Military Finance Report: 2017

Monday, December 4, 2017

Blended Retirement System Continuation Pay Details

Continuation Pay
The Air Force released PDSM 17-88 (dtd 30 November 2018) giving more information on the Calendar Year (CY) 2018 Blended Retirement System (BRS) Continuation Pay.  The continuation pay is a critical piece of the BRS and a key component for members struggling with the choice of opting in to the BRS or staying with the current 50% at 20 annuity.  Continuation pay is for active component and reserve component on active guard reserve Title 10 orders who:
  • Are covered under the BRS (they will have to opt in on 1 Jan 18)
  • Completed 12 years of service
  •  Are able to obtain 48 months of retainability
The continuation pay for CY18 is 2.5 times the member’s monthly BASIC PAY.  It’s important to note that this is for basic pay only.  Many military members go straight to their LES and look at their gross pay and use that for bonus and retirement calculations.

Military members call it the “hump” after 10 years of service and it typically means we plan on staying in for 20 years—especially for those married with kids.  To take this pay, a military member will have to opt in to the BRS and will have the reduced annuity to 40% and only have 8 years of “saving” with the matching TSP contributions.  The military member will have a 4-year active duty service commitment, so the member will be in for 16 years after taking the continuation pay.

RECOMMENDATION:  Based off this information, and for people having to make the choice in the next couple of years, my recommendation is:  If you’re at 12 years, and know 100% sure you will retire from the Air Force, you should stick with the current 50% annuity retirement system. 

If there’s any chance you’ll get out prior to 20 years, then the continuation pay, plus 4-8 years of TSP contributions can be a nice separation bonus.  If you don’t opt into the BRS and separate before 20 years, under the current system, you get nothing but your unmatched TSP contributions to that point.  Current available information states very few of us will actually do 20 years, so not taking the continuation pay and getting the matching contributions, puts you at risk at separating with nothing.    

Monday, October 23, 2017

Blended Retirement System Basics

This post helps you understand the Blended Retirement System (BRS) basics.  Do you, now, or will you, supervise new enlisted military members or new officers?  Are you fluent on all the details of the new BRS that take affect starting 1 January 2018?  I suspect most of us aren’t.  Without going into all the details of the BRS, here are some things you need to know as a Supervisor or Commander.

Tell your new military members to save AT LEAST 5% of their paycheck to the Thrift Savings Plan (TSP) so they can MAX out the DOD contributions.
  • Every new armed forces member will receive a DOD contribution of 1% of their salary to the TSP after 60 days of service.  This is automatic and the member will not have to do anything.
  • All DOD TSP contributions belong to the member.  This means that even if they only do 60 days - 19 years, and don’t qualify for the “annuity”, they keep their DOD TSP contributions.  This is one of the key characteristics of the BRS.  Before the BRS, military members received nothing, but their own TSP contributions, if they did not complete 20 years of military service.
  • If the member contributes 5% of their paycheck, they will receive an additional 4% (10% total, 1% from the automatic contribution) in DOD contributions.  This 5% DOD contribution is FREE money.

To adjust their contribution rate, they’ll need to go to MyPay ( à Traditional TSP and ROTH TSP à Change the contribution % to 5 (more is ideal).
  • I’m hoping that supervisors at all levels discuss personal finances with their new members in the first 30 days of arrival at a new assignment.
  • For 90% (my own opinion) of all new personnel, the ROTH TSP is the best option.  There are some exceptions of why a Traditional TSP is a better option for young personnel.  One exception is for lawyers that have massive school loans and the payments are income dependent.  A Traditional TSP lowers your Adjustable Gross Income (AGI) and lowers the payments.

Once they’ve changed their contributions to 5%, tell your new military member to go to, get a PIN, and then adjust their “portfolio allocation.”
  • The “G” Fund is the default fund.  A lot of people I’ve financially helped didn’t know that their TSP contributions have all been in the G fund.  The 10-year rate of return is only 2.63% for the G fund, compared to the S Fund’s 8.13%. (
  • If you don’t know anything about the individual funds, then I recommend your new military member put all their money into the farthest out LifeCycle Fund.  As of 2017, the L2050 is the farthest out LifeCycle Fund.

