As quickly as you stop payments for old services, you'll start paying for new ones. Think about telephone, cable, internet, and other services you use. These items will definitely be a part of your life in the new location.
Since you're out of your home and usual routine, you're going to eat in restaurants much more frequently both before the move and after. Your food budget will be blown out of the water.
If you're moving out of the country, you might have to sell items at fire sale prices. Once you get to your new duty station, you might not have as much money to purchase a car or make a security deposit on a house or apartment.

The bottom line is that even though you'll have a rapid boost in your account, try to manage the money wisely. Stick to a move budget and use some discipline.

USAA has a lot of resources for you. Their web site can provide the information for free.

Also, MilitaryOneSource.com has a number of resources.

Dental Insurance For Military Retirees

2010-03-18T23:34:00.000-07:00

Just as when you're on active duty, you'll have to pay for dental insurance when you retire. The Tricare Retiree Dental Program offers you the benefits you're familiar with but at a cost that's about four times what you've been paying. My family coverage through Delta Dental is about $25 per month, but will go to $91 for me and my wife after I retire, and $153 a month if I cover my sons. That's a significant increase in costs, so it'll be something you'll want to expect when you decide to hang up the uniform for good. I'm beginning to research other options, and if I find a good alternative plan, I'll tell you about it.

Building a Retirement Nest Egg

2010-03-13T21:53:00.001-08:00

Despite all the benefits of military service, the fact remains that unless you are willing to commit a minimum of 20 years of service, you'll leave the military without any retirement benefits. (For a better understanding of the benefits you will have see the VA website.)

It's up to each of us, then, to build our own retirement nest egg. I've written earlier about a powerful tool, the Thrift Savings Plan, which was first made available to military members in 2001. The TSP allows you to contribute $16,500 per year before taxes are withheld. If you serve in a combat zone you can save up to $49,000 for 2010 (See the TSP website for details about contribution limits.)

I've also described the Roth IRA, or individual retirement account, which allows you to contribute post-tax money which grows tax free for life. Single people can invest $5,000 ($6,000 is over the age of 50), and married people can invest $10,000 ($12,000 if over 50) even if only one person has earned income. These accounts have some spectacular advantages, and most military families would be better off contributing the maximum to their Roth IRA before beginning to fund their TSP. (To learn more about Roth IRA's visit saveandinvest.org, FINRA's website.) Be disciplined about funding your IRA, though. Use automatic transfers from your checking or savings accounts, or sign up for allotments to fund your IRA. Too often, other priorities, like a post-deployment trip, Christmas shopping, or a snap purchase of a car or motorcycle, will push your retirement savings to the back burner, or worse, off the table completely.

So, once the Roth IRA is fully funded, and the TSP is maxed out, then you can begin to look at taxable accounts for additional savings. In addition, if college savings for your children is a goal, you have access to other savings tools, like educational savings accounts (ESAs) and 529 plans, which also allow you to save tax free for college. (FINRA also has some good information about these options.)

The bottom line is that military members who save money throughout their careers are much better prepared to transition to civilian life, whether they serve 4 years or 40 years. Consider this. If a second lieutenant who begins serving in 2010 saves 15% of her pay during a 4-year tour, and she earns 10% per year, she could have more than one-million dollars saved when she turns 65, even if she doesn't save another dime the rest of her life! Start saving today.

The Power of Pre-Tax Contributions to the TSP

2010-03-04T13:52:00.000-08:00

The ThriftLine TSP "Highlights" newsletter for January/February 2010 was sent out with our annual account summary. To help people understand the power of tax deferred contributions, they gave this example:

"For example, for a TSP participant making $38,000 a year, a 5% TSP contribution from biweekly pay would be $73, but the participant's paycheck would be reduced by only $61." (Assumptions: married contributor with two children, 2008 tax table.)

Another way to look at it is that for that tax year, the participant's taxable income was $36,100 but they were able to save $1,900 in their account, which will grow tax deferred until they begin to take distributions. The government lets you keep the money to save and invest, and then you pay taxes on what you take out at retirement.

In late 2011 we'll have another choice, the ROTH-TSP. Stay tuned for more conversations about the pros-and cons, of this option. For now, however, save as much as you can. You'll be glad you did in the future.

Avoiding a pre-payday mistake

2010-02-26T13:17:00.000-08:00

Outside just about every military base you'll see pawnshops and payday loan franchises that pray on service men and women who just need a few more bucks to make it to payday. It's really unfortunate because there are legitimate, low or no-cost loan programs available through non-profit organizations connected to each branch of the military and the Coast Guard. Military.com has assembled a collection of these agencies. The Coast Guard link is available here. Many states have recently passed laws that restricted, or in some locations, closed down payday lending operations that were the most predatory. These moves were a step in the right direction, but at the same time, military members need to know that resources are available to help them. All you have to do is ask for help.

