Military Finance Report: December 2014

Monday, December 22, 2014

Rising Interest Rates and Military Retirement Impacts

Last week, Russia raised its key interest rate 17% to 10.5%. (Bloomberg, 2014) While I personally believe raising the interest rates would be good for America’s economy and long-term economic success, I do recognize the rise would impact our military; specifically, our military retirement plans. Rising interest rates will make our military retirement less valuable.
Our military retirement is fixed; which means the variables do not go up and down. Our retirement is based on what rank we retired as and how many years we served. Our retirement doesn’t change based off of America’s interest rates; only the annual inflation adjustment.
We can see the impact to our retirement plan using my “Military Retirement Value” calculation blog post. A Major at 20 years (I use this because it applies to me) will receive $3,715 a month in retirement.  By comparing it to the yield on a 30-year bond (3%), the retirement is worth $1.5M. If interest rates rise to 4% then the retirement would be worth $1.1M; 5% is $892K. The reason why is because civilians can invest their retirement and gain from higher interest rates, while a fixed military retirement suffers because of rising interest rates.
I personally believe the economy will see inflation and America will be too slow to raise the interest rates to slow it down. The costs of normal consumer goods and borrowing money will rise. Groceries will be more expensive and your credit card interest rates will rise while your retirement will stay the same and you’ll have to wait for the lagging annual inflation adjustment.
What can you do to reduce the impact?
The first thing to do is eliminate all adjustable-rate credit sources. These will increase when the interest rates rise while your income will probably not.
Next, take advantage of the rising interest rates. When then interest rates increase you can find safer investments then stocks to get the same yields. Most people won’t have the flexibility to take advantage unless you’ve been a long-time reader of this blog.
If you’ve been a long-time reader, leave me a comment.
Source: http://www.bloomberg.com/news/2014-12-15/russia-increases-key-interest-rate-to-17-to-stem-ruble-decline.html

Sunday, December 14, 2014

2015 Military Basic Pay Charts and BAH Cut

Last night, the government passed the $1.1 trillion budget, known as an "omnibus" for the federal government. The bill includes a 1% basic pay increase for all military members except for Generals and Flag Officers which are still in a pay freeze and a 1% cut to our Basic Allowance for Housing (BAH). Here's a link to see the proposed 2015 Military Basic Pay Charts, though the site is not the official DFAS site.

Although I've attached the link, you can simply look at your LES and add 1% to your basic pay while decreasing your BAH by 1%. For me, this equates to a net .07% pay increase. That's less than a 1% pay raise. The main reason for cutting the BAH was the Pentagon and Congress don't feel that renter's/homeowner's insurance should be part of our BAH.

How does this make you feel? For me, I've noticed a significant reduction in personnel with an increase in the amount of work. Not being fully compensated makes it a more difficult burden to bear. Leave me a comment on how you feel.

Sources:
http://www.military.com/daily-news/2014/12/02/congress-agrees-to-troop-pay-bah-cuts-in-budget-compromise.html

Friday, December 5, 2014

2015 Thrift Savings Plan (TSP) Contribution Changes

In 2015, there will be big changes to our retirement contribution limits. For military members and our civil servants, our Thrift Savings Plan limit will be $18,000 up $500 from $17,500 in 2014. For those 50-years or older and that are eligible for TSP Catch-Up contributions, it will increase to $6,000 up $500 from $5,500 in 2014. This is great news. This $500 increase will allow us to put more money into tax-sheltered investments. If you do the Traditional TSP, you will be able to contribute an additional $500 pre-tax money to grow tax free and then be taxed when you withdrawal. If you do the ROTH TSP, you will be able to contribute an additional $500 of post-tax money to grow tax free and then will be tax free when you withdrawal. 2015 contributions will remain the same.
Another great change in 2015 is a larger saver’s credit amount. For our junior enlisted that meet the income qualifications they will see higher credits.
BL: If the government gives you an opportunity, then you should take it. When funding your retirement, you should max out an IRA and then max out your TSP. This allows you to invest up to $23K in 2014 and $23.5K in 2015 in tax-sheltered accounts.
Full Disclosure: I’m a conspiracy theorist who believes there is a widening social gap and the government will look to the middle class to support the rich like some future dystopia movie. The investors who took advantage of government-offered programs will be better protected.