Military Investing

[EmergDoc]

Military Investing

Military folks occasionally frequent the forum with basic investing questions. I’m writing this post so I can refer back to it for them rather than typing all this stuff out each time.

General Military Issues:

1) You move a lot. Landlording is a second job. Do you really think it wise to leave your investment worth tens of thousands of dollars in the hands of someone not responsible enough to own their own home and move across the world hoping they take good care of it? Contrary to popular belief, housing values do not always go up, and transaction costs are huge when you buy and sell. You won’t want to go back to your starter house/townhome/condo when you get out. It will be a big pain to manage from another state. Give very serious consideration to just renting your entire career, carefully saving up a down payment for your dream house when you get out. Obviously this doesn’t apply to everyone, but it does apply to far more people than usually realize it.

2) Just because the BAH is $2K doesn’t mean you have to spend $2K on housing. Feel free to spend less and save the difference.

3) You hardly pay any taxes at all. Most military members have an effective federal tax rate well below 5%, and many are negative. Your allowances are tax-free. Your basic pay is tax-free when you deploy. Even your re-enlistment bonuses can be tax-free if you take them while deployed. You may never pay this little in income tax again. In general, choose a Roth account (pay tax now instead of later) instead of a tax-deferred account (pay tax later instead of now.) You should max out a personal and a spousal Roth IRA before putting a dime in the TSP. Starting in 2011, there is supposed to be a Roth option in the TSP. USE THIS!

4) If you aren’t a resident of Nevada, Washington, Alaska, Florida or Texas, what are you waiting for? Do you like paying extra taxes? Do whatever it takes to establish your residency in one of these states, especially Alaska if you get stationed there. The permanent fund dividend is just icing on the cake to the state-tax free income.

5) You have a very secure, very regular income. Take advantage of that to make your investments automatic. Set-up automatic withdrawals into your retirement accounts. You’ll be surprised how quickly a few bucks here and there can grow. You can get away with a smaller emergency fund than the typical person. 3 months worth of expenses is plenty.

6) Take advantage of educational opportunities available in and through the military. One of the smartest things I’ve seen done is when people enlist at 17, go to college while on active duty, transition midway through their career into an officer field (I see med tech to nurse a lot), “retire” and begin your career at 37 with health benefits for life and a lifetime pension. The new GI bill is AWESOME. It is tons better than the old one. Learn the benefits and take advantage of it.

7) You aren’t what you drive. Two of the highest paid people on my base drive beaters. Yet all the E-2s are cruising around in BMWs they don’t own. Car dealers around bases will absolutely prey on you. They’ll even give you a free ride to the dealership. They are not your friends. You’ll get into a debt cycle that will take you half your career to climb out of, if you ever get out at all.

8) If you thought the car dealers were bad, check out the payday loan guys at the entrance to the base. Never, ever, ever take a loan from a payday or title loan company. There is no higher interest rate out there. Keep your debt under control. A bad credit score will affect your security clearance and your career.

Military Specific Investments

1) The TSP is the military “401K”. It is the lowest cost 401K in the country. In investing, costs matter. Vanguard is the low-cost leader in the investment field due to their unique structure. Their investing fees are 1/10th that of most of their competitors. The TSP investing fees are 1/10th that of Vanguard. It is a great place to invest (after you’ve maxed out any Roth accounts available to you.) There are several different index funds in it. The C fund is an S&P 500 index fund. The S fund is an extended market index fund (all the US stocks that aren’ t big enough to be in the S&P 500 index.) The I fund is a very inexpensive Developed Markets International Index fund (think Europe and Japan). It doesn’t contain any emerging market stocks (like Latin America, Russia, Brazil, China etc.) The F fund is a total bond market index fund, holding basically all the bonds sold in the US. The G fund is a very special free lunch type account. It pays you a bond rate of return, yet with zero risk of loss. Although its expected return is lower than other funds, it is much higher than other similar risk-free investments. As such, many Bogleheads with TSP access use the G fund as their primary bond investment. If you’re just starting out, pick an L fund, which is a reasonable mix of the other funds with no additional costs for the diversification. Be sure to look under the hood and find the mix you’re comfortable with. Don’t worry, you can change any time with no transaction fees, commission costs, or taxes. Don’t take all your money out of the TSP when you get out. Your next 401K probably won’t be as good and as long as you keep some money in the TSP you can always move money back into it in later years, even if you leave the service. You can currently put up to $16,500 per year into the TSP.

2) Your military pension is better than most pensions. Consider sticking it out for 20 years to get this. I have a friend who was considering separating at 14 or 15 years, despite having little prospect of significant earning power once he separates. When I pointed out just what his pension is worth, he quickly changed his tune. Your pension is special for two reasons- First, it starts when you retire, rather than when you turn 65. A pension beginning in your 40s is a whole lot more valuable than one that begins in your 60s. Second, it includes health benefits. This is such a significant cost to most early retirees that many end up having to work until they qualify for Medicare primarily due to the cost of health care. Yet it is just free to you. Crazy I know. How much is that pension worth? Well, let’s say you retire as an E-7 after 20 years. That would pay you about $2100 per month, or about $25,000 a year, indexed to inflation. An inflation indexed annuity that pays out $25K a year would currently cost you about $450,000. Add in health care costs for 40-50 years and you can probably safely double that amount. An officer that retires at O-5 would have a pension equivalent to an annuity costing $800K, plus health care benefits. Your regular, secure income combined with this pension allows you to take a great deal of investment risk with your TSP and Roth IRAs.

3) The Savings Deposit Program (SDP) is a program that allows you to put in up to $10K while you are deployed. It pays 10% per year, guaranteed, and continues to pay for 3 months after you come home. Take advantage if you can. Give your special deployment bonuses, lower expenses, and tax-free income, it should be easy to do. You can also defer tax-exempt money into the TSP, but you should only consider doing this if you are already maxing out the SDP AND Roth IRAs for the year. Even then, you may be better off putting that money toward a mortgage, a downpayment, or even a taxable investing account. Be sure to max out your tax-deferred TSP contribution (at least until the Roth TSP becomes available) before or after you deploy, assuming you’re not gone the whole year.