Pay off the house, or invest it?

2010-02-21T01:52:00.001-08:00

The February 2010 issue of Better Homes and Garden printed a question from a reader nearing retirement. They owed $100,000 on their home and had a retirement nest egg of $200,000. She asked if they should pay off the house or keep the money and invest it in a diversified portfolio of stocks and bonds.

The answer the editors of the financial section of the magazine was that they probably should pay off the mortgage. Specifically, since guaranteed investments do not return at the current rate of the mortgage interest, they actually get a better "rate of return" by paying off the mortgage.

This answer should be examined more fully before jumping to conclusions. First, what other income does the couple have and will they receive cost of living adjustments on the benefit? If this is all the money that they have, the first issue they'll have to tackle is how to pay their monthly living expenses. Even without the mortgage, if they draw the standard 4% (considered by many to be a sustainable withdrawal rate) they'll have to live on $4,000 per year! Expending 50% of their cash into their home could result in a cash crisis early in their retirement, forcing them to consider a costly reverse mortgage sooner than later.

Secondly, since the mortgage costs are tax deductible, the simple subtraction (5-6% mortgage - 2-3% bond interest = 2-3% savings by pre-paying the mortgage) doesn't work. It's probably close to a wash depending on the couple's total monthly income.

Third, I was concerned reading the question that this lump sum was in a retirement account. If it's in a 401K or a TSP account, any money you take out is taxable as ordinary income. That could artificially push you into a much higher tax bracket and take as much as 33% of the money off the top.

Finally, the person asking the question doesn't say how long she and her husband are planning on staying in the house. If she's ready to move from Michigan to Florida in the next couple of years, it's probably a much better idea to bank the money now than to tie it up in the MI house.

Now, all this said, I am not arguing that it's never a good plan to prepay the mortgage and own your home. Actually I think it's a great idea, but it has to fit into your overall financial plan. It's a great way to manage a cash flow situation on a fixed income, but not when this amounts to 50% of your total net worth. I'd be much happier with it if was about 25-30% of the net worth.

If you're a military member planning on retiring after 20-30 years of service and making work optional, having a paid-for house is almost a necessity, but it should be something that you've worked for over 10-15 years, not as a lump sum right at the end.

Military Spouse Educational Benefit Suddenly Halted

2010-02-18T12:49:00.001-08:00

An article today at Military.com reports that the Military Spouse Career Advancement Accounts have been halted pending a Department of Defense review. Under the program, which has been accessible through MilitaryOneSource.com, spouses like mine have been able to get up to $6,000 for advanced degrees and job training. The article reports that this review came about without any advance warning. Spouses were simply frozen out of their accounts. We will continue to monitor this situation.

1.9% Pay Increase Suggested for 2011

2010-02-14T15:24:00.000-08:00

The Military Times newspapers have reported that the Obama administration has proposed a 1.4% pay increase for 2011. Representative Joe Wilson has proposed an additional 0.5% increase for a total of 1.9%. Now, that's the smallest increase since 1962, but considering that the social security cost of living allowance didn't increase at all, that's not too bad.

Now, will this increase go through? Probably, but if it is looked at for budget tightening, we'll report it here ASAP.

A Simple Life

2010-02-10T09:09:00.000-08:00

Our family is currently living in base housing overseas. You really get a snapshot of simple living in this environment. Specifically, we're limited to a single car, can actually walk virtually everywhere we need to go, have ready access to public transportation, and limited space to store new "treasures." People drive mid-nineties hand-me-down cars that are reliable but not shiny or trendy. We travel, take pictures, visit friends, and enjoy life. It doesn't hurt that we don't pay rent or utilities. We bought an inexpensive rental insurance policy, and have really simplified our life.

There's a lot we can take home with us when we rotate back to the US. This is our third overseas assignment, and each time it has felt so good to shed our expensive and unfulfilling habits. It is a great laboratory for simple living, and I recommend it to you if you have the opportunity.

USAA Gets Strong Marks for Not Ripping People Off

2010-01-17T13:57:00.000-08:00

Syndicated radio talk show host and author Clark Howard recommended USAA for anyone who can qualify to establish a credit card with the company. Military families have been served well by the company for many years. I have a USAA Mastercard, along with a mortgage, credit card, insurance on my home, cars, property, a brokerage account, and college savings accounts. The company understands military life and families, and hasn't rushed to add bogus charges and fees on their products like other banks.

Contact USAA today to see if you can qualify for their products.

Measure of a Military Member's Family Life

2010-01-16T17:58:00.001-08:00

Robert Powell inspired me to consider the measure of a military member's life in his recent posting on the measure of a life.

