Military Finance Report

Monday, January 18, 2016

Blended Military Retirement System

Under the new “blended” retirement system, military members may be able to save more than the current system; however, it requires action on the service member and an exposure to market risk—both concern me.

The current retirement system allows us to retire at 20 years, and is called a defined benefit retirement system.  If we serve less than 20 years, we get nothing.  The value of the current retirement is abstract.  It is calculated at 50% of base pay, with an extra 2.5% a year, up to 75%.  We can also contribute to the Thrift Savings Plan (TSP) up to the maximum contribution limit ($17,500 in 2016).  Check out my blog post here where I explain how much a military retirement is worth.  I compare it to a 30-year bond.  Right now, the interest rates (and inflation) are low, making the current value of a military retirement valuable.  When inflation rises, our retirement loses value, or in economic terms, we are exposed to inflation risk.  The main reason for a change is to escape the “all or nothing” scenario, where a military member honorably serves for 1-19 years and 11 months and gets nothing if he or she gets out. 

I also feel that this change is designed to cost costs since the American public sucks at saving money.  The blended retirement system requires action on us, which after nearly 2 decades of helping people with finances, concerns me a lot.  It also pours money into the stock market through the TSP funds, and what government wouldn’t want more control over the financial system right?

For members entering service after 1 Jan 2018, the blended retirement reduces the defined portion of the retirement to 40% at 20 years.  No government system would be complete without the corrupt misguided option of offering us a lump sum payment.  We have the redux under the current retirement system.  A lump sum payment is a way for the government to save money, by not inflation-adjusting the payment.  You’d have to put that lump-sum payment to serious work to ensure you keep up with inflation.  I still haven’t met someone who took the redux and made that $30K earn more than a traditional retirement.
The Department of Defense (DoD) will put 1% of every military member’s paycheck into the TSP.  We will be auto-enrolled into 3% of our pay, which we’ll have to update annually.  The 4%, the 1% DoD and 3% auto-enroll, will be ours, and we keep that portion if we were to separate before 20 years.  A 4% retirement-savings rate is not ideal but at least it will “force” military members to start saving for retirement.  The best part of the blended system is that we’ll finally get a matching TSP contribution.

I refuse to share any graphic created by the DoD that shows a comparison between the two retirement systems because the DoD assumes an unstainable rate of return from the stock market.  While the stock market generally goes up, a good portion of our retirement is now reliant on the bond and stock market.  Additionally, I’ve spent nearly 2 decades trying to get military members to save more for retirement, and it’s not happening quickly.  For this new blended retirement system to be “better”, we must save more and hope for good market returns.
Should you opt-in?  If you know, with all your heart that you’ll be separating before hitting 20 years then yes.  But remember, like nearly everyone I met still serving after 10 years, I was only supposed to be in for 6 years, and now I’ve been in for 16 years.  The current system is still superior thanks to the 50% plus 2.5% each year (versus 40% and 2% each year) and the TSP contributions.

Friday, January 1, 2016

2015 New Year's Resolution Breakdown

2015 was not a great year for my personal finance goals.  Here’s a quick rundown of my 2015 financial resolutions and how I plan to meet them in 2016.
1.       Max out my IRA.
a.      Accomplished.  It’s the first thing I do every year so I have money to invest with.
b.      2016:  This is always my first goal, so I’ll definitely accomplish this.

2.      Save $X in my savings account.
a.      Accomplished.  This is the second thing I do every year now that I have a house, to cover large maintenance expenses.
b.      2016:  This will come second after my IRA, and I have no doubt I’ll accomplish this.  I plan to buy a car in cash this year too, so this near-term goal will be a primary objective.

3.      Save at least $X every paycheck.
a.      Not accomplished.  We had some large expenses this year, and we basically took 3 vacations.  We went back home for two weeks, Vegas in December for two weddings, and my in-laws came to my house for the holidays.  I came close though; just needed one more paycheck in the year.
b.      2016:  I’ve already implemented some routine deductions in expenses throughout the year.  This should help balance some of the larger expenses like car and housing maintenance.  I’m also going to try and publish blog posts more frequently and build some side income.