4) Be sure to look into USAA for your insurance needs. The service is great and the price is right. Their banking and investments aren’t bad either, although most Bogleheads prefer Vanguard for investments.

5) If you need a good cash rewards credit card (no point in having one of these if you don’t pay it off in full each month) consider opening an account at PenFed. It only costs you $5 (which you technically get back if you ever close the account.)

6) Be sure to shop on base to enjoy tax-free savings at the commissary and the BX/PX/Navy exchange. That adds up over time. Remember the laws of economics don’t actually apply at the BX so sometimes you find things ridiculously cheap and sometimes they cost way more than they would elsewhere, so be sure to shop around. Also be sure to ask for a military discount everywhere you go. You’ll be surprised how often you get one. The fewer the number of military people in the area the more likely you are to get a significant discount.

7) Stay away from anything that says “First Command” on it. Stay away from anyone who encourages you to invest in something because it is better than the TSP (with the exception of a Roth IRA until the Roth TSP begins.) People who cater to military members are not usually looking out for you, even if they’re former military folks.

Thank you for your service. Those of us who have spent a little time serving our great country are particularly aware of the sacrifices you make each day.

If you have your own tips (or more likely, corrections) feel free to post below. I'll edit this post as needed.

Addendum: The TSP Roth is out as of 2012. You should probably use it even before using a Roth IRA.

[SpecialK22]

Overall great advice, EmergDoc. I'd just like to expand on some of your thoughts:

Military Investing


4.) If you aren’t a resident of Nevada, Washington, Alaska, Florida or Texas, what are you waiting for? Do you like paying extra taxes? Do whatever it takes to establish your residency in one of these states, especially Alaska if you get stationed there. The permanent fund dividend is just icing on the cake to the state-tax free income.

Before someone goes jumping to change their state of residency, I think it would be prudent to determine all the implications of changing one's residency. Things have the potential to get messy depending on certain situations. Nevertheless, it is certainly something advisable to look into.

8.) If you thought the car dealers were bad, check out the payday loan guys at the entrance to the base. Never, ever, ever take a loan from a payday or title loan company. There is no higher interest rate out there. Keep your debt under control. A bad credit score will affect your security clearance and your career.

I agree that a lot of businesses prey on the military, particularly on young enlisted members. Another major thing to watch out for are life insurance salesmen. At 18 I understood that a car loan at 18% was a bad idea, but I didn't comprehend how much more a whole life insurance policy with an accumulation fund costs in relation to the SGLI. Looking back, I still can't believe that I couldn't see such an obvious bad deal at first sight.

As a side note on payday loans, I believe that the government has made it illegal for a business to loan money to a service member at anything greater than 30% APR. Many payday loan vendors will specifically point out in their lending criteria that they won't lend to the military. However, I do agree with you that payday loans are a horrid idea not just for military members but anybody.

2) Your military pension is better than most pensions. Consider sticking it out for 20 years to get this. I have a friend who was considering separating at 14 or 15 years, despite having little prospect of significant earning power once he separates. When I pointed out just what his pension is worth, he quickly changed his tune. Your pension is special for two reasons- First, it starts when you retire, rather than when you turn 65. A pension beginning in your 40s is a whole lot more valuable than one that begins in your 60s. Second, it includes health benefits. This is such a significant cost to most early retirees that many end up having to work until they qualify for Medicare primarily due to the cost of health care. Yet it is just free to you. Crazy I know. How much is that pension worth? Well, let’s say you retire as an E-7 after 20 years. That would pay you about $2100 per month, or about $25,000 a year, indexed to inflation. An inflation indexed annuity that pays out $25K a year would currently cost you about $450,000. Add in health care costs for 40-50 years and you can probably safely double that amount. An officer that retires at O-5 would have a pension equivalent to an annuity costing $800K, plus health care benefits. Your regular, secure income combined with this pension allows you to take a great deal of investment risk with your TSP and Roth IRAs.

.

The military pension is certainly an excellent benefit. If someone does decide to get off of active duty, consider continuing service in the guard or reserve. The pension typically doesn't begin until 60, but it is better than nothing. After active duty Air Force I transferred over to the ANG and will more than likely at least put in 20 years total. I don't know if I could've stomached 20 years active duty, even for a great pension.

6) Be sure to shop on base to enjoy tax-free savings at the commissary and the BX/PX/Navy exchange. That adds up over time. Remember the laws of economics don’t actually apply at the BX so sometimes you find things ridiculously cheap and sometimes they cost way more than they would elsewhere, so be sure to shop around. Also be sure to ask for a military discount everywhere you go. You’ll be surprised how often you get one. The fewer the number of military people in the area the more likely you are to get a significant discount.

I agree to check for the best deal. Unfortunately, more and more I seem to find better deals at Walmart or online for many products, even after taxes. Also, many online vendors will offer free shipping which AAFES direct seems to almost never offer (at least last I looked).

[jamacq]

Excellent post EmergDoc.

I especially like item 6. I joined at 19 with a couple of college credits and retired 23 years later as a LCDR (0-4) with three Master's Degrees. Not only are there opportunities to go to night school (and now internet classes) at many bases to earn a BA/BS, but there are also opportunities as an officer to go to one of the service's graduate schools to earn advanced degrees. I went to the Naval Postgraduate school and did a dual degree in Physics and Astronautical Engineering and only had to pay for my books.

Jeff

[NightHeart]

Thanks a lot EmergDoc. Very useful advice to those of us in the military. I am certainly looking forward to the new Roth TSP. I can't wait until that comes out.

Thanks for your effort in pulling this all together.

[fiddlestyx]

Good post!

I'd add that once you separate, if you are in good health, VGLI isn't necessarily a good deal. It will pay to shop around for your life insurance.

You can get VGLI rates at VGLI.gov and compare them to others.