Here's the link to his words:
Robert Powell
The size of a nest egg is no measure of a man

Some might think that taxes due on an estate might give a sense of the measure of a man. But I am recently returned from the funerals of two men and I am here to report that the measure of a man has nothing to do with how much money one earns or saves. ...Read the rest of the story

It is traditional at the military retirements and promotion ceremonies that I've attended to review the service member's service record based on where they've served and highlights of their duty. We recognize their families, thanking them for their support throughout their military member's career. This year, during the Air Force Year of the Family, I hope we can remember the sacrifices and specific contributions they make to support the mission of the armed forces.

Create Measureable Goals for 2010

2010-01-16T16:48:00.000-08:00

What a great year we had last year!

Do you agree with that? I think it was an amazing year for military families. We saw some reductions in deployments, better pay and benefits (most notably the Post 9/11 GI Bill), got tax-free relief for homeowners who had to give up their underwater homes for PCS moves, and had the opportunity to purchase real estate at 50% of previous high values.

For the American economy, we're seeing "green shoots" of recovery, and the stock market it way up from its low in March 2009. If you were with me and kept investing throughout the year you're very happy with the way things ended up. Listening to personal finance experts like Ray Lucia, I "skimmed some of the cream" moving a percentage of my extraordinary gains out of the stock market and into my fixed income accounts.

Now, I'm focusing on measureable goals for 2010. As you do the same, think about what is called "value averaging." The idea is this:

Calculate your desired return to achieve your goal (perhaps 8-12%/Yr for a stock account)
Choose a time window (bi-annual, annual, quarterly but not monthly or weekly, it'll make you crazy)
At that time, see where you stand. If your return exceeds your target, "skim the cream" and move your excess gains into your guaranteed accounts
If, however, your returns are less than the target, buy more "shares" to get your account on track

In this way, you're forced to buy low and sell high. A criticism of this technique are that it is conservative. Many experts think you should sell losers and let the winners run. Unfortunately it's just tough to know when the losers are about to turn it around and when the winners are spent. I recommend you maintain a balance in your stock allocations, and in your overall stock market investment account.

So my goal for 2010 is a contribution of $26,500 to our family's retirement accounts, $15,000 to our emergency savings, and $10,000 to our taxable savings. For returns, I'm looking at 10% for our stock market account balance.

All the best to you and your family in the new year!

Retiring early and tapping your IRA before you're 59 1/2

2009-12-31T21:31:00.001-08:00

If you're a military member considering retiring completely after 20+ years of service, you are certainly concerned about how you can access savings in IRAs and perhaps in your TSP if you're putting money away in these accounts. You know that these accounts generally cannot be accessed before you're 59 1/2 without suffering a 10% penalty.

There is another option, however. Using section 72(t) of the tax code you can, in fact, take annual payments out of these accounts. The discussion below is from the IRS web page.

How are annual, substantially equal periodic payments determined for purposes of the required minimum distribution method, the fixed amortization method and the fixed annuity method?

An example of the required distribution method, an example of the fixed amortization method and an example of the fixed annuity method using the methodologies described in Rev. Rul. 2002-62 are set forth.

Facts:

Mr. B is the owner of an IRA from which he would like to start taking distributions beginning in 2003. Mr. B will celebrate his 50th birthday in January 2003. Mr. B would like to avoid the additional 10% tax imposed on early distributions under section 72(t)(1) by taking advantage of the exception in section 72(t)(2)(A)(iv) for distributions in the form of substantially equal periodic payments.

Assumptions:

the account balance of Mr. B's IRA is $400,000 as of December 31, 2002, and this is the account balance (and, when applicable, the date as of which the account balance is determined) used to calculate distributions.

120% of the federal mid-term rate for the appropriate month is assumed to be 4.5% and, when applicable, this is the interest rate that will be used for calculations.

distributions will be over Mr. B's life only and, where applicable, single life expectancy will be used for calculations.

1. Required minimum distribution method

For 2003, the annual distribution amount ($11,695.91) is calculated by dividing the December 31, 2002, account balance ($400,000) by the single life expectancy (34.2) obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 50 is used.

$400,000/34.2 = $11,695.91

For subsequent years, the annual distribution amount will be calculated by dividing the account balance as of December 31 of the prior year by the single life expectancy obtained from the same single life expectancy table using the age attained in the year for which distributions are calculated. For example, if Mr. B's IRA account balance, after the 2003 distribution has been paid, is $408,304 on December 31, 2003, the annual distribution amount for 2004 ($12,261.38) is calculated by dividing the December 31, 2003 account balance ($408,304) by the single life expectancy (33.3) obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 51 is used.

