Voluntary Separation Pay (VSP) Advice

The Reduction In Force (RIF) guidance, with the criteria, will start coming out from the individual services sometime next week before Christmas.  If you haven't yet read my RIF Advice, please click that link and read that blog post first.  This blog post will give you some information on what to do with a Voluntary Separation Pay (VSP) payment.

A VSP is usually offered to those with more than 6 years of service but less than 20 years.  It is determined by the service, but the Marines have already announced it will be 20% so I imagine the other services will follow suit.  So it is 20% times the Time in Service times the annual basic pay rate.  An E6 with 12 years of service would get $100K before taxes.  (.2 X 12 years X $41,940).  This may initially seem like a lot of money, but if you've read my retirement calculation blog post, you are actually losing out on a lot of "theoretical" retirement money.  But either way, if you are eligible for a VSP and take it, here is some advice on what to do with it.

If you keep up with blog, you should already have an emergency fund set aside with up to 6 months worth of bills.  If you don't, then a large portion of the VSP can be used for living expenses until you get another job.  If you move to a state that has a high unemployment rate, then you may have to use more of the VSP and vice versa if you move to a state with a high employment rate.  DO NOT spend the VSP until you have another job that covers your expenses.

After you have another job, then the VSP can be viewed as another form of a windfall amount of money.  The goal is to maximize your Return on Investment (ROI).  Typically the best ROI is to pay off excessive consumer debt.  Variable rate student loans and credit cards usually carry a 12% or higher rate.  Any money put into reducing this type of debt would give you the highest rate of return.

After this type of debt has been eliminated then you can compare your other debt like fixed student debt, a car and/or house loan.  If they are recent, the interest rate may be less than 5% and you could actually get a better rate of return in the stock market with an average ROI of 8% (4-12%) or real estate with an average ROI of 6% (4-8%).  That being said, there is an emotional ROI that comes with being debt free.  Everyone remembers the first time they felt being debt free and it feels great.

The worst thing to do with a VSP payment is to raise your current cost of living.  An example of this would be to get a new, fancy car.  Usually a fancy car would increase your registration and insurance costs.  So after the car is bought, you now have "theoretically" less money than you had before the VSP because of the increased recurring costs.  These recurring costs are what caused our junior Airmen to be in poor financial condition even after receiving large enlistment/reenlistment bonuses.  This being said, sometimes purchasing new furniture or making a large purchase that doesn't increase recurring costs may be most appropriate.