[comments aimed at trying to get career service members to buy long term care insurance deleted by admin alex. Poster is a banned insurance salesman]

[steelerfan]

1) You move a lot. Landlording is a second job. Do you really think it wise to leave your investment worth tens of thousands of dollars in the hands of someone not responsible enough to own their own home and move across the world hoping they take good care of it? Contrary to popular belief, housing values do not always go up, and transaction costs are huge when you buy and sell. You won’t want to go back to your starter house/townhome/condo when you get out. It will be a big pain to manage from another state. Give very serious consideration to just renting your entire career, carefully saving up a down payment for your dream house when you get out. Obviously this doesn’t apply to everyone, but it does apply to far more people than usually realize it.

I agree with everything you said in your well put together advice.

Call me lucky, but I decided to buy a house while stationed at Ft Sam Houston, (San Antonio, TX) in 1997 for 85K and sold it in 2002 as a FSBO for 100k.

Then I PCS'd to Ft Lewis (Tacoma, WA) bought a house for 195K and sold it in 2006 for 310K.

So for me, buying and selling houses has made me over 100K in profit.

However, I must say that in both cases I had plenty of notice before having to move. Also, we put money into both houses - making them more valuable to the new buyer.

Just a different perspective. Thanks again for your valuable information.

[EmergDoc]

Good post!

I'd add that once you separate, if you are in good health, VGLI isn't necessarily a good deal. It will pay to shop around for your life insurance.

You can get VGLI rates at VGLI.gov and compare them to others.

Good point. I should have added something about SGLI (bottom line, max it out for you and your spouse). VGLI-not necessarily as good. Probably better to lock in a 10-30 year level term policy depending on your needs.

[pjstack]

Amen, EmergDoc!

[fiddlestyx]

[misleading "information" from banned insurance agent removed by admin alex]

[EmergDoc]

The casual reader should be aware Fiddlestyx makes his living selling life insurance products such as whole life insurance.

When a service member starts receiving military retirement benefits, the person serving in the military will be automatically enrolled in an insurance program known as the Survivor Benefit Plan. The insurance premium is automatically deducted from the retirement check and can be set up to pay retirement benefits to a surviving spouse or minor children.

A service member must have written permission from his or her spouse to not participate in the Survivor Benefit Plan program.

If the survivor benefits insurance is being paid, a surviving spouse, or minor children can continue to receive a portion of the pension. If the insurance was not purchased, the pension stops upon the death of the person entitled to a military pension.

http://diesmart.com/estate-planning/ret ... -benefits/

I suspect the above is the best way to do "pension max."

I don't know if annually renewable is cheaper than level term or not. I prefer the level term (which is quite cheap) as it makes things quite predictable. Either way you need to ensure you never have to prove insurability again. The difference between level term and annually renewable is small compared to the whole life vs term difference.

[fiddlestyx]

[misleading "information" from banned insurance agent removed by admin alex]

[Torg Fadum]

Hello EmergDoc,

Thanks for your military medical service and for your always helpful advice. I think every military member should read and heed your tips. I have a few minor comments related to insurance and also the Survivor Benefit Plan (SBP) mentioned.

It’s been a while since I retired, but back then active-duty members were automatically covered by something I think was called the Dependents Indemnity Coverage (DIC) program. Is that still in effect? DIC provided/provides substantial monthly benefits for dependents (analogous to SBP payments for retirees’ survivors) if the member dies while on active duty. I’ve discarded all my old annual statements from the Armed Forces Services Corp. that showed the amounts of those benefits, so I can’t be specific about how much. Having that DIC benefit does not necessarily remove the need for life insurance, of course, but it greatly reduces the amount of insurance coverage required while on active duty, just as SBP (if elected) reduces insurance requirements after retirement.

Regarding SBP, a couple of additional points. One is that the SBP premiums are pre-tax deductions. That is a significant factor which must be included in any SBP-vs-insurance calculations, since life insurance is purchased with after-tax money. For military retirees with good-paying jobs on top of their retirement pay, that tax deductibility may be a substantial factor. Another point is that, thanks to a law change a few years ago, SBP will be considered fully paid up if you are at least 70 and have made 360 months (30 years) of payments. So sometime after age 70, you get a “pay raise” when the SBP premiums stop while the coverage continues.

Regards,
Torg

[Taz]

EmergDoc: Great info.

/ break/
Torq: Here is a link to VA info on Dependency and Indemnity Compensation.
( http://www1.va.gov/opa/Is1/11.asp ) Here are the eligibility requirements from that site:
Eligibility: For a survivor to be eligible for Dependency and Indemnity Compensation (DIC), the veteran’s death must have resulted from one of the following causes:

1. A disease or injury incurred or aggravated in the line of duty while on active duty or active duty for training.
2. An injury, heart attack, cardiac arrest, or stroke incurred or aggravated in the line of duty while on inactive duty for training.
3. A service-connected disability or a condition directly related to a service-connected disability.

DIC also may be paid to certain survivors of veterans who were totally disabled from service-connected conditions at the time of death, even though their service-connected disabilities did not cause their deaths. The survivor qualifies if the veteran was:

1. Continuously rated totally disabled for a period of 10 years immediately preceding death; or
2. Continuously rated totally disabled from the date of military discharge and for at least 5 years immediately preceding death ;or
3. A former POW who died after Sept. 30, 1999, and who was continuously rated totally disabled for a period of at least one year immediately preceding death.

Cheers -Taz

[desertdug08]

EmergDoc,

I think family medical coverage is one of the greatest benifits of military service. Living in San Antonio lets me take advantage of TriCare Prime. My oldest child has back issues and all care from MRI to physical therapy has been free. Additionally, she was diagnosed with a ovarian cyst and within the day she had several test done and a seen by several specialists. Surgery later this month. I know some have had bad experiences, but mine have always been positive
Family coverage after retirement is also very affordable compared to civilian coverage.

Thanks for your service Doc...hope I never need it.