4.      Increase 2015 passive income (dividend/interest/mutual fund distributions) by 50%.
a.      Not accomplished.  I waited too long in my investing career to focus on passive income from investments—which explains the goal of trying to reach a 50% increase.  There were several factors contributing to me not reaching my goal in 2015.  The first was a reduction in end-of-year mutual fund distributions.  There weren’t a lot of short- and long-term gains with the market dropping this year.  Additionally, some of my dividend stocks gained quickly and I sold the profit.  For example, WWE offered a 5% dividend when I bought it a low of $9, but then it skyrocketed to $18—doubling my money, and I sold it.
b.      2016:  I’m going to put more money into mutual funds during large market drops.  I will also put more money into large dividend payers whose industry isn’t doing well like oil companies and Real Estate Investment Trusts (REITs).  I have a solid chunk of money in bonds, so I’ll need to keep a close eye on the bond market and make sure that I don’t take a huge capital loss by keeping my money in those bond mutual funds just to get a passive income.

5.      Net assets of $X on 31 Dec.
a.      Not accomplished.  I rarely reach my net asset goal, mainly because the percentage increase is always higher than the market average.  I’ve also never measured my progress monthly or quarterly.  I guess I just hoped I would land on the arbitrary amount at the end of year.  The main reason for not meeting my goals this year was the massive loss I took trying to get quick money.  I invested in some speculative, risky, short-term investments and underestimated how quickly I could lose money. 
b.      2016:  I’ll need to split the goal into monthly and quarterly goals and work harder if I’m not meeting those goals.  I won’t make those same risky investments I tried in 2015 either.
I have a feeling that 2016 will be a great year for those prepared and ready to take advantage of it.  What are your 2016 New Year’s goals?

Tuesday, December 29, 2015

2016 BAH Rates Discussion

The 2016 BAH rates have been announced.  According to the Defense Travel Management Office, BAH rates will increase an average of 3.4%.  The average increase across the whole spectrum is $54 a month.  This continues to slow the growth in compensation in a “fair, responsible, sustainable way.”
As a taxpayer and a budget analyst, it’s a good thing to hear about “slowing the growth of compensation” as defense spending continues to skyrocket without any accountability.  Like all of America, the DoD has an insatiable appetite, unable to reduce any spending.  However, as a service member, and at a time where I feel like I’m working the longest hours, doing more additional duties than ever, and dealing with severe manning issues, hearing about reductions in compensation can be disheartening.  But you may ask, didn’t you just say the 2016 have increased an average of 3.4% or $54 a month?
Yes, the 2015-to-2016 rates have increased; however, in some cases it still doesn’t restore the reductions we took in the 2014-to-2015 rates.  In my zip code (71111 – near Barksdale AFB, LA), and for my pay grade (O3E), the 2016 with-dependent rate is still lower than the 2014 with-dependent rate.  The without-dependent rate is higher.
BAH Year (71111)
With Dependent
Without Dependent
Even though I’ve been grandfathered (a.k.a. individual rate protection) into the 2014 rate, it still represents a reduction to future with-dependent O3Es.  As you can see, without-dependent O3Es will make an additional $9 in 2016 compared to 2014.
Remember BAH costs consider rent and average utilities (electricity, heat, and water/sewer).  We must make sound decisions on where we choose to live off base [post, camp, or station].  As a young E-4, I chose to live in a place which my BAH afforded me.  Many E-4s chose to live above their means and it cost them a significant amount of money.  A bigger house not only costs more in rent/mortgage, but utilities generally tend to increase proportionally as well.
While reductions from 2014 may not be a good thing, I think staying within your means, and/or encouraging your subordinates to do the same, may help offset these “fair and responsible” reductions.

Sunday, December 27, 2015

2016 Financial Resolutions

2016 has the potential to offer a great financial revolution.  For the first time, in a very-long time, people are more interested in macro-events regarding their own money.  Many of the political candidates are focusing their campaigns on changing America’s economy.  2015 was one of the biggest years for me helping people with their finances, and I believe 2016 will be a greater financial year.
Unfortunately for me, it looks like I won’t be meeting most of my 2015 financial resolutions.  I took quite a large hit chasing quick money, which had a ripple effect across my other financial goals.  If you’ve never made New Year’s financial resolutions before, then consider these:

1.       I’m going to save $X,XXX in an emergency fund.  Make sure you keep this money in an account that’s not quickly accessible to prevent impulse spending.  I use CapitalOne 360; if you’re interested in setting up a CapitalOne 360 account, please let me know so we can both benefit from referrals.

