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.
Last edited by EmergDoc
on Wed Sep 26, 2012 12:25 am, edited 1 time in total.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course