DUG

[usnaron]

I'm a 28 year old LT in the Navy with a LTJG wife and a 6 month old daughter. Do you think it is wise for me to get rid of SGLI and buy 500k navy mutual 25 year term life insur. for $3/month more than the 400k SGLI which only covers me until I retire? Pros/Cons? Also, what is the benefit to having life insurance for my wife. I want her and my daughter to be taken care of if something were to happen to me, but I feel like I could take the risk if it were the other way around. What do you guys think?

[EmergDoc]

I'm a 28 year old LT in the Navy with a LTJG wife and a 6 month old daughter. Do you think it is wise for me to get rid of SGLI and buy 500k navy mutual 25 year term life insur. for $3/month more than the 400k SGLI which only covers me until I retire? Pros/Cons? Also, what is the benefit to having life insurance for my wife. I want her and my daughter to be taken care of if something were to happen to me, but I feel like I could take the risk if it were the other way around. What do you guys think?

No, keep the SGLI. Buy the Navy mutual when you get out if you still need life insurance. Remember when you retire you don't need the life insurance because you have the pension. SGLI is very cheap. The spousal $100K is also very cheap, and would go a long way to covering day care costs for your daughter in the event of your wife's untimely death.

My only beef with SGLI is you can only buy $400K of it. If you were looking at Navy Mutual for some life insurance, I'd buy it in addition to the SGLI. Maybe add another $500K worth of insurance, 30 year level term. If you don't need any when you retire, just stop paying the premiums. If you just need $500K when you retire, keep the navy mutual policy. If you need more, buy another policy then. Don't underinsure your life, this stuff's dirt cheap. $350 a year gets you $500K in coverage.

http://www.term4sale.com/cgi-bin/cqsl.cgi

[p8bwd]

In regard to state taxes... I know people who claim TX residence based solely on the fact that they have a USAA banking account. Would this stand legally?

Also, is there any easy way for a non-TX,WA, FL resident to "gain" residency for tax filing purposes short of getting a driver's license, owning property, etc?

[EmergDoc]

In regard to state taxes... I know people who claim TX residence based solely on the fact that they have a USAA banking account. Would this stand legally?

Also, is there any easy way for a non-TX,WA, FL resident to "gain" residency for tax filing purposes short of getting a driver's license, owning property, etc?

Pretty tough without getting stationed there (although I don't know how likely it is for you to be caught if you just claim it). Between AK, NV, WA, FL, and TX surely you can find somewhere you can be stationed, no?

[Taz]

In regard to state taxes... I know people who claim TX residence based solely on the fact that they have a USAA banking account. Would this stand legally?

Also, is there any easy way for a non-TX,WA, FL resident to "gain" residency for tax filing purposes short of getting a driver's license, owning property, etc?

Pretty tough without getting stationed there (although I don't know how likely it is for you to be caught if you just claim it). Between AK, NV, WA, FL, and TX surely you can find somewhere you can be stationed, no?

p8bwd: Claiming to be a TX resident because you have a USAA account is like saying you are German because you drive a BMW.

Best talk to the NLSO/JAG about it although I remember one dancing around the exact requirements. In legal officer school years ago we were taught that to claim state residency due to military service you need to have been physically stationed there, express an intent to return to live after leaving military service, and take steps to demonstrate your residency such as obtain a license, register a car, register to vote, and own property. You should maintain as several if you can to bolster your claim.

Some states (CA in particular) have been known to dispute a person's claim of residency.

Bottom line: integrity.

[fishnskiguy]

Great post Doc.

I especially agree with your suggestion that military folk NOT buy a house.

My dad retired as a two star and bought his first and only house after retirement. Neither he or Mom had any regrets.

The best thing service men and women can do is concentrate on their careers and leave the property management to others.

Chris

[cvn74n2]

As a 23 year active duty service member, I have both owned, rented, and lived on base. There is no one right answer, it depends on where you are in your life and what is important to you.

For example, I bought at the height of the 1980s CA real estate boom as a young, just married O2 thinking to make a quick profit once we left the area. Orders come and the real estate market is in a freefall. I decide to turn the property over to a military friendly management firm with the intent to sell once the value recovered. Well time has passed and I still own it. It started out as a negative return for at least 6 years but is now breaking even in terms of cash flow while the appreciation has tripled over the 21 years (even with the market downturn).

Now, I have 3 kids and pets, making house location in terms of school the most important consideration. Finding reasonably priced rental property that accepts pets can be hard to come by in high achieving school districts. This has caused me to buy homes in my last two duty stations and likely my next one as well. My goal is to get out of the house what I put into it and not worry about making a profit. I was successful in Virginia but am waiting and seeing on where the market goes in CA. I may end up as I did the first time and have to rent out the property waiting for the market to recover.

On the otherhand, if I was single or married with no kids, renting becomes a very attractive option but can be hard on the taxes.

[pshonore]

In regard to state taxes... I know people who claim TX residence based solely on the fact that they have a USAA banking account. Would this stand legally?

Also, is there any easy way for a non-TX,WA, FL resident to "gain" residency for tax filing purposes short of getting a driver's license, owning property, etc?

Pretty tough without getting stationed there (although I don't know how likely it is for you to be caught if you just claim it). Between AK, NV, WA, FL, and TX surely you can find somewhere you can be stationed, no?

A couple of points:

1. States have the ability to access Federal returns to determine who has W2 and other income (1099R, etc) sourced to their state to determine if a state return should have been filed.

2. Some states do not tax military pay of non-residents.

3. As I understand it, Uncle Sam will pay to ship all belongings to your original state of residence upon leaving the service. If you change legal residence, that does not apply. At least thats what some military folks have told me.

[NYnative]

New York State is another tax haven for military folks who are from there, but not stationed there. As long as you are there less than 30 days a year, you owe no state or local tax on your military pay. And, when you retire, NY does not tax military, federal, state or local retirement pay (and that's if you live there). Most people think of NY as a very high tax state, which it is, but it gives this very surprising break to the military. During my 6 years of AD I never paid a dime in state or local taxes.

I second the comment on avoiding Frist Command (or whatever they are called now) at all costs. Talk about thieves - their salemen violated their trust as officers and NCOs by taking advantage of trusting military.