$408,304/33.3 = $12,261.38

2. Fixed amortization method

For 2003, the annual distribution amount will be calculated by amortizing the account balance ($400,000) over a number of years equal to Mr. B's single life expectancy (34.2) (obtained from Q&A-1 of § 1.401(a)(9)-9 of the Income Tax Regulations when an age of 50 is used), at a rate of interest equal to 4.5%. If an end-of-year payment is calculated, then the annual distribution amount in 2003 is $23,134.27. Once an annual distribution amount is calculated under this fixed method, the same amount will be distributed under this method in subsequent years.

3. Fixed annuitization method

Under this method the annual distribution amount for 2003 is equal to the account balance ($400,000) divided by the cost of an annuity factor that would provide one dollar per year over Mr. B's life, beginning at age 50 (i.e., the actuarial present value of an annuity of one dollar a year payable for the life of a 50 year old). The age 50 annuity factor (17.462) is calculated based on the mortality table in Appendix B of Rev. Rul. 2002-62 and an interest rate of 4.5%. Such calculations would normally be made by an actuary.

The annual distribution amount is calculated as

$400,000/17.462 = $22,906.88

Once an annual distribution amount is calculated under this fixed method, the same amount will be distributed under this method in subsequent years.

Using these techniques, the IRS basically allows you to create your own lifetime annuity with your IRA funds. Just remember that you'll need to structure your account to accommodate these distributions. I recommend you take a look at Ray Lucia's "Buckets of Money" strategy to ensure that you have sufficient liquid assets in order to prevent you from having to liquidate long term investments during market downturns to allow the distribution.

Another look at Tax Friendly Retirement States

2009-12-30T23:01:00.001-08:00

Several postings ago I detailed states that were favorable for retirement based on taxes. An important thing to remember is that just because a state does not have an income tax that doesn't necessarily mean that the overall taxes in that state are lower. When you factor in property, sales, and inheritance taxes, the income tax states actually look more competitive.

According to Kiplinger's 2008 "Retirement Planning" magazine, 9 states* have no income taxes:

Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming

* New Hampshire and Tennessee tax only interest and dividends.

Five states have no sales tax:

Arkansas
Delaware
Montana
New Hampshire
Oregon

Eight states collect inheritance tax:

Indiana
Iowa
Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania
Tennessee

When MSN Money examined a hypothetical case of a retired married couple living on an income of $60,000. When calculating their expected taxes that include all factors, the top six states for retirees were:

Delaware
Alaska
Kentucky
South Carolina
New York
Michigan

The highest state tax bill was in Pennsylvania, which due to an excessively large property bill, led all others, and that's before collecting their inheritance tax when you pass on.

While taxes alone shouldn't determine your retirement location, it's helpful to compare options if you're not determined to live in one state or another. Also, more than 20 states had a total tax obligation of less than 5% of the hypothetical retirement couples income. Given the services that an American receives for their taxes, I'd say it's still a very fair deal.

Homeowners' Assistance Program benefits are not taxable

2009-12-29T20:48:00.000-08:00

Here are the words from the HAP webpage:

"Tax Liability of Expanded HAP Benefits
• President Obama signed HR 3548, Unemployment Compensation Extension Act of 2009, into law and thereby exempted Expanded HAP benefit payments from taxation. Read More…
• Applicants who received benefits and had taxes withheld, may apply for refunds from the Internal Revenue Service when they submit their tax returns."

Great news for everyone hoping to sell their homes and restart at their next duty or retirement location.

Putting your 3.4% to work

2009-12-25T03:01:00.001-08:00

You know that your military paychecks are going up 3.4% beginning in January. Now's a great time to add that to your TSP withholding if you're not already maxed out. Because the increase comes out pre-tax, you'll still see an increase in your January paycheck. Here's how you do it.

1. Log into myPay. (Note: DFAS is updating all the account names to remove the Social Security numbers right now. You'll have to create a log-in name and new password. A minor pain, but for a good cause.)
2. "Agree" to the terms. There's a dialog box at the bottom of the first screen after you log in.
3. Select "TSP" from the options below "Taxes"
4. Under "Basic Pay" add 3.4% to your current contribution. (The maximum contribution for you is $16,500 in 2010.) Then select "Save".

You'll find a link in a previous blog to the percentage of your monthly check you need to save to max out your TSP.

Also, remember that you can also contribute $5,000 (or $10,000 if you're married) to a ROTH individual retirement account. You'll need to save $416.67/mo ($833.34/mo for a couple) in addition to your TSP withholding to max out your contributions.

Details on our Post 9/11 GI Bill Payment

2009-12-04T17:56:00.000-08:00

My earlier post on our Post 9/11 GI Bill benefit tranfer payment was a bit brief given the workup since April 30th, so I thought I'd spend a few moments outlining what we actually received.

Our VA award letter was dated Nov 18, a full 6 1/2 months after I submitted my application for benefits.