2.      I’m going to reduce or eliminate X% or $X,XXX of debt.  The most concerning problem in the whole world is the overwhelming debt taken on by middle- and lower-income people.  Without getting into any conspiracies, personal and national debt is THE most critical THREAT our world is facing.

3.      I’m going to save $X,XXX in my retirement fund.  People are being forced to work longer because they failed to prepare for retirement.  In one of my most popular posts, I shared my concerns with my generation not being financially prepared.  Read it here:

4.      If you continually do these things, but still want to improve your finances, consider these:

a.      Max out your credit score for your age
b.      Eliminate ALL bank fees by changing banks
c.      Maximize rewards by getting a different credit card

I really believe 2016 can be a financial revolution for the developed countries.  We must take care of our own finances within our control before we can make fundamental changes against the conspiracy theories.

Wednesday, December 9, 2015

Guest Post: How For-Profit Colleges Hoodwink the GI Bill

Brittany Thompson has created this graphic discussing how for-profit colleges are targeting the post 9/11 GI Bill funding.  According to the research, for-profit colleges have a lower completion rate.  One of the conclusions, the graphic points out that with every $1 of military funding (GI Bill) the college receives, it can charge up to 9X that in federal and private loans, and grants.  The bottom line I got, is that for-profit colleges are targeting GI bill funding to increase their ability to raise other government funding.  I experienced a lackluster education from my for-profit college.  The one thing this graphic doesn't touch on, is that when these colleges focus on profit, the quality of educated offered decreases.  What are your thoughts?

How For-Profit Colleges Hoodwink the GI Bill

Saturday, November 28, 2015

Military Members Saving for a Child's College Education

Giving your kids a college education is extremely important.  Like any investment, the best time to start planning and saving is now.  The military provided me with the resources to get my bachelor’s and master’s in business administration.  There are many options to properly save for your kids’ college education.  As in all proper financial planning, avoiding taxes is key.  Here are the main ways to save for a child’s college education.  If you’re a civilian, skip the Post 9/11 GI Bill.   

·         Post 9/11 GI Bill – One of the major changes when the Department of Defense switched from the Montgomery GI Bill to the Post 9/11 GI Bill was the ability to transfer the benefits to your spouse or qualified dependent.  The Post 9/11 GI Bill can pay for 36 months of tuition, provides a housing and book stipend.  Military members do not have to put money into this fund, but they must meet minimum Time-in-Service requirements.  As long as Tuition Assistance (TA) still pays for 100% of tuition (some Master’s programs will cost more than the TA provides) while on active duty, then many military members will be able to transfer their benefits to their children[1].  Transferring your benefits does come with a 4-year active-duty service commitment—which I’ve heard is incredibly hard to get out of.  

·         529 Plan – The most common method for parents to save for their kids’ education is to a 529 Plan.  These are state-sponsored programs that allow you to invest your money and not pay taxes while your invested money grows.  If the child uses it for qualified education expenses, the withdrawals are also tax free.  You can put $14K a year into a 529 plan.  If your extended family is looking for birthday and Christmas gifts, they can send you money to put into the child’s 529 plan.  You can invest in stocks, bonds, or mutual funds (or any investment) and it will grow tax free; however, this does expose your savings to market risk.  Once your child is ready to withdraw the money, you may want to read on tips how to maximize 529 plan deductions.  For example, for a couple making $160K, or $80 for a single parent, the first $2,500 of qualified education expenses are tax deductible under the American Opportunity Credit ($160K couple, $80K single, $2,500)[2].  Little tricks like that will help maximize the money you saved.  The Security and Exchange Commission has a great starting point for all things 529 plans. 

·         Scholarships – As a parent you should thoroughly research scholarships.  My parents provided me with absolutely no information regarding college.  I didn’t even know that scholarships existed.  Finding scholarships from schools and degree types will help you focus your efforts in preparing your children for college.  For example, many colleges have unfilled scholarships for females in golf, tennis, and most of the STEM degrees (science, technology, electronics, and mathematics).