As to staying in the Reserves or NG, it does pay off when you are 60, plus you have full PX and Commissary privileges while you are in and even as a gray area retiree. Only caveat - don't complain when you are called to AD. It's gonna happen.

[friar1610]

Based on my experiences during 28 years of Navy service, I think the original post was spot-on. A few personal reflections:

- I had good luck with buying 3 houses during my career, renting one out for 5 years and then returning to it before eventually selling it prior to another transfer. (The other two I sold just as a finished my tours.) But I was lucky and would not want to tempt fate again if I were still in.

- My first investment experience came with the predecessor organization to First Command. On the plus side, that's where I learned dollar-cost-averaging which I continued to do for my entire career. On the negative side, given the commissions and fees for that "contractual" investment, it was an expensive lesson. But the fund did quite well over the years I owned it, just not as well as I could have done if I had been index-smart.

- There are so many more good deals for military now with the TSP, better GI Bill, etc. But with the wars in Iraq and Afghanistan, the life is probably a lot tougher.

- I got my masters degree paid for by the GI bill (part time at a civilian university).

- The value of a military pension is really significant! Between that and the SS my wife and I now draw, we are set (as long as the Gov. can still keep paying them, something less than a certainty, I'm afraid.)

- I transition from TRICARE Standard to Medicare shortly and I'm a little apprehensive. TRICARE has been very good to us. I recently got a pitch in the mail from AARP for their Medicare supplement policies and did a comparison between them and TRICARE for Life (TFL). I figure the value of TFL is about $2000/yr for just me; when my wife goes on Medicare it will be twice that for both of us.

Thanks again to EmergDoc for good solid advice.

[dratkinson]

Military Investing


4) If you aren’t a resident of Nevada, Washington, Alaska, Florida or Texas, what are you waiting for? Do you like paying extra taxes? Do whatever it takes to establish your residency in one of these states, especially Alaska if you get stationed there. The permanent fund dividend is just icing on the cake to the state-tax free income.

Also New Hampshire, South Dakota, Tennessee, and Wyoming have no state income tax.

State without a state income tax: http://www.irs.gov/efile/article/0,,id=130684,00.html

[heytred]

So, I'm Active Duty getting ready to start investing... this close to the end of the year should I wait on the Roth TSP, or would investing in a Roth IRA now yield similar benefits?

Also regarding a quick question you might be able to answer... in early spring 2011 I will be leaving Active Duty to go to school full time as an ROTC Cadet via the Green to Gold program. I've asked my POC as well as my Chain of Command as to whether I'll still be able to contribute to TSP. Technically since I'll be on a 4 year scholarship I'll still be in a contract with the Army. No one has gotten back to me yet however.

Any and all help is immensely appreciated.

[dratkinson]

So, I'm Active Duty getting ready to start investing... this close to the end of the year should I wait on the Roth TSP, or would investing in a Roth IRA now yield similar benefits?

Also regarding a quick question you might be able to answer... in early spring 2011 I will be leaving Active Duty to go to school full time as an ROTC Cadet via the Green to Gold program. I've asked my POC as well as my Chain of Command as to whether I'll still be able to contribute to TSP. Technically since I'll be on a 4 year scholarship I'll still be in a contract with the Army. No one has gotten back to me yet however.

Any and all help is immensely appreciated.

I'll take a cut at this and the experts can correct my misunderstandings.

You must have earned income to invest in an IRA (Roth or traditional). Earned income is reported on a form W-2.

Bottom line: no W-2 = no earned income = no IRA eligibility.

Investing for this year (2010). Take any Roth you can get. You will probably use it for the bond portion of your allocation and you probably can't do better than Total Bond Market (VBMFX) if you are investing outside of the TSP Roth. So your problem is solved.

Investing for 2011. Your salary from Jan to Spring 2011 is your justification for investing in any Roth you can get. It will be reported to you on a W-2. So your problem is solved.

Your compensation for the Green to Gold program will also be reported to you. If it comes on the W-2, then your problem is solved for 2012, forward. If it comes on some other form, then you have one year's advance notice that you will have "earned income" eligibility problems in 2012.

Investing for 2012. If your compensation via the Green to Gold program is reported to you on a W-2, then this is "earned income" and is your justification for investing in any Roth you can get. If your compensation is reported on some form other than a W-2, then it is "probably" not considered to be earned income. But you knew about this the year before.

You have until the 15 Apr tax filing date to contribute to an IRA for the previous year. So for 2012, you will have until 15 Apr 2013 to contribute to a Roth for 2012 and you will certainly know by then if you have received a W-2 for 2012. (Actually, you knew the year before how the program compensation was reported.)

Maybe you will want to get a part-time job on campus to get some earned income. I remember campus security and cafeteria as being common part-time student jobs. If the Green to Gold program does not cover all of your living expenses, then a part-time job will come in handy and do double duty: pocket money, and IRA eligibility.

Investing for 2013+. The same rules as in 2012 will apply.



Idea. Talk to current students in the Green to Gold program. Ask them how compensation is reported. The higher-ups may not know this detail, but certainly currently enrolled students know this after going through tax reporting on the compensation.



Good luck with your career. Stay safe.

[Stoutboy]

This thread offers much sage advice. One thing I'd add, is that under no circumstances should a career military accept the REDUX bonus sham. That 30K (more like low 20s after tax) will end up costing you well into the mid to upper six figures of lost pension and COLA.

[norookie]

Good luck!

[dim tempsey]

Hey GI: If you are drawing separate rations (a food allowance paid to those who don't have a meal card for meals in the mess hall), consider this advice: set up a special (non-IRA) investment account for the exact amount of the separate rats. Allot the sep rats amount every month. Do this the entire time you are drawing separate rats. Let it compound & grow.

Feed yourself out of your basic pay.
After all, what other job pays you for meals?? Very few, it seems.

Some day, if you stick with it, you can look upon this account as a wonderful thing. A thing of beauty. And it won't be a small amount, bon ami.