Tuition and Fees:

The school submitted information to the VA that verified that my son enrolled in the university from Aug 20 through Dec 20, with a full-time course load and total tuition of $14,778.50 and fees of $1,430.25.
"The in-state maximum fees per term for your state (CA) is $287.00. Since we are entitled to receive 100% of the amounts payable under the program, you may be paid up to $2,165.25 for fees each term or 100% of the actual fees charged, whichever is less. Your school certified that you were charged $1,430.25 for 15 credit hours.
"We issued a tuition and fees payment to your school on your behalf in the amount of $5,735.25."

Monthly Housing Allowance:

"The monthly housing allowance payable under the Post-9/11 GI Bill for your school's zip code is $1,930 (Berkeley, CA). Since you are eligible at the 100% rate, you will receive $1,930 a month for each full month of training during the certified enrollment payment."

Books and Supplies Stipend:

"The maximum amount payable for books and supplies is $1,000 each year. Since you are entitlesd to receive 100% of the amount payable under the Post-9/11 GI Bill, you may be paid up to $1,000 each year for books and supplies. VA pays a portion of the books and supplies stipend for each credit hour pursued during the year up to 24 credit hours. Your school certified that you are enrolled in 15 credit hours. We sent you a payment of $625.05 for books and supplies."

On November 30th two deposits hit my son's checking acount. The first was for $$6,497.67 for the housing allowance. The second was $625.05 for the books and supplies. We made a payment to the university for his room and board, and left $1,000 in his checking account for expenses and books for second semester.

So, to summarize our benefit:

October 13, we receive $3,000
Nov 30, we receive two payments, totaling $7,122.72
The university received a direct payment of 5,735,25

TOTAL RECEIVED: $15,857.97

All together, it was a slow process, but an incredible benefit to our military family.

Academic Research Suggests You're Paying Your Fund Managers Too Much

2009-12-03T20:00:00.001-08:00

A very interesting report on Marketwatch.com reports that index funds beat actively managed mutual funds 97% of the time. This is counter to what some financial planning experts, such as Ray Lucia (of whom I am a huge fan) have said. Mr. Lucia said in a recent broadcast of his syndicated "Ray Lucia Show" that in turbulent times like this, actively managed funds will beat the indexes because of the skill of the fund managers. Unfortunately it's just plain tough to pick a fund manager who's right enough of the time to beat the broader indexes. The other factor is the expense of using mutual funds. Even no-load funds have fees equal to 1% or more of assets invested. Compare this with index funds where the fees are less than 0.3%, and the actively managed funds are already lagging behind index funds. Now try Exchange Traded funds where the cost can be less than 0.17% (plus brokerage fees of course) and you're really swimming up stream with your mutual funds.

Does all this mean that I'm firing all my fund managers? Absolutely not, but for those who argue that the TSP is not a great option because you're linked to broad indexes instead of actively managed mutual funds, this study helps provide a counter-argument.

When it opens, should I fund the Roth or the traditional TSP? Maybe neither!

2009-12-02T02:12:00.001-08:00

Let's start with the basics. Dollar for dollar, the money in the Roth Retirement savings account is more valuable than the money in the traditional TSP or 401K. Here's a link to help explain why.

So, all other things being equal, if you can scrape together with $16,500 post tax, the Roth TSP/401K is worth between 25-33% more than the same amount of money in the traditional TSP/401K account because of the taxes.

It's a two edged sword, of course, because you'll have to come up with more money up front because you'll have to pay the taxes now.

When funding retirement savings, conventional wisdom goes like this: Fund your TSP (or 401K) up to the limit of the company match (which of course is $0 for military members), then fund your Roth IRA to the max ($10,000 per married couple) then go back and max out the traditional 401K to the limit ($16,500 in 2010). The Roth IRA allows you to simplify this dramatically. Max out the Roth IRA, then max out the Roth TSP. To do both you'll need to save $2208/mo! That's a lot of clams.

So here's the wildcard: what if you can't save that much? Is it better to have a larger balance growing in a traditional (taxable) 401K or a smaller (post-tax) balance in a ROTH 401K? All other things being equal, it would appear to be a wash--but--current tax laws treat traditional 401K benefits as earned income when computing your taxable portion of your Social Security benefits. It's like getting taxed twice on your money.

So, the bottom line is that as long as you believe that you'll be in a similar or higher tax bracket in retirement, the best plan is max out your ROTH TSP if you can.

Others waffle more than me. but I think this is a solid plan.

The last item to consider is investment choices. Since there's no matching for military members (yet), when the ROTH TSP option becomes available I recommend this plan:

1. Max out your ROTH IRA to maximize your investment options.
2. After you've done that, begin funding your Roth TSP.
3. Once 1 and 2 are complete you can begin to contribute to taxable account using tax advantaged accounts like exchange traded funds.