·         Child ROTH IRA – A more obscure way of saving for your kids’ college education is to start a child ROTH IRA.  It works very similar to a 529 Plan, but the child doesn’t have to use it for a college degree.  It’s simply an IRA that you can use to avoid taxes when you withdraw the money for qualified education expenses.

NOTE:  Qualified Education Expenses: tuition, fees, books, supplies, and equipment and an eligible institution
This blog post assumes that you want to save for your kids’ college education.  Some parents don’t believe in paying for their kids’ college education.  What are your thoughts?  Should parents pay for college education or should kids have to “work for it”.


Friday, November 20, 2015

Financial Milestones for your Thirties

I have a growing concern that my generation (30-39) will have to work well beyond the age of 55.  Additionally, the future of “Mandatory” government spending programs like Medicare and Social Security is in jeopardy.  The excessive consumerism driving excessive debt and the lack of saving by our generation is very worrisome. 

GENERALLY SPEAKING, the decisions we made from 18-29 determined what social class we would end up.  Those of you that were already blessed to start in a good social class or became educated or found an extremely high-income job quickly will be wealthy in the future.  Those of us that became educated and started a career early are probably in the middle- to middle upper-class.  Those of that remained static since high school, or had a series of unfortunate events, are probably lower class.

The 30-39 years will determine at what age you can stop working at the social class you created when you were 18-29.  I started with generally speaking, because through entrepreneurship, inheritance, or the lotto, some of us will be able to bypass the 18-39 time period.  But if you’re 30-39, there are certain milestones you should have achieved to mathematically ensure you can retire at 55.

If you don’t meet 2 or more of the following, you are mathematically in danger of having to work past the age of 55.

  1. $100,000 in net assets (before debt) – You should have $100K and more by the time you’re 30-39 to be able to retire by 55.  Unless you’re the next Warren Buffett, you’ll be tied to the same market returns as everyone else.  To retire by 55, you’ll need $100K or more to be invested correctly.  If you’re earning 4-8% a year in returns, then you’ll need ~$100K to start working now.  Additionally, if we have several years of negative returns, you’ll need more money to offset those losses.
  2. Household income of $100K or more – Your household income, whether you’re single or married, should be $100K or more before taxes.  With the crazy inflation of nearly every commodity, an income of $100K is simply middle class.  For simplicity, I won’t go into the cost of living of each city, in each state; however, on a national average, $100K is basically middle income now. 30-39 is the prime age to maximize your income.
  3. Job with full benefits (life insurance, medical, dental, unemployment credits) – No other commodity in America has grown as quickly as medical expenses.  Without proper insurance, medical bills can financially destroy a person for the rest of his or her life.  Neither political party has tackled the rising costs of medical care, only tap-danced around insurance coverage.  Insurance companies take your money, invest it and earn crazy investment profits, and then nickel and dime you.
  4. 1 or more real estate investments – This is mathematically self-explanatory.  If you’re 39 and don’t have a mortgage yet, then even with a 15-year mortgage at 40-years old, you’ll be paying for a house all the way into your 55th year.  If you’re 39 and just bought a 30-year mortgage, that’s okay because you’ll have significant equity by 55, so you’ll have power moves available to you at 55.
  5. Excluding your mortgage, you have less than 1-year’s income in debt – To include student and car loans, you shouldn’t have more debt than you make in a year.  If you only make $50K a year, you shouldn’t have $60K in student loans and a $40K car loan.  When you’re 30-39 with that much student debt, it may be a signal that your career didn’t correlate with the price of your education.  If you’re only making $50K and have a $40K car payment, then you’re probably living way above your means.
  6. You have one or more different tax-sheltered retirement accounts – You have many options to properly save for retirement.  Here are several you should have: Federal Government (to include military)/Civil services/State worker pension; 401(k) or similar accounts, Thrift Savings Plan (for government workers), Individual Retirement Accounts (IRAs), and 529 college plans for your kids.

These are GENERALIZED milestones.  If you don’t meet 2 or more of these, then you need to start immediately reconsidering your retirement aspirations.  This Thanksgiving “break” reminded me that weekdays and weekends are something that we humans created.  It’s not scientifically real; just our perception of time.  Wealthy people who are financial independent don’t wait for the weekends; same with properly financed retired people.  Do you really want to be in this daily grind into your 60s or 70s or beyond?  Or worse, be totally dependent on politicians and government programs?