All the best, thank you for your service, you Air Force guys too,
--- ol' dim
VanGuard STAR old boy

[SwampDonkey]

1. I've only been browsing this site for a few weeks now and wow.... it is an absolute gold mine! Is there any way to accredit this and issue me a MBA in finance after a few more years of reading?

2. One huge benefit to add to your list, OP. Many service members join the service after screwing around for a while after high school. This screwing around usually leads to a bit of high-interest debt. A new regulation (or law?) recently came in to affect that mandates all debt that was accumulated prior to their ADSD must be reduced to a rate of 6% if the service member requests it from their debtor.

3. The statistics on TSP contributions are pretty interesting to read if you're ever in the mood. The Navy leads all services with a 40-50% contribution rate and this is due to their heavy handed, boot camp, drill instructor, tactics of "any sailor worth his salt is contributing to TSP. Do you want to be the one that doesn't?" Also, in the next year or so, the Navy will automatically enroll its recruits in TSP and if they don't want to contribute they will have to opt out (as opposed to opting in, as they currently do). This will be the same set-up as SGLI which has something like a 99.5% contribution rate.

Thanks again for the post, OP. I'll probably print off several of your comments and post them around my command if that is alright with you.

-SD

[leonard]

Emergdoc - that is a great post for anyone that currently serves or is considering serving. Very nice.

[ChapMan]

Wow, just found this thread, thanks!

I'll be in the process of changing my residence to NY. SO's parents are there and they have a bigass house we can inherit/retire into, heh.

Also, for new officers, USAA offers a low-interest accession loan. It's something like $25,000 at an interest rate of around 2.99%. You can use this money for whatever you want. Friends have used it to pay off loans, do a self-consolidation, put it towards a house, etc. I'm planning on using mine to help out my family.

[TheBRod]

@SwampDonkey

It's called the Servicemembers Civil Relief Act (military(dot)com/benefits/legal-matters/scra/overview)

There's some strings attached to the program (the debt must occur BEFORE you enter active duty, debt must be over 6%, you make less $$ in the military then as you did as a civilian), but it's still well worth looking at.

There's also the Military College Loan Repayment Program, where the military will pay up to 10k of college debt. (usmilitary.about(dot)com/cs/joiningup/a/clrp.htm). The big kickers are that a) the payments are taxed at 28% and b) you CAN'T sign up for the GI bill and the MCLR at the same time. Not sure if this applies with the post-9/11 bill though. Either way, both programs are worth asking the recruiter about.

[dmcmahon]

As I recall, Florida used to have an "intangible property tax" on any stocks/bonds etc. over $250k. Retirement accounts were exempt. I think it's been mostly repealed, but it serves as a caution: people considering a state of residence should look at the total tax picture, not just the income tax.

[C319]

As of August 2009 active-duty service members are allowed to transfer their unused Post-9/11 GI Bill benefits to their spouses and children. This is a potentially huge benefit but of course, there are restrictions. For example, there is a time-in-service requirement and commitment to stay on after the benefit assignment, but is a no-brainer if you're a career military member.

The biggest gotcha is that you can't transfer the benefit once you've left the military, which has caused a lot of people some pain. You can only transfer the benefit while on active duty, and can only execute the transfer through the Defense Manpower Data Center (DMDC) website with your valid CAC card.

The information can be found at the VA's Post-9/11 GI Bill website. Go to gibill(dot)va(dot)gov and look for the Transfer Of Post-9/11 GI-Bill Benefits To Dependents (TEB) link.

[radionightster]

I'm glad I found this thread. I'm 29, and just received my commission as an officer in the Army. I start BOLC in 2.5 weeks.

Question: I'm currently a resident of Louisiana. I own no property here, but do have my cars registered here. I spend 4.5 months of TDY at Ft. Sam Houston en route to my first duty station. While at FSH, I'd like to establish residency in Texas. It's an honest intention. If there's any state I'd retire in, it would be TX or HI, and I have no intention on ever returning to Louisiana outside of visiting some family for holidays. I've looked over the form DD 2058 (State of Legal Residence), and you simply put your name, SSN, and your new "legal residence."

The form states: "The formula for changing your State of legal residence/domicile is simply stated as follows: physical presence in the new State with the simultaneous intent of making it your permanent home and abandonment of the old State of legal residence/domicile. In most cases, you must actually reside in the new State at the time you form the intent to make it your permanent home. Such intent must be clearly indicated. Your intent to make the new State your permanent home may be indicated by certain actions such as: (1) registering to vote; (2) purchasing residential property or an unimproved residential lot; (3) titling and registering your automobile(s); (4) notifying the State of your previous legal residence/domicile of the change in your State of legal residence/domicile; and (5) preparing a new last will and testament which indicates your new State of legal residence/domicile. Finally, you must comply with the applicable tax laws of the State which is your new legal residence/domicile."

I have already registered to vote in TX. I will not purchase any property there (or anywhere). I have not registered vehicles there because military service members are not required to re-register their vehicles every time they move. So basically I've only registered to vote in TX.

Does anyone know if the military gives you a hard time about changing your legal residence? Or do they just accept the form and move along with life? The truth is, I have no intention on EVER returning to Louisiana, and if I retire in the states, it will be TX or HI. Why should I pay income tax to a state that I am no longer in anyway associated with?

[friar1610]

I'm glad I found this thread. I'm 29, and just received my commission as an officer in the Army. I start BOLC in 2.5 weeks.

Question: I'm currently a resident of Louisiana. I own no property here, but do have my cars registered here. I spend 4.5 months of TDY at Ft. Sam Houston en route to my first duty station. While at FSH, I'd like to establish residency in Texas. It's an honest intention. If there's any state I'd retire in, it would be TX or HI, and I have no intention on ever returning to Louisiana outside of visiting some family for holidays. I've looked over the form DD 2058 (State of Legal Residence), and you simply put your name, SSN, and your new "legal residence."