Post 9/11 GI Bill Pays

2009-11-30T12:40:00.000-08:00

We received a letter dated 18 Nov that our claim had been paid. Yesterday, on 30 Nov, the money hit our joint account and I transferred much of it to the University. All together, we received almost $15,000!

TSP planning for 2010 with Pay table

2009-11-24T03:55:00.001-08:00

Now that the 2010 pay table has been released you can begin planning for your TSP withholding percentage. If you plan to distribute your withholding out equally over the year you'll need to have the government hold out $1,375 each month. The math then is pretty simple. Just divide $1,375 by your basic pay to determine the percentage of your base pay to allot to the TSP each month to max it out.

I've taken the 2010 pay table from Military.com and done the math for you in excel. Here's the link to the results. You'll see that a 14 year E-7 needs to set aside 35.6% of their base pay to max out the full $16,500 in 2010. A 14 year O-4 defers 20.4%.

If those numbers sound high, remember that these are pre-tax dollars, and exclude your BAH, bonuses, or other special pay allowances you receive. You really can max out your TSP.

College waiting to be paid

2009-10-31T00:30:00.000-07:00

Our son's college has really been very patient with the VA. They have charged us late payment fees of about $20 per month, but overall there haven't been any harassing phone calls or nasty letters. Our son did talk to the veterans affairs office and they advised him to continue to be patient while the processing gets done.

The issue now is registration for the spring schedule. Without his account paid, he will not be allowed to sign up for classes. We're hopeful that the VA can take care of this soon, and that they'll begin his living expense payments and pay them retroactively to August when he completed the requisite paperwork.

Eligibility Certificate Arrives!

2009-10-15T16:30:00.001-07:00

Sixty days after we submitted the VA forms, our son's benefit eligibility certificate arrived. We immediately sent that to his university as instructed on the certificate. Once they verify his enrollment, the payments will begin. His school is waiting to be paid, so the sooner they act the sooner they'll receive the money.

I'll keep you informed of our progress, so keep an eye out.

VA Check arrives!

2009-10-13T05:25:00.001-07:00

Our son received his first VA check today, the $3,000 advanced payment while they complete his initial claim. He will take the check to the registrar and pay his first installment. It's great to see this actually happening.

Kiplinger's Military Money Site

2009-10-09T15:20:00.000-07:00

Kiplinger.com has done a service for military members by building a web site just for us. The information on their site offers a wide range of topics of interest to the military, such as preparing for deployments, investing, avoiding scams, and purchasing a home.

One particularly helpful area is a list of 28 web sites that you can reference for even more information. Unfortunately you won't find "Your Military Money" there yet, but we'll keep working on it.

Request for immediate GI Bill Payment

2009-10-09T06:53:00.000-07:00

My son used the online form to request his initial $3,000 payment. The VA is supposed to cut the check and mail it within three days of the request, so he should have the money next week.

I also sent a letter to the OK VA office requesting their action to obtain his eligibility certificate. No words back from them yet.

More soonest...

Homeowners Assistance Program

2009-10-05T04:11:00.001-07:00

Many of my colleges found themselves PCS'd overseas with a home in the CONUS that they couldn't sell or rent for enough to cover their mortgage. They've been looking for assistance from the DoD Homeowners' Assistance Program. This program was designed to help military members leaving bases that were being closed, has been extended to others who are stuck with the homes because of an ordered move.

My friends are trying to cope with one significant issue right now. The benefits are apparently taxable, which for some who are underwater (owe more than their home is worth at fair market value), they won't have enough at closing to release the title to the new owners. Congress has excused the taxes for families that have gone through a foreclosure (loan forgiveness results in a 1099 which was previously taxed as ordinary income). We encourage veterans support groups to lobby congress to make the Homeowners' Assistance Program proceeds tax free.

VA offers interim $3,000 payment because processing is so slow

2009-10-01T16:17:00.000-07:00

If you're like I am, you're frustrated that it's taken so long for the VA to process your VA educational benefits. If you've applied for your benefit and haven't received the payment for the Fall 2009 term, you can log onto the VA website beginning at 12:00 AM ET on Friday, October 2. The payments will be issued within 3 days of your request.

Good job Secretary Shinseki!

Changes to your TSP

2009-10-01T16:03:00.000-07:00

The TSP Web Page just announced several changes and proposed changes to the program. Three of them were interesting to me.

The first was the approval of the ROTH TSP option. Beginning in 2011, TSP will have a ROTH option that will allow military members to contribute post-tax money into their retirement account. Instead of growing tax deferred, proceeds to the ROTH TSP will be tax free when withdrawn.

Many of you have seen my posts recommending that military members fully fund their ROTH IRAs before contributing to the TSP because of the tax treatments. This option might not change that guidance, since TSP investment options are not that interesting, but it will allow you to contribute a lot more money to these tax-favored accounts.