There are other changes that they should keep track of.
  • If they plan on doing 20 years or more, they need to know that the “annuity” went down from 50%, to 40% of their base pay.
  • Depending on their career field, they should be on the lookout for continuation pay near their 12-year mark.
  • If you supervise military members that have to face the opt-in, then I recommend you discuss with your services’ Family Readiness Center and talk to a trained BRS counselor.

Lastly, tell your new military members that saving money, staying out of debt, and investing will lead to financial success in the future.

Sunday, August 20, 2017

What does FIRE mean?

FIRE is a new acronym spreading like fire (pun) throughout the personal finance world.  It stands for Financially Independent and Retired Early.  FIRE is the new personal finance goal replacing “I want to be rich.”  Being rich really means nothing—the same as being wealthy.  FIRE is the new standard because it allows us to define goals and objectives, and more importantly, measure our progress.  Let’s look at each one separately.

Financially Independent – The goal of being financially independent is to create a lifestyle focused on passively earning income while minimizing expenses.  There are many objectives you can use to achieve being financially independent and here are some: 
  • Generate passive income – You can do this by investing and earning interest and dividends.  Renting out real-estate properties is a very common method.  You can also do this by having a side job like blogging.  The main objective is to create multiple “streams” of passive income so you minimize risks of losing a stream.
  • Minimizing expenses – The most common mistake people make is losing control of their expenses or living beyond their means.  Minimizing expenses allows you to make the most out of your income and to save more.  This means staying away from debt, making smart purchases, and being aware of how much you’re willing to spend on entertainment and services 
  • Increase your savings rate – By using your primary income to generate passive income and minimize expenses, you should be able to increase your savings rate.  Unfortunately, many people struggle to save at least 10%, when we should be striving for a 25-50% savings rate (or higher if possible).  In an age of seemingly infinite resources and excessive consumerism, people are struggling to save any money.

Retired Early – Defining “early” is a personal goal.  There is a huge movement to break away from retiring at 60 or later, and having very limited time to enjoy your retirement years.   Retiring early also doesn’t mean a specific retirement savings goal either.  For example, some people just want one million dollars without thinking what the $1M will provide or how long it will last in retirement.  The objective of working towards retiring early involves identifying how much you’ll need to generate by the time you retire.  You calculate how much retiring will cost you annually and then figure out much you’ll need to retire at the specified time you’d like to retire.
  • Identify WHEN and HOW you’d like to retire – A common retirement goal for military members is to retire from the military at ~45 within the same lifestyle they were living.  When military members retire after 20 years of service, we receive 50% of our basic pay plus an additional 2.5% for each year after that.  In the beginning of 2018, the retirement system will change significantly.  The main problem with that goal is that BAH (Housing Allowance) is not part of our retirement, so military members actually only retire with 35% of their paycheck.  They’d need to generate an additional 65% of that income through investing and passive-income strategies in only about 20 years—a difficult task.  A generic FIRE goal is to retire at 55 with a lifestyle slightly less than having full-time jobs.  It’s recommended that your expenses (living, traveling, hobbies) only make up 80% or less of pre-retirement expenses.
  • Your savings rate is within your control – The easiest ways to retire early are to have a high savings rate and live a retired lifestyle within your means.  It would be difficult to retire early saving only 10% of your income.  Conversely, one could retire early within an aggressive savings rate of 50% or more.  Additionally, you could also live a life in retirement which requires very little income.  I know one military family that will only need $25K a year for their retirement plans.  The military member’s retirement income will fully cover the cost of their simple retirement.

The people most interested in FIRE tend to be minimalists.  They have no interest in excessive consumerism or working until they’re old.  They want to enjoy life earlier and without the distractions of excessive TV consumption, celebrity worship, and the exhaustion of a hectic life.  Is this something that interests you?