The form states: "The formula for changing your State of legal residence/domicile is simply stated as follows: physical presence in the new State with the simultaneous intent of making it your permanent home and abandonment of the old State of legal residence/domicile. In most cases, you must actually reside in the new State at the time you form the intent to make it your permanent home. Such intent must be clearly indicated. Your intent to make the new State your permanent home may be indicated by certain actions such as: (1) registering to vote; (2) purchasing residential property or an unimproved residential lot; (3) titling and registering your automobile(s); (4) notifying the State of your previous legal residence/domicile of the change in your State of legal residence/domicile; and (5) preparing a new last will and testament which indicates your new State of legal residence/domicile. Finally, you must comply with the applicable tax laws of the State which is your new legal residence/domicile."

I have already registered to vote in TX. I will not purchase any property there (or anywhere). I have not registered vehicles there because military service members are not required to re-register their vehicles every time they move. So basically I've only registered to vote in TX.

Does anyone know if the military gives you a hard time about changing your legal residence? Or do they just accept the form and move along with life? The truth is, I have no intention on EVER returning to Louisiana, and if I retire in the states, it will be TX or HI. Why should I pay income tax to a state that I am no longer in anyway associated with?

I am not a lawyer nor am I necessarily an expert in these matters. However, I was a career military officer and faced a similar situation in that I wanted to extricate myself from MA (which was a high tax state) and establish residence in NH (which was a low tax state.)

Here are the things I did:
- Registered to vote in NH. Always voted by absentee ballot when the time came.
- Got a NH driver's license and registered my car(s) there. Kept both regardless of where I was stationed.
- Opened a bank account with a NH bank.
- Religiously paid the taxes on interest and dividend income every year. NH doesn't have a broad-based state income tax and only taxes interest and dividend income. During most of my military career, that was negligible income so the meager taxes I paid were better than the alternative of paying full state income taxes in the states where I was stationed.

I did have a relative in NH whose address I was able to use when asked for a specific address.

I don't think the military gives a hoot where you establish residency. They are simply concerned that you have established a home state and that, if applicable, DFAS is taking the appropriate amount of tax out of your pay. The only people you should have to convince are the tax collectors from a state in which you may be stationed and which would like to get taxes from you.

I think if you look beneath the hood you will find that there are a disproportionate number of military members claiming TX, FL and other no income tax states as their residence.

BTW, when I retired I ended up staying in a state income-tax state for a number of years. Immediately after I retired, I registered to vote there, transferred my driver's license/registration and began paying income tax - all by the book.

[Ron]

Just thought I would throw in a comment related to retirement from the military.

Doug Nordman ("Nords" on the E-R board) will have a book out later this year on the subject. You can see a summary/outline here:

http://the-military-guide.com/

- Ron

[dratkinson]

...
Question: I'm currently a resident of Louisiana. ...

... So basically I've only registered to vote in TX.

Does anyone know if the military gives you a hard time about changing your legal residence? ...

The military doesn't care. They just use the information to withhold state taxes.

However, the states are a different matter, they want your tax dollars. And your state tax withholding that is now going to TX is lost by LA. (Yes, I know.) So for the states, you must be a little more careful.

I was told states (for taxing purposes) would look at "2 out of 3" of the following items to determine our intention to change our legal state of residency.
(1) Voter registration
(2) Driver's license
(3) Vehicle registration/tags

Note: Local law enforcement also likes to see things that match when they stop your vehicle: driver's license, vehicle tags, vehicle state registration---2 of the 3 should match.

A google search for "intent change state residency" (without quotes) provided:

"Military Law/Changing Residency:"
http://en.allexperts.com/q/Military-Law ... idency.htm

"How to Change Legal State of Residency:"
http://www.ehow.com/how_6501452_change- ... dency.html

"Legal Residency Change in the Military:"
http://ezinearticles.com/?Legal-Residen ... id=1134376

(I note references 1 and 3 are very much alike, but have different authors. Hmm?)

All three references confirm the importance of the three items.

When I changes my state of legal residency, I just filled out the form and gave it back to Accounting and Finance (LA --> WY). Was never questioned about it by anyone. My new vehicle (tags and state registration) and driver's license were from WY, but I voted locally in national elections. I was blissfully free to all state politics until I retired.

I learned when I settled down in CO that vehicle tags/license and state registration are different things. So my vehicle is still registered in WY, but tagged/licensed in CO. (Don't ask me what that means.) The process to change vehicle state registration can be done by DMV at the same time you get your vehicle tags for a small additional fee ($4 in 2000 for CO). According to the DMV worker when I asked "What does changing my vehicle state registration get me?", she said "Nothing. There is no CO requirement to change it and it will cost you $4 to do so." So I didn't.

In your case, it would be wise to do both---register your vehicle in TX and put permanent-resident TX tags on it.

Get a TX driver's license.

With your TX voter registration, that gives you "3 out of 3" and should be proof-enough to LA that you are not coming back.

To make things a little simpler, tell TX that you only want to vote in national elections, so you will not get the local/state ballots.

Enjoy your career. Thanks for your service.

[SpringMan]

Great post, it is good enough to be either a sticky post or the essence extracted and added to the wiki IMO.

[Nords]

I have already registered to vote in TX. I will not purchase any property there (or anywhere). I have not registered vehicles there because military service members are not required to re-register their vehicles every time they move. So basically I've only registered to vote in TX.

Does anyone know if the military gives you a hard time about changing your legal residence? Or do they just accept the form and move along with life? The truth is, I have no intention on EVER returning to Louisiana, and if I retire in the states, it will be TX or HI. Why should I pay income tax to a state that I am no longer in anyway associated with?

Florida loves having military residents because the state gets more representation in the House of Representatives without having to actually devote any significant resources to their "virtual residents". I've heard the proportion of military residents is over 10%.

If you're registered to vote in Texas then Florida will eventually figure it out (the states exchange most DL and voter registration data) and may get fussy about renewing your driver's license and license plates. Or maybe they won't care, but if they do then you know Murphy's Law will be in full force. OTOH if you register your cars in Texas and get a Texas DL then there won't be any confusion about residency.

When you prepare for deployment and your command checks that you have an updated will, your unit's lawyer may be concerned about which state's laws will be in effect for probate. Having to address that question while you're getting ready to deploy is just one more hassle. If you already have everything lined up for Texas then updating your will is no problem.