Speaking of investment options, the second interesting bit of news is that the administrators of the TSP have been granted permission to open a “Mutual Fund Window” to give participants access to a wide variety of funds. There are concerns about the complexity and costs associated with this option, however, so we’ll have to see how this goes. I suggest that military members and organizations like the Military Officers Association of America, the American Legion, the VFW, and other military support groups send letters and e-mails supporting the Mutual Fund Window to the TSP.

Finally, there was news on “Automatic Enrollments” into the TSP. Here’s the quote on the topic from the TSP News:

"Automatic Enrollment
The original impetus of the new law was the automatic enrollment provision that was studied and subsequently recommended for legistlative action by the members of the Federal Retirement Thrift Investment Board. The new law authorizes automatic enrollment for new Federal vicilian employees. In deference to concerns within the Department of Defense, the final legislation was amended by the Congress to exclude members of the uniformed services from the automatic enrollment provision..."

I personally believe that automatic enrollment would be an excellent move for the uniformed services to implement. I’ve read that people are usually not inclined to turn down enrollment if it’s automatic, but often do not enroll if they must actively “enroll.” For 18-24 year olds, a 1 – 3% allotment to the TSP account tied to the government insured “G-Fund” would be painless, and provides them with a foundation for future savings. Now many veterans leave the service after one or two tours of duty with no retirement savings at all.

I believe that the DoD should allow automatic enrollment, but that it should also include a bonus for first and second term enlistees/officers equal to amount of the automatic enrollment amount. For example, if the automatic enrollment is for 3%, then the government should match all of that.

This powerful program would dramatically improve the number of military members participating in TSP and provide all of them a real opportunity to save for retirement outside of waiting 20-years to be vested in the program.

Where you can live cheap...

2009-09-27T00:47:00.000-07:00

If you are thinking about retiring on your military pension, minimizing your housing costs might be the make-or-break decision. BusinessWeek online just posted a list of 20 American Cities where the cost to own a home is lower than or just a little more expensive than renting.

It's interesting that cities like Tampa, Phoenix, and Las Vegas that were so popular just a few years ago are so out of favor today. As I've said elsewhere, military retirees can now live in more areas than they ever could have before, but here's the key. Soon inflation will go up, maybe way up. You definitely want to own real estate in inflationary times. Landlords will have to raise rents in that environment just to cover their costs. If you buy your retirement home now you'll lock in rock-bottom interest rates, have many many homes to choose from, and at the lowest sales prices in years. Plus, if your ready to move into that home soon, and you're a first-time buyer, you can get a no-downpayment VA loan, finance for 15 or 30 years, and get a check back from the government for $8,000.

What a country!

My son called the VA...

2009-09-27T00:45:00.000-07:00

My son's college hopes to get paid soon, and since the VA won't talk to me about his benefit because I've filled out all the requisite paperwork, he gave them a call ten days ago. They repeated that they are taking about 8 weeks to process the requests and to contact them if he doesn't hear back from them by about October 6th.

As long as the University continues to be understanding, they can take as long as they need.

More soonest...

GI Bill update...

2009-09-19T06:26:00.000-07:00

I called the VA 10 days ago to check on the status of our paperwork to transfer my benefit to my son. I guess things are coming along because they had it on file that the benefit was transferred, and because now the benefit belongs to him they would not discuss it with me further. The last time this happened, my son was with me. Now of course, school has started and he's there.

He called them last week. They had all the required paperwork on 6 August. They told him that because of the massive volume of submissions that it could take 8 weeks to get his eligibility certificate. After he gets that he has to take it to the veterans affairs officer at his school who then sends it back to VA. The school is charging us interest now, so I really need the VA to take care of their part of the tranfer.

More soon...(I hope!)

The VA is working on my case...

2009-08-22T15:22:00.000-07:00

Second in the series.

I contacted the VA this week to get an update on our application. The VA rep picked up in less than 3 minutes, and had access to our information at his fingertips. My son, to whom I am transferring my benefit, was with me at the time, which became important. The rep needed to verify that he was speaking to me with my son's approval, since his social security number is now associated with the benefit.

Lesson 1: When transferring your benefit, in order to then get information about the application make sure your child is available to approve the release of information.

Question: Can I put a Power of Attorney on file?

The agent reviewed the application and assured me that all necessary information had been received. He asked if I had gone on the Dept of Defense web page to transfer the benefit. I told him I had, but apparently he could not see that side of the application.

Lesson 2: You must transfer your benefit with both the DoD and the VA, and they can't both see each other.

(Need the web page at DoD? It's best to use your CAC card to do this, but it takes only a few minutes.)

After just a few questions he let me know that everything I need to do has been done and that I can anticipate getting a response back soon. I asked if I should provide my certificate of eligibility to my son's school to verify that the process is underway. He advised me to do so.

More soon...