Thursday, May 25, 2017

3 Steps to Start Your Financial Journey

The most common personal finance question when people get motivated to start a financial journey is, "where do I start?". Here are the 3 steps to start your financial journey.

  1. 30-day Spend Plan Challenge - For 30 days, track every cent that you spend. You can use an app (like, an excel sheet, or just a piece of paper. Put some sort of category next to each expense. At the end of the 30 days, review what you spent your money on. 9 times out of 10, people can find ways to cut expenses and save money. The most common expenses we can cut are frequent dining out, ATM fees (even over the $15 reimbursed by USAA), random goodies at gas stations and Wal-Mart, and daily Starbucks runs. This is probably the easiest step since most people don't come back for financial help after this step, and being slightly embarrassed about not knowing where they were spending their money.
  2. Net Worth Calculation - After that, I typically recommend tracking all your assets and liabilities. As asset is the money you have in savings, investments, cars, and home equity. A liability is your home loan balance, car loan balances, credit card balances, and student loans. Then you take your assets minus your liabilities. For most people, owning a home may put you in a negative net worth situation for many years. Your goal is to increase your net worth every year. You can do this by increasing your assets--saving and investing more--and/or decreasing your liabilities--paying down debt. I recommend calculating your net worth every six months or more frequent (e.g., every month).

  3. Monthly Expense Calculation - Lastly, I recommend you calculate the monthly average of all your bills. I do this every six months. Often times, our bills will creep up by small amounts and if you're not keeping track, can make you lose a lot of money. I call my service providers (cable, internet, and phone) and ask for reduced prices and/or better service for the same price. After doing this calculation, many people get upset and cut out a whole service altogether.

If you do these 3 steps, you'll be in a good position to figure out where you need to start and put more focus towards achieving financial independence.

Thursday, April 20, 2017

Betterment Investing Review

I’ve been investing with Betterment for nearly two years and I’m very pleased with the service. I wrote a quick initial review when I first opened the account and was impressed even back then. I noticed that military members like the traditional military retirement, because it’s easy and doesn’t require any involvement on the military member. Betterment makes investing easy.

The service I’m truly impressed with is the transparency of its advisory fees. Since I first opened the account, Betterment has lowered its advisory fee and removed the minimum balance tiers. On your activity statement the advisory fee is listed (see below) and you can click on the link to read more about it. This is awesome because most mutual funds and exchange traded funds keep the fees buried.

A quick way for me to instantly bore my readers is to talk about portfolio asset allocation. This is a fancy way of describing having the right amount of money in the right investments for your age and goals. Betterment does that automatically for you using algorithms. You simply set your stock-to-bond ratio and Betterment does the rest for you. The best part is that you can adjust it anytime you want (see below).

Betterment then uses low-cost Vanguard mutual funds and invests your money for you. My portfolio is invested in 10 mutual funds, which are diversified automatically for me based on the ratio I chose. After nearly two decades of missing my financial goals by trying to time the market, I decided to put all my money in a single mutual fund, a Total Stock Market mutual fund and ALSO invest with Betterment. I allow Betterment to manage the different mutual funds for me (see below).

I’ve discussed taxes on my social media a lot. One of your main financial goals should be to avoid taxes, regardless of your political ideologies. You have to be financially literate to avoid taxes properly, but Betterment’s algorithms do it automatically for you. Betterment uses advanced methods like optimizing tax lot selection, tax-aware re-balancing transactions, and employing tax-loss harvesting.

For anyone wanting to put their portfolio on auto-drive and not worry about re-balancing portfolio allocations (or don’t even  understand what I just wrote), then I highly recommend Betterment. I’ve placed a referral link every time I mentioned Betterment. If you sign up with Betterment using the link, then I’ll get 30 days with no advisory fee and you’ll get 60 DAYS with no advisory fee.