The military doesn't care which state your legal residence is in as long as you have one. They just want to know if any state taxes should be withheld from your paycheck.

From a tax perspective, Hawaii is one of the nation's most retiree-friendly states. I'm not sure about state resident's income taxes on active-duty pay but Reserve/National Guard receive a generous exemption on their pay. You don't particularly want to be a Hawaii resident if you're still receiving other W-2 or 1099 or self-employment/Schedule C income.

Just thought I would throw in a comment related to retirement from the military.
Doug Nordman ("Nords" on the E-R board) will have a book out later this year on the subject. You can see a summary/outline here:
http://the-military-guide.com/
- Ron

Thanks, Ron!

The book answers the question "If military retirees have a COLA pension and cheap healthcare, then why are they still working?" Being able to choose their state of residency is one more way for servicemembers to accelerate their financial independence. They they can work if they want to, not because they think they have to.

The book has contributions from over 50 of Early-Retirement.org's servicemembers & veterans. It's a non-profit project-- all royalties will be donated to military charities chosen by the contributors.

[Nords]

Update to Ron's post: "The Military Guide To Financial Independence and Retirement" is now available for order from Impact Publications and (hint, hint) through the Bogleheads link to Amazon.com at the top of this page. There's also a (much cheaper) 4"x5" 64-page "pocket guide" version available on Impact's website.

Mel, your review copy is in the mail. Reviews are also being posted at the book's Amazon page.

All royalties go to military charities. (Thanks to Taylor & Mel for this "Bogleheads Guide" inspiration!) It'd be great to hear from volunteers who step up with book donations to libraries on military bases and local communities. I'm taking care of the Hawaii State Public Library system and the base libraries at Pearl Harbor, Schofield, & Kaneohe.

I'd love to hear more stories from servicemembers, veterans, & family members. You can contribute to the second edition (and the blog) and help send more royalties to military charities.

[dhodson]

awesome post

a few additional thoughts i had:

the comments about car dealers preying on you is very true. this is inparticularly true while deployed. i deployed for the invasion in 2003 and even then there were associations in kuwait selling cars and bikes to soldiers. these seem like good deals at the time since you are given the impression you will have a lot paid off before you return home but they are not good deals. You should do as emergdoc suggested with saving the money. it will make a huge difference in your life down the road.

The GI bill benefits can be transferred to kids. Do it now if you know you wont use the benefits before this gets changed. its a great deal.

while im actually not a big aafes fan (not that i hate them just that they typically didnt have the best price), there are some companies you can buy from through the aafes portal such as dell for instance. fatwallet and slickdeals.net usually list any good current aafes computer deals in the hot deals forum. when purchasing through aafes, there is no tax.

if you are a high income earner on the outside and getting out, i will however have to recommend against going in the guard especially for the army (which was my branch). The reason being is that the chance of being called are very high still and your business would need to be able to survive without your presence during this time period. Many docs lost their shirts this way in the first golf war. They just never realized or thought that they would be gone so long. If you do it, plan to be deployed. For high income earners, i am more of the camp stay on active or get completely out. for higher income earners, usually 14-15 years towards retirement is the break even point. after 15 years, economically you almost always should stay and dont forget about the health care benefits when computing your numbers.

[djmbob]

I retired from active duty Air Force last year after 34+ years... I suggest keeping SGLI while still in... over the course of my career it increased coverage at minimal cost. While perhaps not optimal now, it has the possiblity of getting there through future increases.

Also, I found the best deals for additional outside insurance often come from the various professional military associations, like the Reserve Officers Assn, Military Officers Assn, NCO Assn, Naval Reserve Assn, National Guard Assn US, Army Assn (AUSA), and many others. It is good to check out a few of them and compare rates. In my case, I picked up a policy through one of my associations before retiring, which is a great level term policy and it beat out VGLI (easily) and even USAA.

Good to do some research!
Best Wishes,
Cheers,
Ray

[MCM 2008]

Michigan, while having an income tax, does not tax military pay.

[DWSwildcat]

Kudos! Wonderful you do this for your troops. Especially like the advice on the Penfed cash back card. I always encouraged my troops to get the same card. 5% cash back on gas and 1.5% on everthing else can't be beat. I'd put all my charges on that card then get back $500 every Novermber. When My troops saw my year end Penfed check, that they all signed up. That was my Christmas present to my guys.

You might also want to mention the Space A travel option. That's another way to save your people a buttload of money.

[EmergDoc]

PenFed is now 1% on everything else, and the payments are applied to your bill each month, no year end check needed.

[stedmakr]

I retired from the Army after serving 30 years. One of the things that I learned at war college (the 22 year point) was that many of my contemporaries hadn't saved any money. Their savings were minimal. I was surprised about the number of officers that were living pay check to pay check.

EmerDoc's post is excellent. If I were to add a point it would be to emphasize the need for military personnel to become informed investors and to learn that importance of passive investing.

A couple of comments.
I bought and sold 4 houses when I was in the Army. 3 were losers and I came out ahead 1 time. When I was assigned to a new duty station I sought out the best schools and it was often difficult to find a rental so I bought. The best schools were always off post. It makes sense to rent but the right house needs to be available where you want to live.

When I was a battalion commander I drove a Dodge Neon. At our headquarters parking lot it was by far the cheapest car.

My last comment concerns the BX. I am not a big fan. The high prices are not offset by the lack of a sales tax. It is my belief that military families would be better served by a Walmart or Target located on the post or just outside the gate.

I have very fond thoughts about the military community but the Services could do much more to increase the financial IQ of their members.

[Navy Chop]

My first post in the website after being reading it for about 4 months. Thanks to all for the comments and advices.

I got a great question about taxes...I understand with the military pay to fund the Roth IRA first. But at what point it makes sense to put first into the TSP. I just put on O-4 in the Navy, and it seems that taxes went up more than I expected. I'm a Florida resident, so I don't pay state tax.

Thank you!!