My Post 9/11 GI Bill Story

2009-08-03T06:40:00.000-07:00

As you might know, I am in the process of transferring my GI Bill benefits to my two sons. The process is outlined on the VA website. I mailed my initial application to the VA on April 29, 2009 to make sure it reached the western office in Muskogee, OK on 1 May, the first day that the window opened. On June 9th I received my Certificate of Eligibility. I received my VA Form 22-1990E in late July, which was the application for transfer of entitlement. I completed that form, and sent it back with a VA Form 21-686C, the declaration of status of dependents.

About a month earlier I filled out the DoD web-form to transfer my benefit to my two sons. I received confirmation of the transfer about a week later.

I spoke to the Veterans' Affairs officer at my son's college, since his enrollment must be verified by the university before the VA begins making payments. I asked him about the bill I received that requested payment on August 15th. He advised me to delay making the payment until this was accomplished. I am reluctant to do this, however, since I hate missing a due date.

I'll keep posting regarding my progress. I am likely one of the first 15o,000 or so to get enrolled in the program, so I feel like a trailblazer.

More soon!

100th Post on Your Military Money

2009-07-25T00:23:00.000-07:00

I’ve been considering for a couple of weeks what to talk about on this, the 100th posting to the Your Military Money blog. I’d thought about doing a post with links to prior entries, or another about the value of military benefits. Instead I decided to write about the value to a life spent in service to others. The American people can pay us what they choose, but we serve to protect freedom. I often am surprised that I’m paid well to fly airplanes and lead smart people doing important work for others.

Proudly serving for 20 + years,

Lee

Roth TSP Option

2009-07-05T21:24:00.000-07:00

Congress has proposed a Roth TSP option, which many consider to be a "game-changer" for military families. Right now a married couple where one spouse is serving can save $16,500 (more if deployed to a combat zone in a pre-taxed account, plus an additional $10,000 in a post-tax Roth IRA. Under the new proposal, couples could save the same $16,500, but pay the tax now, and let the investments grow tax free now, and come out tax free later.

Conventional wisdom has said that military members should fully fund the Roth IRA before saving money in the TSP. Now with the Roth TSP we can do both.

One additional word. You might want to stick with the strategy of fully funding your Roth IRA first before contributing to the Roth TSP. The reason is investment choices. The TSP options, which might be expanding, currently limit your to a small basket of index-linked funds. If you go with a discount brokerage, like USAA, Schwab, or TD Ameritrade, your options are almost limitless. That makes a difference if you want to add exchange traded funds, commodities, and real estate investment trusts to your mix.

Back to Basics

2009-06-12T19:25:00.000-07:00

It's easy to read the business headlines and get out of synch with the basics. For example, military members might be fearful from contributing to the Thrift Savings plan because of stock market volatility. Others might think that because inflation is likely in the near future, they should go out and spend money now, or borrow money now to buy everything they want.

These are very dangerous choices. Now is a great time to return to fundamentals of financial planning.

1. Budget wisely. How much do you spend each month in restaurants, coffee shops, movie theaters, and other discretionary ways?
2. Pay yourself first. Put 10-15% of your income away for retirement either in Roth IRAs, the TSP, or other tax advantaged accounts.
3. Spend wisely. Consider a used vehicle, avoid a long term lease, carefully consider purchases, and avoid impulsive decisions. Carry cash and avoid credit cards whenever possible.
4. Pull your credit report. You can go to annualcreditreport.com and get your report for free. If it contains errors, report them right away.
5. Get adequate life insurance if you need it. If someone depends on you for their basic needs, you need life insurance. For many, SGLI is enough, and comes directly out of your pay. If you've been in the military more more than 10 years, you may additional coverage. I recommend you contact USAA for more information about their insurance products.
6. Learn more about taking care of your money. Pick up a book like Dave Ramsey's "Total Money Makeover" to get a good understanding of the principles.

Post 9/11 GI Bill Transfer Rules Announced

2009-05-18T04:08:00.000-07:00

The rules surrounding the transfer benefit for the Post 9/11 GI Bill are beginning to come into focus. The press release, dated April 28th, warns that the rules are in the final stages, but have not been signed. The proposed policy will give any member of the Armed Forces who is eligible for the program and meets certain criteria, will be able to transfer their entire benefit to their spouse or children.

Here is the criteria:

You must have at lease 6 years of service on the date of election and agree to serve 4 additional years.
If you have 10 years of service on the date of election, you are eligible to transfer your benefit if further service is precluded by your service, as long as you serve the maximum amount of time allowed by your service component policy, or
If you are, or become retirement eligible during the period from August 1, 2009 through August 1, 2013. If this applied to you, your retirement date is pushed back by as much as 3-years.

If you'd like to receive a copy of this document, e-mail me at leeflint3@gmail.com.